Section 8:

Politics


In the final section of this volume, we turn to the political realm and its relationship with economic dynamism. Lee Drutman’s essay, “Political Dynamism,” begins this section with a discussion of the ways bias toward economic “winners” gets reinforced by political winners, creating incumbent protection that suppresses entrepreneurship and innovation, therefore, and shuts out policy entrepreneurs. If we are concerned about increasing economic dynamism, Drutman explains, we also need to stimulate more political dynamism, which has similarly declined in the United States. He recommends that we increase the number of policy entrepreneurs in the system by creating a small donor matching system (as in New York City), which would widen the sphere of “political opportunity.” More large-scale, general interest intermediary organizations also need to be developed and cultivated to balance the policy discussion in Washington. And, as policy entrepreneurs need more resources and opportunities within government, Congress should allocate more money to hire more and more experienced staffers for members and committees.

Ryan Streeter’s paper, “Policy Entrepreneurs Helping Real Entrepreneurs: Two Laboratories Ripe for Policy Experimentation,” argues that state economic development needs to switch from a transactional approach—based on incentives, credits, vouchers, and other piecemeal mechanisms—to one focused on attracting talented individuals. This shift would involve partnerships with universities and perhaps even cash grants to entrepreneurs. He also discusses the need for rulemaking and regulation to be more accommodating to entrepreneurs. Either through a Regulatory Improvement Commission, as some have proposed, or other mechanisms, American regulation at all levels needs to take better account of entrepreneurial growth and competition from other jurisdictions.

In “Optimizing Government for an Optimizing Economy,” Cary Coglianese considers the ways in which many of today’s most successful entrepreneurial companies—Uber, Airbnb, and Netflix, among many others—are examples of optimization of existing resources. The “optimizing economy,” he explains, relies on machine learning, distributed resources, and customization. Government regulation, however, is not meant for optimization, leading to an “optimization mismatch” between new entrepreneurs and government. This misalliance creates difficulties because of the uncertainty about the costs and benefits of entrepreneurship and innovation that results, as well as more and more regulatory complexity. Coglianese argues that we need an optimizing government that is better aligned with the new, optimizing entrepreneurial economy—a government that has a more analytically sophisticated “human infrastructure,” greater use of machine learning and data analytics, and a smarter approach to regulation overall.

Steve Teles focuses on regressive rent-seeking in his essay, “The Political Economy of Rent-Seeking and Inequality.” The past few decades, he explains, have seen a rise in regressive and upward-redistributing rents. At a time of apparent free-market triumph, the irony is that these state-derived rents are the result of greater market protections. One result has been greater inequality. The sources of these regressive rents include professional licenses, state regulation, government contracting, and intellectual property protection. The financial and housing sectors also appear to be rife with such rent-seeking, raising costs and barriers to entrepreneurship and innovation. Teles recommends that philanthropic foundations, just as they have done with environmentalism and education reform, need to pour more resources into generating countervailing power against the entrenched interests of regressive rent-seeking. They should seek to generate greater plurality and open up the decision-making contexts of many areas of policy. Policy changes, he says, also can challenge regressive rent-seeking: rule changes and shifts in oversight, as well as stronger regulatory review at the state and local levels, can help.

Jeremy Goldberg and Max Neiman, in “Boosting Business and Entrepreneurial Performance: Broad Base Power, Policy Improvements, Contextual Constraints, and Localized Opportunities,” suggest that while entrepreneurship has powerful economic effects, there also are positive social outcomes from greater participation in entrepreneurship. They offer a framework called “broad base power,” explaining that if more people start businesses—even if they fail—there will be greater social and political support for entrepreneurs in general. Competition policy, they argue, needs to ensure legitimacy and confidence that entrepreneurial endeavors will not be prematurely stifled by incumbents. And, broad base economic activity must be encouraged through a similarly broad base education, including more STEM education, as well as more generalist education. Public policy needs to reduce geographic barriers, particularly with regard to policies that often tie people to a specific place, such as homeownership subsidies. Finally, they recommend that local governments reconsider the billions of dollars they spend on economic development, which has questionable effects, especially for entrepreneurship.

Political Dynamism

By Lee Drutman Author and Senior Fellow in the program on political reform at New America
Lee Drutman
Lee Drutman

Summary

This paper argues that, to achieve economic dynamism, we need political dynamism—a political environment that supports and nurtures policy entrepreneurs who challenge existing upward-redistributing policies, and advance policy changes that encourage economic entrepreneurship and innovation.

Maintaining political dynamism is an active and ongoing struggle that requires close attention to rules supporting openness, competition, fluidity and innovation in politics. It requires constant attention because political and economic systems have a natural tendency away from dynamism and toward fixedness—winners wish to stay winners and, if allowed to, they will use resources gained from victory to maintain their power. We have neglected support for dynamism in U.S. national politics for the past three decades. This paper offers ideas about how we can rebuild it.

Introduction

Public policy sets the rules of the economic marketplace, both in general and in particular sectors. Market rules can support economic dynamism by lowering barriers to entry and making it easier for new challengers to get in the game. In turn, this stimulates competition and increases the rewards of innovation and entrepreneurship. Market rules also can limit entrepreneurial growth by raising barriers to entry and protecting existing winners, reducing the possibilities for would-be entrepreneurs and innovators, and contributing to a more fixed and less dynamic economy. In other words, political systems and economic systems are fundamentally connected.

Both political and economic systems also can be described as either dynamic or fixed.

A dynamic system is characterized by change and openness. It encourages and enables all kinds of entrepreneurial activities, and can sweep away old ideas and old rules as they become obsolete. These changes may be quite disruptive, but they create new opportunities. New opportunities are the key to dynamism.

A fixed system protects incumbents and frustrates change. It stymies innovation and entrepreneurship, and concentrates power and wealth. It is a system with the same people and same firms holding the same positions of authority, year after year, recycling the same ideas.

Both political and economic systems have a natural tendency toward fixedness because winners want to stay winners. In both politics and markets, victors carry the spoils. In markets, competitors try to use their market power to intimidate or destroy new competitors. In politics, incumbency confers resource benefits and control over policy, which skillful politicians can use to maintain power.1

Economic winners often turn to political winners to help them maintain their dominant market positions. They reinvest their profits in both direct and indirect lobbying, attempting to alter political possibilities by shaping the boundaries of policy contestation.2

Political incumbents look to economic winners to help them stay in power. After all, economic winners have considerable resources to help political incumbents, with campaign contributions being only the most salient.3 Fixed political systems help economic winners maintain “upward-redistributing rents”—a term I borrow from Steven Teles, who uses it to describe the many ways economic winners use public policy “to enrich the already advantaged.”4

Both our political and economic systems have been moving from dynamic to fixed for decades. More and more economic gains are concentrated in a smaller segment of society. Entrepreneurship and innovation are decreasing steadily,5 while inequality is increasing.6

While many economists have ideas for public-policy fixes that would make our economy more dynamic, few of these fixes have been enacted. That’s because, in an increasingly fixed political system, economic winners have more significant political advantages than in a dynamic political system. When politics is fluid and open, it is much easier for policy entrepreneurs to challenge existing policies and create change. When politics is fixed, economic and political winners operate in much closer alliance.

Supporting Political Dynamism

Something needs to change. But we need to be careful how we think about the possibilities. Some political reform programs oversell a single approach. In some cases, it is a radical approach, such as a constitutional amendment, which is entirely infeasible. In other cases, it is a small-bore approach, such as more disclosure, which is feasible, but is unlikely to make much difference. Other political reform programs list fifty or 100 changes, all nibbling at various margins without any coherence. These also are infeasible.

A smart political reform program should pick a few high-leverage changes without requiring radical changes to our political institutions. My approach does just this. I accept that the basic institutional contours of American politics (e.g., winner-take-all elections, a separately elected executive and legislature, a constitution that protects political speech) are not going anywhere, though there are many who may wish otherwise. I also accept that certain aspects of politics (e.g., the fundamental conflicts about who gets what where when and how) never can be “solved” by algorithm or wiki (as many in the tech world would like) because they involve fundamental, solvable trade-offs that are good for political dynamism, which thrives on nothing ever being completely resolved. Uncertainty creates opportunity. Opportunity is necessary for political entrepreneurship.

I also accept that we delegate political decision-making to political leaders for the very good reason that most of us would rather be doing other things with our time —we are not going to transition to a direct or plebiscite democracy anytime soon. We need intermediary institutions to organize and aggregate citizen interests.

Finally, I posit that, although it was far from perfect, policymaking between 1964 and 1986 (or thereabouts) embodied more aspects of dynamism than the years since or prior. Some conditions of the earlier era probably are gone forever (e.g., a labor-centric manufacturing economy capable of supporting a large middle class), while others are impossible to recreate directly (e.g., relatively low levels of partisanship). Yet this period is recent enough that its lessons are not entirely lost to history. It also furnishes some valuable examples, such as the 1978 airline deregulation and the 1986 tax reform, which help illustrate some aspects of how political dynamism can work when it works well.

Compared with other reform frameworks, political dynamism puts innovation and entrepreneurship front and center in our politics. It embraces competition, and sees the comparative openness and loose-jointed nature built into our political system as its greatest source of strength and resilience—not something to be controlled.

The remainder of this paper lays out four principles for bringing about more political dynamism in American politics. For each principle, I’ll describe how I believe things should work, how they’ve gone astray, and how we could make things work better. Here are the four principles:

  • Make it easier for new policy entrepreneurs to enter politics without having to gain the support of existing powerbrokers and status-quo-invested donors.
  • Make it easier for policy entrepreneurs to challenge the status quo by creating a vibrant, intermediary, group environment to develop and advance new ideas.
  • Make it easier for policy entrepreneurs to actuate political change by providing adequate government resources within Congress.
  • Make it easier for policy entrepreneurs to operate within Congress by decentralizing power within the institution.

None of these principles by itself is a silver bullet—silver bullets do not exist. But collectively and additively, they can move us toward more dynamism. While my focus is on Washington, this framework applies equally well to all levels of government.

