– July 19, 2019
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New Jersey’s child labor laws, especially its $10 minimum wage, are helping to turn my 16-year-old son, a rising senior in high school, into a juvenile delinquent. Although literally every other business in the seaside resort in which he resides has up a Help Wanted sign, he can’t get a regular job. So instead of building human capital and making a few bucks, he wallows in idleness and profligacy out of the sight of his disapproving parents and siblings.

The other night, I stopped at the hotel where my wife works the desk to try to determine the boy’s whereabouts. She was swamped, so I helped out by fixing the television of an elderly gentleman who slipped me a Hamilton for my trouble. (Yeah, I took the money for changing the input from HDMI1 to HDMI2. If you don’t know why, read my Financial Exclusion.) Then it hit me: I could teach the boy how to mess up things a little bit in each room and then work for tips fixing the “problems.”

But then a bigger thought hit me: I was becoming a modern America, looking for ways to get something, essentially for nothing in return. In terms of HBO’s brilliant series The Wire (which I teach a course about, by the way), I was looking for a lawful way into the other guy’s pocket instead of making or doing something of value. Modern economists call it rent seeking/rent capture, while the great 19th-century political economist Frederic Bastiat called it “legal plunder.”

Then came the big epiphany: my boy’s employment conundrum and my response to it is an example of what I called a hybrid failure in Fubarnomics. What looked like a market failure, my rent-seeking, was actually rooted in a government failure, New Jersey’s paternalistic labor laws.

Turns out that many of our most problematic socioeconomic arenas, including Social Security, higher education, custom construction, financial exclusion, health care, modern slavery, and climate change, all stem from hybrid failures. Some pundits latch on to the market failures (asymmetric information, externalities, public goods) while others fixate on the government failures (too numerous to list but see any public choice text or Democrat Peter H. Schuck’s Why Government Fails So Often for a start). 

Those who would understand these laggard sectors in order to release the productive forces laying dormant in them, however, need to dive deeply into policy history. There, they will find the same story repeated in each case: some politician trying to get (re)elected or (re)appointed (often, but not always, FDR) identifies a politically salient problem and purports to “fix” it with some contrived or ill-conceived new tax, regulation, or other policy. 

Sometime between a fortnight and a decade later, the policy is exposed as an utter failure but it cannot be repealed due to the opposition of the few who benefit from it, if only the bureaucrats charged with administering the nonsense. The policy invariably distorts market incentives, leading to ever bigger problems in need of political “fixing.” Repeat at regular intervals until the only solution to many seems to be nationalization. Too often, the result is an abomination like Amtrak, or calls for single-payer health insurance, student loan jubilee, and so forth.

Radical deregulation in the name of competition, though, is a far better policy prescription. Deregulation worked wonders for the airline industry in 1978 but got a bad name due to the financial crisis of 2008. That crisis, though, was yet another example of a hybrid failure, a complex set of minor market and major government failures only truly understood in historical perspective. 

Unlike airline deregulation, financial deregulation was largely anti-competitive. Too Big to Fail policy, for example, inhibited competition instead of increasing it by subsidizing the risk-taking of the biggest banks, right up to, but not including, Lehman Brothers. Deregulation that increases competition, however, is always a winner, even in social services, where non-profits fill voids vacated by racist or fiscally overstretched governments.

And the American economy desperately needs a win. Recent research out of New York University and the NBER suggests that rent capture, economy-wide, is increasing rather than waning. According to Thomas Phillipon and his coauthors, “tougher price competition, intangible investment, and increasing productivity” explained profit growth in the 1990s. Since 2000, however, profits have come mostly from “decreasing competition and increasing barriers to entry.” 

The results of the study, which nicely coincides with the timing of The Wire I should add, may seem ho-hum but the stakes are essentially existential. Humans, you see, are born rent seekers. All else equal, when faced with the choice of “make or take” or “trade or raid,” humans pick take/raid. That is why most humans lived in abject poverty for so long. Only when humans figured out how to tip the scales in favor of make/trade did the hockey stick of human prosperity emerge

The key was to convince people that it was not in their best interest to bonk other people on the head and take their stuff. Governments arose to reduce neighbor-on-neighbor bonking but soon became the biggest bonkers of them all. Eventually, a few enlightened despots figured out that fully expropriating their subjects left them too poor to fend off the depredations of other despots, so they worked out arrangements that left both ruler and ruled better off. 

Those arrangements evolved until reaching their pinnacle in the constitutions of Anglo-American countries, which credibly protected the life, liberty, and property of their denizens from foes foreign and domestic, including the government itself. The old-fashioned head bonking variety of taking and raiding persists in those and other developed countries but historically speaking it is infrequent, especially outside of the underground markets that form in response to paternalistic prohibitions of alcohol, drugs, interest rates, and such.

But, as Michael Munger reminds us, humans do like to get something for nothing, making a descent into crony capitalism and other forms of legal plunder seem well-nigh inevitable. 

Perhaps because I spend most of my days in virtual conversation with the Founders, though, I am more optimistic than Mike. The Founders knew that rent seekers would try to run amok and deliberately created a small but energetic government to minimize their ability to exact legal plunder from their kith and kin. But the genius of Hamilton (yes, Alexander Hamilton, who wanted a large government only compared to that proffered by the slaveholding presidents) is being lost as our checks and balances wither in storms of executive orders and weak courts. Worst of all, the fiscal constitution Hamilton created lay as prostrate as my prostate.

All can be reversed, however, if SCOTUS again places serious limits on the ability of Congress to delegate to executive agencies, or if the American people wake up to the fact that the Preamble is not just a cartoon song but rather the contextual key to understanding the rest of the Constitution. The most important word is the “and” just before “secure the blessings of liberty to ourselves and our posterity.”

My posterity, my son, does not feel blessed by the laws of New Jersey that prevent him from exercising his liberty by finding employment of mutual benefit to himself and his employer. One day soon, I hope, such laws again will be seen as prima facie unconstitutional, as will all similar constraints on liberty and its boon companion, competition. Until then, though, it’s a Munger world.

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Robert E. Wright

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Robert E. Wright is the Nef Family Chair of Political Economy at Augustana University in Sioux Falls, South Dakota. He is the author of 18 books, including a new book on financial exclusion published by AIER.

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