Getting More Entrepreneurs into Politics:

How It Should Work

Elections traditionally are seen as the mechanisms by which voters can hold elected officials accountable. But they can serve a second, perhaps equally important, function—they are opportunities for challengers to bring new ideas and issues into the political debate.

Challengers almost always start with a disadvantage. Every seat represents a district or state with a baseline partisan balance and, more than likely, the incumbent represents the partisan majority. While incumbents have a record on which to run, challengers instead have to make the case that the status quo is inadequate—that something must be done differently. In the words of political scientist Gary Jacobson, “A challenger cannot hope to win without reordering the campaign agenda.”7 Challengers have incentives to propose new policies and programs. In a study of political innovation, Nelson Polsby notes that presidential elections regularly serve as founts of new ideas: “Among the routine stimuli to innovation, one can identify, for example, the fact that presidents must have programs... Prospective candidates search for issues with which they can become identified, with themes that will resonate with national constituencies.”8 Even if challengers lose, incumbents might be forced to respond to the challenges they have raised. The political scientist Tracy Sulkin calls this phenomenon “issue uptake.”9 In a study using data from the 1990s, she found considerable evidence for this phenomenon—incumbents did take on issues raised by their challengers.

The basic insight is that when our electoral system works well, challengers raise new ideas and new issues. Some of these challenges will be genuinely innovative and entrepreneurial. And even if incumbents win, they will be pressured to respond to new ideas.

Why It Doesn’t Work the Way It Should

As increasing campaign costs have overwhelmed congressional elections, commentators have complained about the decline of actual issues in campaigns. The 2014 election was dubbed the “Seinfeld election” for being about nothing. It also had the lowest turnout since 1942, with barely one third (36 percent) of eligible voters showing up. This was not an election that brought in new candidates or new ideas.10

During an earlier era, the relentless gauntlet of campaign financing did not loom nearly as large. This meant that candidates could focus on ideas first and donors second. In our current high-cost system of privately funded elections, challengers face incentives that mitigate against introducing new issues and new ideas. The most significant is that, to be considered a serious candidate in the first place, a challenger must raise considerable campaign money by appealing to donors who make large contributions. These donors come in two types: pragmatic and partisan. Pragmatic donors mostly are businesses that want to maintain access, primarily through their political action committees (PACs). They want to preserve and expand their existing advantages and, therefore, give almost entirely to incumbents and mostly reward those who support the status quo.

Partisan donors want their party to win. They are highly ideological and often are part of a coalition of “intense policy demanders”11 within the party. Thus, challengers generally need to appeal to some group of ideological donors who already are deeply invested in a current political fight. This means challengers do better by attaching themselves to an issue that already has attracted considerable attention. Raising money to support new issues is much more difficult.
 
Most congressional races are not close, and most incumbents play it safe—they appeal to the same, familiar donors so they can raise enough money to fend off challengers and stay in good standing within the party. Races that are close will attract considerable money both from the two parties and from a set of “outside” groups affiliated with the two parties. Once this happens, candidates lose control of their own messages. Instead, campaigns are overwhelmed with partisan ads that rehash the same predictable battle lines, with negative character attacks and amorphous calls to general values. The ads do not raise new, crosscutting issues.

As a result, our current campaign system mostly produces candidates who: 1) are solid partisans with support from their parties; and/or 2) can appeal to wealthy donors who also are almost entirely partisan, and/or 3) pass the litmus tests of the “intense policy demanders,” which form the base of both parties. With few rare exceptions, these do not tend to be the qualities of would-be policy entrepreneurs.

How It Could Work Better

We need a way to get more policy entrepreneurs into our political system. The most promising solution is to enact a small donor-matching system that would give candidates some independence from parties and large partisan donors. A six-to-one small donor-matching program for constituent contributions (as exists in New York City) would allow potential policy entrepreneurs to think more creatively about challenging the status quo.12 Rather than having to work through existing powerbrokers, they could find new and creative ways to talk about issues. We also could experiment with vouchers and tax credits for small donors.

All this fits within what Mark Schmitt calls “political opportunity,” which argues that expanding the sphere is the key to reducing stagnancy and increasing new ideas. In other words, if we make it easier for more citizens to get involved earlier in the process by giving them higher-stakes opportunity to participate (matching funds, tax credits, and vouchers being three possibilities), the range of possible pathways to political candidacy will increase.13 More opportunities mean more new voices and more political entrepreneurs entering the system. 

More Intermediary Organizations Generating More Entrepreneurial Ideas:

How It Should Work

A significant percentage of new policy ideas originate outside government, from the thousands of interest groups that participate in politics. Political change often arises when groups outside government put pressure on actors inside government to enact policy. Often, these outside groups raise the salience of an issue to the point where a diffuse public demands action, thus helping policy entrepreneurs within government move general-interest reforms forward.

Going back to Tocqueville, observers have praised American politics for its widespread “associationalism.” In this pluralist vision of America, diverse citizens come together into groups and make general-interest demands of their government.14 These intermediary institutions serve an important function in politics, amplifying and unifying the voices of diffuse citizens in ways that enable them to be more effective than if acting individually.

During the 1960s and 1970s, these mechanisms worked reasonably well. New issues, such as environmental and consumer protection, emerged because third parties, especially Ralph Nader-led consumer groups, raised them. They wrote reports, they generated press coverage, and they worked with members of Congress to implement solutions. They channeled citizens who were unhappy with the status quo, and provided resources and political pressure for change. Nader, it should be noted, also was a key supporter of the 1978 airline deregulation. In addition, a key driver of the 1986 tax reform was a report that revealed half of the largest companies paid zero income taxes at least once between 1981 and1983. The report came from Robert McIntyre’s Citizens for Tax Justice, a Nader-supported advocacy group. It generated significant press interest, and also stimulated a steady stream of related revelations, which contributed to the narrative that the tax system was a national embarrassment. As Alan Murray and Jeffrey Birnbaum noted in their history of the 1986 tax reform, “In the tax debates ahead, Bob McIntyre’s one-man report would turn out to be more influential than all the firepower the corporate lobbyists could muster.”15

Large-scale, intermediary organizations with adequate resources can both generate challenges to existing rent-distributing policies and effectively advocate for them, helping entrepreneurs in Congress, and putting pressure on resisters. Government doesn’t operate in a vacuum, nor should it. Outside organizations always have been involved in important policy changes.

Why It Doesn’t Work the Way It Should

During the past several decades, two important things have happened in Washington’s interest-group environment. The first is that business organizations, which most benefit from existing policies, have increasingly overwhelmed Washington.16 The second is that, while most businesses have managed to stay somewhat bipartisan on most issues, intermediary organizations most likely to bring challenges to powerful businesses have become polarized, reducing their effectiveness.

The first is a problem because changing policy to remove “upward-redistributing rents” requires considerable outside pressure. The steady growth of corporate lobbying during the past four decades has tipped representation in Washington overwhelmingly toward large corporations, which mostly are the beneficiaries of these rents. The types of organized interests that might effectively challenge these rents—labor unions, or groups such as consumers or taxpayers who represent diffuse publics—now spend $1 for every $34 business spends on lobbying, by my count. That’s an increase from a one-to-twenty-two ratio during 1998. Of the 100 organizations that spend the most on lobbying annually, 95 represent business.17 We’ve left the formation of third-party advocacy organizations entirely to the market, and the market has responded as we would expect. Economic winners have reinvested their profits in politics to maintain their advantages. Those who might wish to mount challenges have a much harder time.

This resource disadvantage is further exacerbated by polarization. The consumer and labor groups most likely to challenge rent-seeking policies have become uniformly aligned with Democrats. This simultaneously undermines their ability to build necessary bipartisan support for proposals, dooms most of them to failure and gives them less leverage within the Democratic Party (where else would they go?) Meanwhile, the free-market organizations that also are opposed to corporate cronyism have become too much a part of the Republican coalition to build bipartisan support for their approaches. While these two groups have much in common in their critiques, their ability to coordinate is undermined by their partisan alignments, which also drive divergences in their solutions.

While resources are not always destiny, they do matter in the aggregate. In an interest-group environment as overwhelmingly imbalanced as the one that now exists in Washington, it has become increasingly difficult to challenge policies that redistribute rents upward. The winners have made considerable reinvestments into politics; the losers haven’t.

How It Could Work Better

To have political dynamism, we need more large-scale, general-interest, intermediary organizations that can work with policy entrepreneurs to support and enact policy reforms in potentially crosscutting ways. Such groups also should have the capacity to pay more attention to the arcane, indirect ways in which existing winners continue to build barriers to competition and find new ways to redistribute wealth upward, taking advantage of policy complexity to hide their efforts.18

Considerable evidence and theory tell us that groups representing diffuse general-interest publics face significant obstacles to mobilizing on the same scale on which economic winners have mobilized.19 Therefore, we need to intervene. There are three ways this could happen.

First, foundations could fund more direct advocacy activity by creating large-scale lobbying organizations that directly challenge upward-redistributing rents. This would require foundations to get over their discomfort with direct advocacy, and might also encourage foundations to make larger bets on single organizations rather than spreading resources widely.

Second, Congress could develop a public matching system for citizen lobbies that would turbocharge the citizen-advocacy sector to make it a much more meaningful player in the political process. This would lead to more alternative takes on rent-seeking policies, which normally go unchallenged.

Third, Congress could develop a public-defender-style approach to make sure perspectives that are not represented get an adequate hearing in policy debates, especially those not likely to generate much public interest because of their arcane nature. This is important because much rent seeking hides in policy arcana.

While there are more details to work out than can be described here, the basic thrust of all three of these propositions is that, without third-party advocates who can work effectively on behalf of general interests, economic winners almost always will triumph, thus maintaining and expanding upward-redistributing rent seeking.

More Resources Within Government for Policy Entrepreneurs:

How Things Should Work

Pick any upward-redistributing, rent-seeking policy, and you most likely will find a forbidding moat of obfuscatory legalese and technical justifications guarded closely by self-appointed industry “experts” who bamboozle would-be reformers by convincing them that they don’t understand what they are doing—that, in that favorite phrase of so many status-quo-defending lobbyists, any change to the status quo will have “unintended consequences.” The legislative process is full of hurdles, and existing winners are well stationed at each of them. Thus, to change any status quo requires considerable policy capacity because one needs to effectively respond to these self-appointed “experts.”

Policy entrepreneurs, like economic entrepreneurs, need human resources. Behind successful acts of policy entrepreneurship, such as airline deregulation and tax reform, were thousands upon thousands of hours of work by smart, dedicated staff—endless research, long drafting sessions, and hundreds of hours of hearings and testimony. Because these were incredibly complex issues, they required experienced staffers who not only could draft legislation, but also could provide analysis independent of special interests with a direct stake in the outcomes. They needed to have the political knowhow and networks to move policy forward.

For example, during 1975, Ted Kennedy attracted Stephen Breyer, then a Harvard Law professor, to temporarily give up his position to work on a congressional subcommittee holding hearings about airline regulation. Kennedy furnished Breyer with sizable staff and six months to prepare hearings. The study produced new academic findings and reams of evidence about anticompetitive pricing. Entire days of hearings were devoted to subjects as specific as demonstrating that intrastate fares in states without intrastate-fare regulations (e.g., Texas and California) were cheaper than in states with regulation.20 These hearings were crucial to building support for change. They required considerable resources.

Why It Doesn’t Work the Way It Should

During the past three decades, lobbying and outside pressure have grown exponentially. The world has become far more complex. In an age of email, social media and twenty-four-hour news, constituent and media demands are far greater. As a result, congressional staffers are expected to do and know far more than ever before.

Yet, during this time period, Congress has reduced its committee staff by roughly one third.21 Independent research arms of Congress, such as the Government Accountability Office (GAO) and the Congressional Research Service (CRS),
also are in decline.

This means that congressional offices are fundamentally reactive. They have limited capacity to develop any policy unless it is advanced externally for them.22 Because the majority of outside lobbying organizations operate in support of economic winners, this limits the ability of would-be entrepreneurs to challenge upward-redistributing, rent-seeking policies. With neither the internal capacity nor the external support to mount an effective challenge, members of Congress and their staffs simply move on to other issues through which they can accomplish something—namely, issues for which they can find both sufficient external support and limited opposition.

How It Could Work Better

There is a very simple solution to the problem of resources. Congress could give itself the policy capacity to tackle big issues. It could hire more staffers with more experience. Right now, the operating budget of the House and the Senate adds up to little more than $2 billion—about 0.06 percent of the total federal budget ($3.6 trillion), and less than the estimated $2.6 billion that business spends annually on lobbying. If Congress seriously wanted to support policy entrepreneurs, it would give those entrepreneurs the manpower to do big things. Entrepreneurs need human resources. It’s as simple as that.

However, there are some obvious cautions here. Without adhering to the other principles discussed here, members of Congress might use additional resources to simply bolster their own profiles via more media and communications work—more self-promotion. While important, resources alone are only part of the story. That’s why we also need to think about how to allocate resources and how Congress works.

More Opportunities Within Government for Policy Entrepreneurs:

How Things Should Work

In Congress (as in many institutions), there always has been tension between centralized power (party leaders in control) and decentralized power (committee leaders and/or individual members in control). Decentralized power creates more opportunities for entrepreneurship because it creates more points of entry for would-be entrepreneurs. Centralized power makes entrepreneurship more difficult because it limits opportunities.

During an earlier era, Congress increased the number of committee assignments and subcommittees, along with the attendant resources to support necessary work. In the Senate, the number of subcommittees grew from eight-six during the Ninetieth Congress (1966-1967) to 113 during the Ninety-Third Congress (1973-1974). Committees also gained considerably more staff. Between 1970 and 1979, Congress roughly tripled its committee and policy support staff, from 1,669 to 4,377. Congress also created two new in-house (almost exclusively merit-based) think tanks: the Office of Technology Assessment (OTA), created during 1972 to help Congress get smart on emerging technologies; and the Congressional Budget Office (CBO), created during 1974 to give Congress more of a brain on budgetary matters in the wake of the Nixon budget impoundment crisis. Both attracted high-quality experts whose reports and analyses improved policymaking. Committee policy staff also increased during the 1970s because of the proliferation of new subcommittees, which also required new staff.23 The Legislative Reorganization Act of 1970 made it easier for rank-and-file committee members to participate in committees. All this greatly expanded the opportunities for entrepreneurial activity within Congress.

Political scientists Frank R. Baumgartner and Bryan D. Jones describe an expansion of “the arena of serious dialogue for possible government intervention” until a peak around 1978 or so. Government was addressing more issues in more different ways. This supported dynamism. As Baumgartner and Jones write, “Some may think that increased complexity and interaction among component parts in a system lead to gridlock and an inability to act. That is not the case. Many quasi-independent venues for policymaking, problem discovery and definition lead to dynamism and change.”24

Such an environment was good for policy entrepreneurs in Congress. From their various committee and subcommittee posts, they could work independently from party leadership. They gained independence by not having to rely on party committees for fundraising support. In such an environment, a policy entrepreneur such as Ted Kennedy, who chaired the Judiciary Committee and did not have clear jurisdiction over airlines, could use that committee to hold hearings about airline regulation, and thus raise the profile of the issue.25

Why It Doesn’t Work the Way It Should

During the past thirty-five years, resources and the power that goes with them moved steadily in the direction of party leadership in both the House and the Senate. In both chambers, committee staffing levels have declined, while leadership staffing levels have increased. Especially in the House, party leaders have taken a much more aggressive role in steering, and in some cases superseding, committee activity. As the Bipartisan Policy Center’s recent Commission on Political Reform report concluded, “Committee chairs and members feel disenfranchised by the fact that congressional leaders craft many important pieces of legislation on the cusp of deadlines without the benefit of a committee process.”26 The BPC report goes on to note that: “The weakening of the committee system ... has deprived Congress of the opportunity to build stronger networks of expertise and experience … and contributed to a sense of disenfranchisement among many rank-and-file members.”27. In other words, it has undermined the potential for policy entrepreneurship.

These arrangements limit the ability of committee and subcommittee leaders to independently developing their own initiatives. Certainly, it is now easier than ever for individual members to stand out as entrepreneurs outside of party leadership. But this individualist approach further undermines the ability of entrepreneurs to actually change policy. In the quasi-Golden Age, a would-be policy entrepreneur, such as Ted Kennedy, had the ability to work through his committee to raise the profile of an issue by doing the hard work necessary to make it happen. Now the senator occupying his seat, Elizabeth Warren, primarily uses the media to call attention to her perspective. She does not have the institutional resources to hold hearings and develop legislation in the ways Kennedy did.

The current institutional options force a choice on would-be entrepreneurs: 1) Work within the institution, and play along with the existing leadership, or 2) Challenge the leadership and work outside the institution, but with limited ability to accomplish anything more than advancing a rhetorical position (e.g., Ted Cruz). If you pick option one, you essentially give up on being an entrepreneur. Because there are so few opportunities to advance policy entrepreneurship within Congress, ambitious actors are forced to work as outsiders. This contributes to further discord and fragmentation.

How It Could Work Better

Finding the balance between centralization and decentralization is difficult because it has a Goldilocks quality—too much centralization cuts off potential for independent entrepreneurship, but too little risks chaos in which nothing gets done. Perhaps the best we can hope for is to get it right in moments of transition (moving from too much centralization to too little, and vice versa), and then be able to adjust course once we have overshot.

However, we have reached a point where it is clear that party leadership has too much power, and this centralization reinforces the status quo. New ideas can come from committees and subcommittees only if they have the resources and authority to develop them independently.

The House and Senate should triple the budget for committee staff, and aim to double the personnel (paying more money to hire top people). Committees should hire staff on a professional, long-term basis, rather than simply requiring staff to serve at the pleasure of whomever chairs the committee at a given moment. Committee staff also would rotate to serve in members’ offices. Each congressional member of a committee would have one committee policy staffer assigned to her/his office to help with committee issues on a two-year basis. Over time, committee staff would go back and forth between working exclusively for the committee and working for particular members. Because individual staffers would be employed by the committee, their jobs would not depend on whether individual members won or lost their seats. This would free them to challenge the status quo because they would be less tied to electoral fortunes of individual members, and more concerned about long-term policy implications.28

Conclusion

Political and economic systems tend towards fixedness. Since the two systems are intimately connected, their tendencies reinforce each other in what can easily become a destructive feedback loop. Without some kind of external shock (such as a war or a major economic depression), stagnation tends to deepen. Political economy tends to acquire the dull and painful inevitability of the second half of the board game Monopoly —the point at which a clear leader has emerged, and it is only a matter of time before she drives her opponents into abject poverty by taking all their money.

While economists are very good at coming up with proposals that would stimulate innovation and entrepreneurship, they are very bad at getting those proposals enacted. That’s because, in a fixed political system, there is little possibility of enacting policy changes that challenge existing winners. Yet such changes and challenges are necessary. And they require a particular breed of policy entrepreneur to carry them forward. This kind of policy entrepreneur is most likely to emerge and thrive in a dynamic political environment.

The ideas put forward here suggest how we might encourage political dynamism. We need to make it easier for outsiders to challenge the status quo (and change policy in ways that facilitate economic dynamism) and get into politics in the first place. We need to support third-party, diffuse interest organizations that can develop and advocate for these policies. We need to give policy entrepreneurs in Congress the internal resources and independence to enact policy changes.

These reforms all fit together. Without a way for policy entrepreneurs to get into Congress in the first place, and without outside support for their activities, institutional reforms in Congress won’t make much difference. But without institutional reforms, getting potential policy entrepreneurs into Congress and providing outside support will have limited impact because they’ll have so little to work with.

Both economic dynamism and political dynamism are difficult to achieve. They challenge the default settings of political economic systems. They cut against the inherently conservative, risk-avoiding tendencies of human psychology, which tend to prefer stability rather than change. Therefore, they require constant attention and ongoing maintenance. We have fallen far behind on our attention and maintenance. It is time to catch up.

About the Author
Lee Drutman is a senior fellow in the program on political reform at New America. He is the author of The Business of America is Lobbying (Oxford University Press, March 2015).

Footnotes

  1. Jacob S. Hacker and Paul Pierson, Off Center: The Republican Revolution and the Erosion of American Democracy (New Haven: Yale University Press, 2005).
  2. Francis Fukuyama, Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy (New York: Farrar, Straus and Giroux, 2014); Jacob S. Hacker and Paul Pierson, Winner-Take-All Politics: How Washington Made the Rich Richer--and Turned Its Back on the Middle Class (Simon and Schuster, 2010); Jonathan Rauch, Government’s End: Why Washington Stopped Working, vol. Rev (New York: PublicAffairs, 1999); Mancur Olson, The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities (New Haven: Yale University Press, 1982).
  3. The Political 1% of the 1% in 2012 (The Sunlight Foundation, June 24, 2013).
  4. Steven M. Teles, “The Political Economy of Rent Seeking and Inequality” 2015.
  5. Barry C. Lynn and Lila Khan, “The Slow-Motion Collapse of American Entrepreneurship,” The Washington Monthly, August 2012
  6. Capital in the Twenty-First Century, 2014.
  7. Jacobson and Gary C. Jacobson, The Politics of Congressional Elections, 5th edition (New York: Longman, 2000), 87.
  8. Nelson W. Polsby, Political Innovation in America: The Politics of Policy Initiation (New Haven; London: Yale University Press, 1985), 161.
  9. Tracy Sulkin, Issue Politics in Congress (Cambridge ; New York: Cambridge University Press, 2005).
  10. Lee Drutman and Mark Schmitt, “The 2014 Campaign Is a Campaign about Nothing,” The Washington Post, October 27, 2014.
  11. Kathleen Bawn et al., “A Theory of Political Parties: Groups, Policy Demands and Nominations in American Politics,” Perspectives on Politics 10, no. 03 (September 2012): 571–97, doi:10.1017/S1537592712001624; Marty Cohen et al., The Party Decides: Presidential Nominations Before and After Reform (Chicago: University Of Chicago Press, 2008).
  12. Michael J. Malbin, Peter W. Brusoe, and Glavin, Brendan, “Small Donors, Big Democracy: New York City’s Matching Funds as a Model for the Nation and States,” Election Law Journal 11, no. 1 (2012): 3–20; Michael J. Malbin, “Small Donors: Incentives, Economies of Scale, and Effects,” The Forum 11, no. 3 (October 1, 2013): 385–411.
  13. Mark Schmitt, “Political Opportunity: A New Framework for Democratic Reform” (New America, February 2015).
  14. David Bicknell Truman, The Governmental Process; Political Interests and Public Opinion, (New York: Knopf, 1951).
  15. Jeffrey H. Birnbaum, Showdown at Gucci Gulch: Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform, (New York: Random House, 1987), 13.
  16. Lee Drutman, The Business of America Is Lobbying: How Corporations Became Politicized and Politics Became More Corporate (New York, NY: Oxford University Press, 2015).
  17. Ibid.
  18. Steven M. Teles, “Kludgeocracy in America,” National Affairs, 2013.
  19. These obstacles arise both because of policy design (see, e.g. James Q. Wilson, The Politics of Regulation (New York: Basic Books, 1980); Mancur Olson, The Logic of Collective Action; Public Goods and the Theory of Groups (Cambridge, Mass.: Harvard University Press, 1965).
  20. Martha Derthick and Paul J. Quirk, The Politics of Deregulation (Washington, D.C: Brookings Institution Press, 1985).
  21. Lee Drutman and Steven M. Teles, “A New Agenda for Political Reform,” The Washington Monthly, May 2015.
  22. Richard L Hall and Alan V Deardorff, “Lobbying as Legislative Subsidy,” American Political Science Review 100, no. 1 (2006): 69–84.
  23. Lee Drutman and Steven M. Teles, “A New Agenda for Political Reform,” The Washington Monthly, May 2015.
  24. Frank R. Baumgartner and Bryan D. Jones, The Politics of Information: Problem Definition and the Course of Public Policy in America (Chicago ; London: University Of Chicago Press, 2015), 192.
  25. Derthick and Quirk, The Politics of Deregulation.
  26. “Governing in a Polarized America:  A Bipartisan Blueprint to Strengthen Our Democracy” (Bipartisan Policy Center, 2014), 52.
  27. Ibid., 53.
  28. Lee Drutman and Steven M. Teles, “A New Agenda for Political Reform,” The Washington Monthly, May 201.

Policy Entrepreneurs Helping Real Entrepreneurs:

Two Laboratories Ripe for Policy Experimentation

By Ryan Streeter Executive Director, Center for Politics and Governance and Clinical Professor University of Texas of Texas at Austin and Clinical Professor of Public Policy at the LBJ School of Public Affairs
Ryan Streeter
Ryan Streeter

Of all the important economic issues facing the United States, the long-term decline in new firm formation is marked by the starkest inverse relationship between its importance to the future of the economy and the interest policymakers show in it. The decades-long decline in startups is directly related to the lackluster jobs market that politicians decry, and yet they show little interest in understanding the economics of startups.

This has begun to change in recent years, owing in no small part to the efforts of the Kauffman Foundation to bring more data and knowledge to the subject, but the curiosity of policymakers and private-sector thought leaders has not caught up to the research.

This creates an opportunity for “policy entrepreneurs”—be they governors, mayors, thought leaders, or private-sector actors—who have a heart for experimentation and the will to swim upstream.

There are two major, under-explored areas of policy activity ripe for experimentation in the effort to boost entrepreneurial activity in America. Each will likely increase entrepreneurial activity and give researchers more material to work with as we build our knowledge base about what drives entrepreneurial growth. The first concerns economic development strategy at the state level. The second concerns the increasing profusion of rules at all levels of government that discourage entrants into the marketplace and likely depress startup activity.

Talent vs. Transaction

Just as all politics is local, so is economic development. State-based economic development is almost always a three-way negotiation between private-sector companies, state governments, and local governments. And it almost always is based on the wrong view of economic development. The right view of economic development usually is advocated by no one, and simply “happens” through serendipity rather than strategy.

What do I mean? To illustrate the point, take the story of Microsoft, told by Enrico Moretti in his 2012 book, The New Geography of Jobs. Bill Gates and Paul Allen moved their startup, Microsoft, from Albuquerque to their hometown, Seattle, in 1979. The pull of home did more for the future of Seattle than the city’s economic development officials ever would have hoped to do. Seattle was a coastal Detroit back then, with people and jobs fleeing to more favorable places. Albuquerque had a superior economy to Seattle’s and enjoyed lower crime rates. That all changed when Gates and Allen came home.

Moretti calculates that former Microsoft employees have launched more than 4,000 companies since 1979, and 120,000 service-sector jobs and 80,000 jobs for college graduates have been directly created by Microsoft’s presence in Seattle. The fact that Microsoft was in Seattle influenced Jeff Bezos’s decision to base Amazon there in 1994. Voila, another 100,000 jobs, many of which are high-skilled and, in turn, have produced a demand for services that creates additional jobs. In less than fifteen years, Seattle went from being a coastal Detroit to a global talent destination.1

Economic dynamism, measured by increases in per-capita income, net new jobs, increased household wealth, and an increase in innovation-based companies, results when entrepreneurs begin to gather around each other and draw new capital into a city or community. At some point in the stories of Seattle, Silicon Valley, Austin, and other high-growth hotspots, a “flywheel effect” kicks into place, and the community becomes a self-reinforcing talent magnet. To get the flywheel moving, though, a community needs talent capitalizing on breakthroughs and recruiting other talent to help build on those breakthroughs.

Transactional economic development—which just about every state in America practices by packaging together incentives such as tax credits, training vouchers, local tax abatements and cash bonuses—rarely gets the flywheel moving. The Seattle story was not the result of a carefully tailored incentive package that Washington state officials assembled to lure Microsoft from New Mexico. If such tools were in use back then, a good many of them likely were invested in companies whose names have been lost to history. That is simply the way transactional economic development goes.

I am not arguing that economic development incentives are bad policy per se, or even that they do not work. The evidence suggests, though, that they do not work very well—or at least not as well as their advocates suggest. Their relationship to the measures of economic growth for which they are employed, such as wage growth and job creation, is sketchy at best.2 And, despite the rapid growth in tax incentives used by states for economic development purposes in recent decades, states do not do a very good job of evaluating the impact of the incentives and using evaluation to guide compelling economic development strategies.3

But the biggest underlying problem is deeper than this: most state economic development officials see their primary job as trying to get established companies to move to their state from somewhere else. This is a widely shared, but flawed, view of economic development that is focused on transactions between states and large companies. Through a growing body of research, we now know that young companies are where the job-growth action is and that large older companies are net job losers over time. Job growth is a primary objective of every state economic development organization, and yet, the transaction model of economic development does not yield new jobs the way young growing companies do. Economic development policy and promoting entrepreneurship should go hand in hand.

The better view of economic development focuses on attracting and growing entrepreneurial talent. “Talent” is an overused word these days, yet despite its popularity as a concept, it has not become a comprehensive organizing principle for state-level economic development strategies anywhere in America. Basing economic strategies on entrepreneurial talent would require states to think less about companies and more about individuals. This is not quite the same thing as the idea of creating “ecosystems” that are attractive to entrepreneurs and engaging in place-based economic development to attract young talent, activities familiar to cadres of (mostly tech) entrepreneurs and professionals in creative industries in most metropolitan areas in America. When I say “think more about individuals,” I am speaking quite literally. States would do better to think like universities when they are trying to grow a successful academic department or football teams that want to build a stronger offensive line: go out and recruit the best you can get. Given what we know about regional economic growth and the behavior of entrepreneurs, the odds are far greater that a talent-centric approach to economic development would yield better job and income growth than the traditional transactional model does.

This type of approach would require state economic development activities to shift away from taking calls from forum-shopping businesses and leads from site selectors representing companies. Rather, it would require shifting toward talent identification more along the lines of executive search firms and offering concierge-like services tailored to those individuals.

What kinds of programmatic activity would such a shift require? First, as flippant as it may sound, it would make more economic sense simply to pay out cash to entrepreneurs in other states to move their new companies to your state than it does to structure multiple-incentive deals with larger, older companies. Impaneling a committee of private-sector leaders, entrepreneurs, and investors to vet candidates for recruitment would put a state government in the role of administrator and (at least partial) funder, but leave those whose industries and sectors of the company would benefit in charge of making decisions. Many states pursue a two-pronged strategy that combines the transactional model described earlier with seed funding for startups. A “talent fund” of sorts would meet the objectives of that two-pronged approach in a different way—and a way rooted more firmly in how regional economic dynamics work. Instead of trying to cultivate entrepreneurship from within and recruiting large companies from without, it is better to recruit fledging companies run by people who seem worth the gamble because of their prior track records, their early investors, or their reputation among partners.

Instead of a playing deal-maker with packages of off-the-shelf tax incentives and related tools, the lead organization under such a strategy would work more as a concierge to talent recruits. Help the trailing spouse find meaningful employment or civic involvement. Offset tuition payments for children. Help with commercial or personal real estate needs.

Another related programmatic option is to work closely with universities. For starters, alumni networks are filled with talented people who live elsewhere but have a connection to their home states. They may have moved off to higher-cost, higher-opportunity cities but find the idea of moving home appealing as they think about starting a family or launching their first enterprise. They create a prime pool of potential recruits for a talent fund model.

Universities also have a little-known advantage with H1-B visas. Federal policy caps the number of H1-Bs that can be issued each year, but universities are exempt from the cap and can submit applications on behalf of employees at any time during the year. Sponsored employees also can accept concurrent employment with non-exempt employers, allowing for a range of employment partnerships between universities and innovation-based companies. Given the track record of entrepreneurship among skilled immigrants and the fact that the majority of engineering and IT-related degrees awarded at American universities go to individuals born in other countries, this presents states an important avenue for boosting entrepreneurship and retaining talent in-state rather than watching that talent board planes and head home. Massachusetts has created a program based on the university exemption, and officials in Indiana are making plans to launch something similar. (Full disclosure: I served for two years as the chief policy advisor to the Governor of Indiana and initiated the early discussions about this program).

Unfortunately, along with its basis in flawed reasoning about economic growth, the wrong view of economic development also is more politically expedient than a talent-based strategy. As we will see in a minute, a serious effort to create talent-centric economic development presents political challenges, whereas transactional development always presents positive political incentives for local and state officials. Claiming credit for bringing 300 jobs to a disinvested rural community by luring a tire factory from a neighboring state is usually more important than most of the votes a legislator will cast in a given year.

As a result, states spend most of their efforts trying to lure across their borders companies that generally will not create any net new jobs in the foreseeable future. As state economic development agencies blast out press releases about a manufacturer that has moved to the state and created 150 new jobs, they typically do not announce that four other manufacturers closed their doors the same month and eliminated 1,000 jobs. Large, incumbent employers do not typically create net new jobs anywhere in America. The infusion of jobs into a local economy in the year this or that company moves to this or that state is good for the state in question in that calendar year, but, in the following years, it typically matters little either to job creation or economic dynamism. However, adding up those deals and the jobs they “create” is important to local officials and help states point to economic progress.

Variations of the Microsoft story could be told across America, albeit mostly with lower-profile companies, but states continue to build their economic development strategies largely on the transactional model because of inertia and politics. Switching to a talent-centric strategy presents some very real challenges. The most serious challenge is that talent largely congregates in urban areas today, and any strategy that directs more state resources into urban areas at the expense of non-urban areas is a hard sell politically. While serving as the policy advisor to the Governor of Indiana, I was in a conversation with a state senator who complained that Marion County, the heart of the Indianapolis metropolitan area, benefited from state policy at the expense of poorer, less-populated counties. When I pointed out that Marion County was a net donor to the rest of the state in terms of taxes paid and subsidies received, the senator said, “Well, I don’t care what your numbers say. We’re tired of seeing Indianapolis get everything.” He had a point. He was from a county that received more in subsidies than it paid in taxes, but that did not matter. What he saw was the brightest students from his home town going off to college and then moving to Indianapolis after graduation; meanwhile, local businesses in his community were shutting down as better-capitalized competitors grew in or near the capital city.

Another key challenge to a talent-centric strategy is that it sounds elitist no matter how one tries to characterize it, or at least that it favors the “haves” over the “have-nots.” The kinds of individuals that state leaders would want to recruit with a talent fund, if they had one, would be people who already have demonstrated success in one way or another. Paying them cash to move their startups will appear unfair to many voters and, as with any economic development deal, and especially those involving entrepreneurs, there will be failures. Such a strategy also will favor the cities and communities that already have some compelling concentration of wealth or talent. It typically would favor high-potential and, in some cases, high-flying individuals who do not seem like they need the help. It is hard to communicate “multiplier effects” to a skeptical public that wonders how these individuals will create jobs that benefit others, or to make persuasive arguments, a la Moretti, that lower-skill jobs will multiply and pay better by getting more entrepreneurs creating more innovation-based companies.

Never have I had an experience in which a good idea was embraced by so many people and yet went nowhere as when I tried to rally support for a talent fund in Indiana. Over the course of two years, I had many conversations with many entrepreneurs, business executives, investors, and some state legislators about collapsing some of the state’s economic development tools into a talent fund. The idea was nearly universally embraced as a general concept. But when it came time to try to figure out how we might act on the idea, conversations always hit a wall for a variety of reasons—mostly because the risks involved in moving away from an economic development model that seemed to be working well enough to a higher-risk model did not seem worth taking the first step.

One way to deal with the inertia and political forces that prevent state strategies from embracing the right view of economic development is to pursue regional strategies that also match the right view (as opposed to regional economic development strategies that do not work and have failed enough in the past to prove they will not work if tried again). This requires pursuing a talent strategy as much as possible in tandem with investments that improve the quality of life and underlying economic assets in cities or communities with the most potential. In Indiana, we spent a year studying cities around the country that had experienced disproportionately positive growth compared to peer cities. Our economic development officials traveled the state building support in public forums for a program that would award grants on a competitive basis according to strict criteria to regional cities that proposed a plan driven by private-sector leaders and private-sector financial commitments. The expected objections from rural areas were met by asking regional city partnerships to look for creative financing mechanisms that would tie outlying towns into the regional plan, without relying on unproven theories of growth. Met with a lot of skepticism at first, the program was officially created and funded in the 2015 legislative session. While it is too soon to know how well it will work, the process of building support for the idea created an ongoing public discussion about the importance of talent attraction in a state with a long history of relying on middle-skill employment in manufacturing and agriculture.

The Web of Rules

The second opportunity for policy entrepreneurs who care about increasing entrepreneurial activity in America has to do with all of the rule-writing that proceeds from the keystrokes of mostly unelected public employees. Regulations and rules have exploded in the past several decades in ways that favor entrenched interests rather than new entrants into the market.

Most discussions of regulations among policy professionals these days begin with a sort of litmus-test question about whether all interlocutors believe regulations are necessary. Let us posit at the outset that they are. But let us also posit that it is a legitimate question to ask whether most rules promulgated by government agencies are necessary to achieve the public good in question. Congress and state legislatures across America have delegated rule-writing to agencies with almost reckless abandon in recent decades, with an unfounded faith in public employees’ ability to discern what is best and true. The result is a proliferation of rules that are unfriendly to innovation, disruption, and the experimentation on which new enterprises are built. Andreessen Horowitz recently announced it is creating a public policy practice precisely because of the regulatory problems and questions that arise when new technology is created. Investing in new companies increasingly requires a well-conceived regulatory, or counter-regulatory, strategy.

The research on whether and how federal regulations dampen entrepreneurial activity is mixed. Polls show that, while small business owners are perfectly supportive of sensible regulation, they cite regulatory compliance as a major burden and a significant reason for not hiring new employees. What we do know, though, is that regulations at all levels of government have grown significantly over the past thirty years as startups have declined and big businesses have only grown bigger. In the twenty-year stretch from 1994 to 2013, Fortune 100 companies grew their share of nominal GDP from 33 to 46 percent.4 This trend was consistent before and after the financial crisis. During the same time, startups as a share of all businesses were cut in half. There are a number of factors driving these changes, and we do not understand them all. But it is becoming increasingly hard to argue with the claim that the rules of the marketplace increasingly favor larger, established firms and are used to prohibit entrants into the marketplace rather than setting the guardrails by which more people can enter the marketplace.

Should it really be illegal for a young stylist to cut people’s hair in her home and receive compensation in return? Does Uber need to prove that it is, or is not, a taxi service in order to allow private individuals to connect through it to share rides under self-regulatory terms designed to promote trust and accountability? Should ratepayers see their electricity bills go up because federal regulators have imposed standards on power plants that are indiscernible to most knowledgeable people and have never been approved by the elected representatives of those people? Does a startup need to spend exorbitant sums to get the FDA to stamp its approval on a mobile health diagnostic app that was already covered by sufficient disclaimers?

Reasonable people will disagree as they answer questions such as these. But one cannot argue that rules and regulations are not growing at a fast clip. Restrictions in federal regulations have grown 28 percent since 1997.5

While growth of the regulatory apparatus in America is rooted in the laudable concern for security and safety, it has progressed at the expense of innovation, progress, and growth. With a new time series measure constructed to analyze federal regulations’ relationship to economic performance, John Dawson and John Seater estimate that economic growth would have been 2 percent higher per year over the past half century, and GDP a staggering $38.8 trillion higher, if regulations had stayed at the same level as in 1949.6 While federal regulations may not have the effect on startups that many assume, as Nathan Goldschlag and Alex Tabarrok recently demonstrated, surveys routinely show that restrictive rules—usually at the state and municipal levels—affect perceptions about how welcome entrepreneurs are.7 For instance, in Thumbtack’s survey of business owners, individuals subject to licensing requirements are more likely than those who are not to say their state is inhospitable to small businesses.8

Eyes have long glazed over as politicians call for “regulatory reform” and then propose very little—if they propose anything at all—about how to generate that reform. The best counter-strategy to the growth of the regulatory state may, ironically, come from the new companies against whom the rules are typically rigged. Entrepreneurs can use new technology and new services to build support for rewriting outdated rules and regulations. When Google proposed rolling out Google Fiber in Mountain View, Calif., they were rebuffed by their local legal and regulatory regime and, thus, took bids from cities around the country. The winners typically attracted Google Fiber by lifting outdated regulations, and, in the process, Google demonstrated that it could increase broadband speed by 100x and make it available to customers at the same cost other providers charged for slower speeds. Google demonstrated that existing regulations were hiding very large costs. Thirty-four cities, including Mountain View, followed the winning strategy to get Google Fiber to move into town.

Using geographical competition to rewrite regulations and rules is not only available to entrepreneurs within the fifty U.S. states. International dynamics also can come into play. Developing products in partnership with non-U.S. companies can put external pressure on U.S. regulators, combined with increasingly sophisticated social media to build public support and awareness, since regulators are sensitive to reputational incentives. Y Combinator CEO Sam Altman recently said that a number of startups he is working with are looking overseas precisely because the domestic regulatory environment is too burdensome, and he holds out hope that this trend will help rules and laws in the U.S. evolve. “It’s sort of cool that there are a range of regulatory environments and people can make decisions about where they want to go,” he says. “If I were developing a drone company, I’d go to New Zealand. If I were developing a medical device company, I’d go to Europe.”9

There clearly are important steps that policymakers should be taking at the federal and state levels to limit and eliminate regulations. Senator Marco Rubio has proposed a National Regulatory Budget; as a presidential candidate, Mitt Romney proposed a regulatory cap; and Michael Mandel of the Progressive Policy Institute has proposed a Regulatory Improvement Commission. These proposals all have their merits and are in some ways variations of each other. Like other proposals before them, these ideas typically focus on the amount and cost of regulations and try to slow the growth of both.

The benefit of regulatory disruption by technology and entrepreneurs is that it exposes the intrusiveness and irrelevance of particular regulatory regimes, not just the cost of regulations or the number of rules. It also infuses the profit motive and consumer behavior as powerful forces for change. Uber’s highly publicized battles with municipal laws, rules, and cartels have the benefit of sympathy from the car-sharing service’s customers, who enjoy the experience far more than riding in the taxis local officials seem to be trying to protect. These types of battles will proliferate in more complicated ways as medical diagnostic technology advances, drones become more common, self-driving cars enter the market, and the sharing economy generates new services we have not even conceived of yet.

It seems to me that the best course of action is to form more explicit partnerships between investors, entrepreneurs, researchers, and universities to explore new ways of regulating, or leaving unregulated, new services and technology in ways that open access to markets and favor experimentation and innovation.

Conclusion

The two areas of potential experimentation suggested in this paper, moving toward a talent-centric economic development strategy and technology-driven regulatory disruption, obviously are not the only two potential areas of policy innovation that would spur more entrepreneurship. There is a lot of room to experiment in education and human capital development, especially in the field of what traditionally has been called vocational education. The college bubble problems in America after the Great Recession have raised to public awareness the critical issue of how much people get in return for the college costs they incur. The opaque and disorganized realm between high school and a four-year college degree, funded as it is by federal programs with names like “WIOA,” is filled with waste, overlapping initiatives, and a profound lack of demand-based strategies for matching people with careers. These issues, combined with new innovations in both the K-12 and higher education arenas, offer almost endless opportunities for policy innovators to spur more entrepreneurship.

But there is already quite a bit of activity in these areas, while fewer people are paying attention to the two proposed in this paper. Given their importance to creating a more entrepreneurial America, we would all benefit if more smart people were digging into them and creating new opportunities for pro-entrepreneurship reforms.

About the Author
Ryan Streeter is the Executive Director of the Center for Politics and Governance at the University of Texas at Austin and Clinical Professor of Public Policy at the LBJ School of Public Affairs. Streeter has served in a variety of public policy roles in both the private and public sectors. He served as a Special Assistant for Domestic Policy to President George W. Bush. Streeter is the author of more than 50 articles and has authored, edited, or co-authored four books. His articles have appeared in outlets such as the Wall Street Journal, Fox News, the Washington Post, National Review, the Weekly Standard, and other daily papers and online journals. Streeter holds a Ph.D. from Emory University.

Footnotes

  1. Moretti, Enrico. 2012. The New Geography of Jobs. New York: Harcourt. Kindle edition, Location 1040. See also Andrew Yang, “The Entrepreneurs Who Saved Seattle,” Fast Company, June 9, 2014.
  2. Florida, Richard. “The Uselessness of Economic Development Incentives,” CityLab, The Atlantic, December 7, 2012. .
  3. For instance, see “Evidence Counts,” Pew Charitable Trusts, 2012.
  4. For a good analysis of the issues, see Andrew Flowers, “Big Business is Getting Bigger,” Data Lab, Five Thirty Eight, May 18, 2015. 
  5. See data compiled by RegData at the Mercatus Center, http://regdata.mercatus.org/.
  6. Dawson, John, and John Seater. “Federal Regulations and Aggregate Economic Growth,” Journal of Economic Growth, June 2013.
  7. Goldschlag, Nathan, and Alex Tabarrok. “Is Regulation to Blame for the Decline in American Entrepreneurship?” .
  8. Thumbtack’s online survey results are here: https://www.thumbtack.com. A more in-depth treatment of the results can be found here: https://www.heartland.org.
  9. Denuccio, Kyle. “Silicon Valley is Letting Go of its Techie Island Fantasies,” Wired, May 16, 2015..

Optimizing Government for an Optimizing Economy

By Cary Coglianese Edward B. Shils Professor of Law and Professor of Political Science; Director, Penn Program on Regulation University of Pennsylvania
Cary Coglianese
Cary Coglianese

Across a range of sectors, entrepreneurial growth in the United States today stems increasingly from technological advances that facilitate the use of resources in ever more marginally effective and efficient ways. Rather than exploiting new resources altogether, many of the most captivating innovations in today’s economy instead deploy technology to optimize the production or allocation of existing resources, goods, and services.

Consider several seemingly disparate examples. So-called sharing-economy firms like Uber and Airbnb find transformational ways to allocate to willing buyers otherwise under-used resources, such as private cars and extra bedrooms. Marketing firms rely more than ever on data mining to make highly targeted pitches to consumers, while supply-chain and delivery system optimization has streamlined manufacturing and retail markets. Major advances in health care now travel under the banner of “precision medicine,” with health care professionals using sophisticated genetic screening and other data analysis to target treatments even more effectively to individual patients. “FinTech” firms promise to deliver financial products more accurately designed and priced to reflect underlying borrower risks and thus expand access to capital. These and other changes across the economy signal an important trend toward using technology to contextualize in ways that make possible more efficient uses of available resources.

The emergence of an optimizing economy holds important implications for public policy. Government must be able to keep up with fast-changing technological developments, fulfilling its important responsibilities to protect the public while also not impeding socially valuable changes in the economy. An optimizing economy, in short, depends on an equally optimizing government. Policymakers from all ends of the political spectrum should be able to unite behind efforts to optimize government, taking steps to strengthen governmental capacity to match better the most significant trends in entrepreneurship and economic growth.

The Optimizing Economy

All economic growth depends on finding optimal outcomes for society. In a general sense, then, the idea of optimization is hardly new. The American economy has long benefited from entrepreneurial efforts to optimize business activity, such as when assembly-line methods dramatically improved manufacturing efficiency around the turn of the last century. What is different today is how technology achieves optimization through increasing precision in matching goods and services to individual preferences and needs. Today’s optimization is marked by a leap forward in individualization, as well as on a reliance on big data and advanced analytics to support greater contextualization and distributed activity. Major innovations with these characteristics are already starting to disrupt vital sectors of the economy, including transportation, energy, healthcare, and manufacturing. More looms on the horizon.1

The transportation service behemoth, Uber, may provide the most salient example of the kind of disruption that the new optimizing model can create. Uber and, to a lesser extent, Lyft are transforming transportation services throughout the nation’s metropolitan areas by giving everyone with a smartphone the ability to find a driver willing to take them where they want to go. These companies are built on digital and networking technology that improves the allocation of existing resources by matching people who need transportation with people who have vehicles and time available.

In this same way, other so-called sharing-economy firms also make better use of resources that would otherwise go under-utilized. Airbnb, for example, matches homes and apartments that property owners have available with people who want a place to stay. In New York City alone, 416,000 guests took advantage of Airbnb from August 2012 to July 2013, which by one estimate translated into a loss in rental of one million hotel rooms during that period.2

The optimizing economy is broader than just sharing-economy firms. Conventional retail business also has been shaped dramatically by optimization. eBay optimizes retail sales by matching people who have items to sell with customers who want them. Amazon and Netflix use machine-learning to match customers better with products they likely desire. When customers go online to shop today, they now see displayed a variety of products identified as likely to interest them in particular. Facebook and other social media firms provide data to support still more sophisticated micro-targeting.

Similar strategies that optimize through individualization are transforming medicine.3 Lung cancer treatments, for example, now can be customized based upon the identification of specific individual genes.4 This so-called precision medicine is also facilitated by sophisticated data analysis of health records—somewhat akin to what Amazon and Netflix do with consumer purchasing data. The national shift to electronic medical records will only enhance future health care delivery based on machine learning and more precisely targeted treatments.5

Retailers like Amazon not only optimize through more individualized marketing, but they also have significantly optimized their supply chain management, inventory control, and product delivery systems. Overall, e-commerce optimizes retail space, but even in its warehouse storage, Amazon proves itself a physical manifestation of the optimizing economy. Its inventory is stored not by product type, but instead by the precise size and shape of every item the company sells. Each item is given an identifying number and measured, and then complex computer algorithms direct where and how those items should be stacked based on physical dimensions.

The nation’s congested highways represent a similar space-optimization challenge. Google’s self-driving cars, while still in the earliest stages, portend a transportation future that eventually could optimize on time and energy. Once everyone has a self-driving car, slowdowns caused by accidents or by drivers trying to cut ahead in exit lines could be dramatically reduced. Optimizing the transportation system to reduce congestion could deliver important productivity gains as well as make people’s lives markedly happier.6 In addition, when everyone’s cars start to do all the driving, human occupants may be able to focus their attention away from the road to other, more productive uses of travel time.

The future also may bring a highly distributed system of energy production built on solar panels and, to a smaller extent, micro-generators. Already these kinds of distributed energy technologies are being put into ever-increasing use; with the prices for solar cells dropping dramatically, individuals are now not only powering their own homes, but also seeking to sell excess energy back to the grid. Full implementation of distributed energy production will depend ultimately on advances in energy storage technology; however, the prospect of using currently untapped roof space in cities around the country to produce energy holds significant optimizing potential.7

These are but some of the more prominent examples of the emerging optimizing economy. They reveal how significant parts of the economy’s trajectory will be influenced by optimization, and they illustrate optimization’s three main features: customization or individualization; the use of machine learning and other sophisticated forms of data analysis; and the reliance on distributed resources, such as data or distributed energy. These three characteristics underlie the great promise the optimizing economy holds for improving society—but they also create major challenges that government must confront.

Challenges for Government

At its core, the optimizing economy is based on contextualizing: doing a better job in matching or otherwise finding ways to tap into and exploit smaller, more distributed, but previously underused, resources. And yet, herein lies the fundamental conundrum for government. Governments do not have a standout track record when it comes to contextualizing; indeed, they are generally not even in that business. Lawmaking, for example, is the business of establishing rules, which are, by definition, generalizations, not context-specific judgments.8 And in the enforcement and implementation of laws, government aims to treat people equally—the same, not different. Even if government does not always achieve this equal-treatment aspiration in practice, the orientation toward standardization still persists throughout government and resists movement toward customization. The upshot is a growing mismatch between the private and public sectors, a gulf not just between private interests and the public interest, but a chasm in methods and capacities. Entrepreneurship increasingly aims at greater and greater precision, while government regulation and administration continue to operate by broad generalizations and standard operating procedures.

The growing gulf in optimization propensity and skill between the private and public sectors should concern anyone, no matter one’s political philosophy. It may seem that calling attention to the optimization mismatch fits most naturally with a critique of regulation as a burdensome barrier to innovation. After all, when state and local government officials invoke existing regulations to resist disruptive innovations—such as Uber’s networking dispatch services—that resistance fits into a narrative of regulatory stagnancy. But those who reject the critique of regulation as an unjustified drag on business and who, instead, worry that regulation is insufficiently protective of the public, ought also to be concerned about the optimization mismatch: new businesses and business practices, after all, bring with them new and different risks. If nothing else, the very newness of products and processes in the optimizing economy creates uncertainty about their impact on others and uncertainty over their quality. Think of how cybersecurity as a major policy problem simply did not exist twenty years ago.

But there is more than just the newness of optimizing innovations. Innovation by optimization actually may make hazards to the public harder to detect and prevent. Precision drugs, for example, have to be manufactured to more exacting standards if they are to be effective—which itself makes government’s job in overseeing product quality that much harder. Moreover, the conventional standards by which government tests new drugs for safety and efficacy may prove ill-equipped for an era of precision medicine, as more targeted formulas and treatment protocols necessarily reduce the sample sizes upon which drug testing’s statistical analysis depends.

The optimizing economy’s penchant for distributing, as well as customizing, also may mean there could be many new sites of distinct harm that government will need to monitor. With the advent of 3D printing, for example, any individual with the necessary technology and know-how could begin to manufacture any number of products—even, potentially, new forms of biological substances or dangerous materials. The need for smarter, more sophisticated monitoring capacity by government seems likely to grow rather than diminish.

And yet, government also needs to tread carefully when confronting optimizing innovations, because even if they hold risks, they also hold the potential for making significant improvements in society. In the face of prospects for significantly improved health outcomes from precision medicine, for instance, drug regulators charged with ensuring safety and efficacy of new products also must not impede the development of better medicines. What society needs is an ever-more-optimizing government to come closer to matching an ever-more-optimizing economy.

At some fundamental level, of course, government officials always have had to confront a tradeoff between squelching technological innovation and overlooking new risks. Interestingly, balancing the benefits of government regulations with their costs is itself an optimization problem—although it has been one for which the federal government has only in the last few decades created robust institutional processes to try to solve.9 Yet, no matter how well or poorly the federal government has reconciled regulatory benefits and costs in the past, in the years to come it will only become harder to regulate well. As the regulation of precision medicine illustrates, identifying and delivering regulatory benefits will become more complicated in the face of growing complexity and the contextualized nature of many business enterprises. Regulatory problems are likely to be subtler and much harder to detect overall. They likely will be more dynamic too, emerging from systems of economic transactions that are moving quickly—sometimes across borders.10

Regulators also will face challenges in controlling regulatory costs, potentially finding it more important than ever to minimize cumulative and overlapping regulatory burdens. According to the Office of the Federal Register, the size of the federal rulebook has grown nearly 2000 percent since 1950.11 Although it is not clear whether this growth is itself a problem—compared to what should 2000 percent be judged? —such growth does indicate the complexity of the regulatory system, as well as the potential for increased cumulative regulatory costs. Michael Mandel and Diana Carew have argued that accumulating regulations bring more than just increased costs to businesses; they also increase the possibility of undesirable interactions between regulations and potentially can decrease the amount of upper-level management attention devoted to further business optimization and growth.12 In some areas of regulation, such as food safety and financial services, concern persists that regulations already overlap with each other or are administered by different government agencies in an uncoordinated fashion.13 Such concerns seem only likely to grow in an optimizing economy. Uber, after all, faces disputes today over whether its drivers fall into the category of employees, who are subject to labor law protections, or the category of contractors, who are not.14 Other firms offering optimizing innovations may find that they cut across a variety of regulatory categories. Moreover, as firms increasingly build optimizing business strategies, the relative importance of overlapping regulatory authorities to their success may only increase. Overlapping jurisdictions and the accretion of regulation layered upon regulation may be more easily tolerated in a “satisficing” era than in an optimizing one.

Optimizing Government

The growing mismatch between complex contextualization in the economy and an accumulated set of rule generalizations in the government may be one of most significant challenges for governance of the U.S. economy in the decades to come. What might be done to bring government and the regulatory system into greater alignment with emerging innovations in the economy, so as to regulate more smartly an economy that is itself only growing smarter?

First and foremost, an optimizing government needs an analytically sophisticated workforce.15 Since at least the 1980s, though, it has been clear that the federal government confronts a shortfall in talented managers and leaders. As Paul Volcker’s National Commission on Public Service noted then, “too many of the nation’s senior executives are ready to leave government, and not enough of its most talented young people are willing to join.”16 It is no longer just a matter of stemming the tide of out-flow from the ranks of governmental service. Today, government needs a new type of talent in-flow as well, one that brings even greater analytic capacities to the oversight of the optimizing economy. The federal government needs human analytic capacity capable of understanding, tracking, and responding to new risks and new business practices in ways that do not impede productive innovations for society. If one of the answers to declining American competitiveness is, as Michael Porter and colleagues have recently suggested in the context of regulating unconventional oil and gas development,17 the greater use of performance-based and management-based approaches to regulation, government will need to have the distinctive human infrastructure in place to establish and implement these approaches in ways that actually work well.18

Second, the federal government’s information technology infrastructure needs to rise to the task. Aging computer systems are well known,19 but perhaps nearly as important and more challenging will be to find ways to combine databases across the federal government and use machine learning to make regulation and other governmental functions smarter. New analytic tools give regulators an ability to optimize their own regulatory resources better. For example, analysis by Adam Finkel and Richard Berk at the Penn Program on Regulation has shown that the federal Occupational Safety and Health Administration could improve its targeting of inspection resources dramatically by combining and applying machine learning to disparate governmental and private-sector datasets. In an economy increasingly propelled by machine learning and other optimizing analytics in the private sector, it makes sense that regulators need to rely on these techniques, too.20 Some agencies, like the U.S. Environmental Protection Agency, are starting to consider how new remote sensing and other technology can be deployed for improved regulatory monitoring, but the government has many miles still to travel in this direction.21

Finally, an optimizing government should learn from the past in order to chart a better path forward. Society has faced innovations and new risks before. Yet in the past, new technologies have sometimes been given either a regulatory “free pass,” emerging with little government oversight but leaving public harms in its wake—as with much economic development in the nineteenth and early twentieth centuries—or, at the other extreme, new innovations have sometimes been blocked altogether. Both approaches are decidedly non-optimizing—even clunky—in the context of today’s economy. And yet, remnants of these approaches still persist in public policy responses to new innovations in the economy.22 The government can afford neither to give a complete regulatory free pass to new innovations that pose potential risks, nor to adopt complete bans on valuable new business models and practices. Government’s proper aspiration lies somewhere between these extremes. Smarter regulation—which requires still smarter regulators—optimizes by regulating just enough, in the right ways.

Conclusion

What stands in the way of more optimal government? Significant resource constraints, bureaucratic and political entrenchment, and a status-quo bias—all of these are and likely will remain major impediments for some time to come. But they need to be confronted and overcome. Public policy challenges in an optimizing economy certainly will be no easier than ones in the past; however, they will prove decidedly insurmountable if nothing is done to counteract the growing mismatch between governmental capacity and private-sector innovation. Policy action must become smarter than ever before.

The path forward to expanded entrepreneurship and economic growth involves new, creative forms of optimization. Indeed, an American economy based on natural resource and labor abundance may already be on the decline, and, if so, the economy of the future will, by necessity, be built on optimizing what is left. With significant portions of the economy already based on an imperative to optimize, and with businesses rapidly advancing in precision and analytic sophistication, government will only be able to fulfill its responsibilities by becoming more optimizing itself.

About the Author
Cary Coglianese is the Edward B. Shils Professor of Law and Professor of Political Science at the University of Pennsylvania, where he currently serves as the director of the Penn Program on Regulation and has served as the law school’s Deputy Dean for Academic Affairs. His most recent books include: Does Regulation Kill Jobs?; Regulatory Breakdown: The Crisis of Confidence in U.S. Regulation; Import Safety: Regulatory Governance in the Global Economy; and Regulation and Regulatory Processes. Previously Coglianese served on the faculty at Harvard University’s John F. Kennedy School of Government. He served on the ABA’s task force on improving Regulations.Gov, and chaired a task force on transparency and public participation that offered a blueprint to the Obama Administration. Coglianese holds a JD, a PhD in political science and a master's in public policy all from the University of Michigan. His undergraduate degree is from the College of Idaho.

Author Acknowledgements

I thank John Coglianese and Shane Murphy for helpful comments on an earlier draft of this paper. Shane Murphy also provided valuable research assistance.

Notes

  1. Many of these economic changes bear affinities with what Jeremy Rifkin describes as the “zero marginal cost society.” Jeremy Rifkin. 2015. The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism.
  2. Kusisto, Laura. “Airbnb Cites its Role in City.” The Wall Street Journal (October 21, 2013); Jeremy Rifkin. “The Rise of the Sharing Economy.” Los Angeles Times (April 6, 2014). A study of Airbnb’s impact on the hotel sector in Texas found that the entrance of Airbnb into this market reduced hotel prices, as well as contributed to up to a 10 percent decline in revenue for incumbent hotels. Georgios Zervas, Davide Proserpio, and John Byers. “The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry.” Boston University School of Management Research Paper (May 7, 2015).
  3. Jameson, J. Larry, and Dan L. Longo. “Precision Medicine—Personalized, Problematic, and Promising.” New England Journal of Medicine (June 4, 2015); Francis S. Collins and Harold Varmus. “A New Initiative on Precision Medicine.” New England Journal of Medicine (February 26, 2015).
  4. Buettner, Reinhard, Jürgen Wolf, and Roman K. Thomas. “Lessons Learned From Lung Cancer Genomics: The Emerging Concept of Individualized Diagnostics and Treatment.” Journal of Clinical Oncology (May 20, 2013).
  5. Hawgood, Sam, India G. Hook-Barnard, Theresa C. O’Brien, and Keith R. Yamamoto. “Precision Medicine: Beyond the Inflection Point.” Science Translational Medicine (August 12, 2015).
  6. See Ike Brannon and Mike Gorman. “How Investment in Transportation Infrastructure Boosts Productivity.” The Hill (September 23, 2015).
  7. For an overview, see Boston Consulting Group. 2014. Distributed Energy: A Disruptive Force (2014).
  8. Schauer, Frederick, and Richard Zeckhauser. 2007. “Regulation by Generalization.” Regulation & Governance 1:68–87.
  9. And, even then, the standards under which the institutional process of creating and reviewing benefit-cost analysis of major new regulations have shifted to some degree. In 1981, President Reagan formalized White House review of major regulations, directing in Executive Order 12,291 that the benefits of regulation generally “outweigh” their costs—a formal expression of optimization. In 1993, however, President Clinton replaced the Reagan executive order with one of his own (Executive Order 12,866) that has been retained by subsequent presidents and that requires, instead of full optimization, that regulations’ benefits “justify” their costs.
  10. See, e.g., Cary Coglianese, Adam Finkel, and David Zaring, eds. 2009. Import Safety: Regulatory Governance in the Global Economy.
  11. Office of the Federal Register, Code of Federal Regulations (Total Volumes and Pages 1950–2104). Available at https://www.federalregister.gov.
  12. Mandel, Michael, and Diana G. Carew. “Regulatory Improvement Commission: A Politically-Viable Approach to U.S. Regulatory Reform.” Progressive Policy Institute (May 2013).
  13. See Cary Coglianese. “There’s an Easy Way to Untangle Regulatory Knots.” Los Angeles Times (March 31, 2015).
  14. Steinmetz, Katy. “Why the California Ruling on Uber Should Frighten the Sharing Economy.” Time (June 17, 2015).
  15. Coglianese, Cary. “Regulatory Excellence as ‘People Excellence.’” RegBlog (October 23, 2015). 
  16. National Commission on the Public Service. 1989. Leadership for America: Rebuilding the Public Service.
  17. America’s Unconventional Energy Opportunity
  18. Coglianese, Cary. “Management-Based Regulation: Implications for Public Policy,” in Gregory Bounds and Nikolai Malyshev, eds. Risk and Regulatory Policy: Improving the Governance of Risk (OECD Publishing, 2010); Cary Coglianese, Jennifer Nash, and Todd Olmstead. 2003. “Performance-Based Regulation: Prospects and Limitations in Health, Safety, and Environmental Regulation.” Administrative Law Review 55: 705–729.
  19. Jack Moore, “The Crisis in Federal IT That’s Scarier Than Y2K Ever Was,” Nextgov (November 20, 2015).
  20. Coglianese, Cary and David Lehr. 2016. “Regulating by Robot: Administrative Decision-Making in the Machine-Learning Era.” Manuscript.
  21. Giles, Cynthia. “Next Generation Compliance.” Environmental Forum (September/October 2013).
  22. One of the more salient examples comes from the energy sector, where technological advances have enabled extraction firms to find natural gas in literally fine-grained ways by using hydraulic fracturing—or fracking—to extract previously trapped energy resources. The federal government exempted unconventional natural gas development entirely from certain environmental regulations under the so-called Halliburton amendment. Several states, including New York, have gone to the other extreme and have enacted complete bans on this method of energy extraction.

The Political Economy of Rent-Seeking and Inequality

By Steven M. Teles Associate Professor Department of Political Science Johns Hopkins University
Steven M. Teles
Steven M. Teles

America today faces two great challenges. First, the explosion in inequality threatens the public’s belief in the justice of our economic system. Second, stagnating firm formation endangers economic growth and employment. We are used to thinking about the solutions to these problems as in tension with one another—greater inequality necessarily comes at the price of economic growth. But this tension dissolves where inequality is generated by policies that distort market allocations of resources, what I call “upward-redistributing rents.” These rents are large and growing, produced by disturbing flaws in democratic governance that facilitate the use of the state to enrich the already advantaged.

Redistribution is a Sysiphian task when the state is simultaneously creating the inequality it seeks to remedy. Any feasible egalitarianism must marry redistribution with an attack on the state’s own role in producing inequality.

Conservatives should find the growth of regressive rents alarming, as well. Historically, conservatives have defended the distribution of rewards that flows from capitalism as just, so long as they are produced by free exchange. At the same time, conservatives have argued that the growth of state intervention in the economy increasingly distorts capitalism, producing a political economy of crony capitalism. These two arguments are on a collision course, for the more that our economic system is characterized by crony capitalism rather than by a free market, the more likely that the distribution of income is a product of state action rather than free exchange.

Conservatives are increasingly willing to broach the issue of inequality when it comes to the bottom of the income distribution, with even very conservative Republicans drawing attention to declining social mobility and the creation of a permanent underclass and a fragile working class. For example, Sen. Marco Rubio has argued that, “America is still the land of opportunity for most, but it is not a land of opportunity for all. If we are to remain an exceptional nation, we must close this gap in opportunity.” This is refreshing, but also insufficient. Conservatives have every reason to admit that exploding top-end inequality is their problem, too. If high-end inequality is not diminished through removing the mechanisms by which the wealthy use the state to extract resources from the rest of society, the inequalities that they believe are just, those that flow from innovation and hard work, will be in danger.

Conservatives and liberals will continue to disagree on the scale of redistribution created by even a properly organized market. I happen to believe that those inequalities are growing and normatively troubling, and justify greater redistribution. But there is ample room to work across ideological lines to attack state-generated inequalities.

These inequalities have their root in some fundamental problems of democratic government, exacerbated by peculiar features of American political institutions and super-charged by the recycling of high-end rents back into the political process. Exploding high-end inequality is, in short, a symptom of what Francis Fukuyama has called “political decay.” To conserve free markets, conservatives need to take seriously the political decay caused by a political system too open to their usual allies in business and the wealthy. Reversing that decay will require the creation of new organizations to counter the influence of organized interests, and a rebuilding of the autonomy and analytical capacity of the state itself.

I.      The Causes of Inequality

In the classic statement of the tension between equality and efficiency, Arthur Okun claimed, “In an economy that is based primarily on private enterprise, public efforts to promote equality represent a deliberate interference with the results generated by the marketplace, and they are rarely costless.”1 Okun merely stated the common sense of the economics profession that inequality is a natural feature of market economies, that remedying the distribution of income is primarily a matter of redistribution, and that redistribution is subject to familiar problems of moral hazard, reduction of individual incentives to work and invest, and the “leaky bucket” associated with processing resources through the state. Okun was a liberal economist, so he was willing to accept more of these distortions to get to a more just distribution of income. But his framework for analysis was not fundamentally different than that of his disciplinary colleagues to the right.

There was much wisdom in Okun’s framework, for there is a tradeoff between many forms of redistribution and economic efficiency and dynamism. But note that Okun began by assuming “an economy that is based primarily on private enterprise.” Most of our public discourse on political economy takes as a given that a wave of deregulation and the expansions of markets over the last third of a century has made the United States, if anything, more based on “private enterprise.” And, in certain areas, that is certainly true. Inspired in part by Okun’s colleagues at Brookings, the United States deregulated a number of products and services, such as airlines and trucking, in the 1970s and 1980s.2

But the most important market rigidities that have been eliminated have been those that protected those from the middle class and below, such as labor unions.3 In fact, the great paradox of the last third of a century is an explosion of regulation in a supposedly deregulatory era—regulation that has the effect of redistributing, sometimes dramatically, upward. Our economy is, at the top, less characterized by “private enterprise” than it was in Okun’s day. If so, there may not, in fact, be a “big tradeoff” between equality and efficiency. We could move to greater equality through, in particular areas, organizing our economy in a more market-like fashion through the elimination of rents, which for my purposes we can define as legally created barriers to entry or other market distortions that create excess profits for market incumbents.4

A focus on rent-seeking allows us to look at American inequality with a different lens. On the left, there has been a tendency, lately accelerated by the publication of Thomas Piketty’s Capital, to see the expansion of inequality as a natural product of capitalism, one that can only be remedied through massive taxes and transfers. Inequality, for Piketty and his followers, is what happens in the absence of state activity.

Further to the center, the dominant account of exploding inequality puts it at the feet of the increasing returns on skills and education, driven by the shift of the economy to cognitively demanding tasks, the replacement of tasks susceptible to routinization by technology, and the expansion of the scope of the market due to free trade and the decline in transaction costs.5 And, as Erik Brynjolfsson has argued, technology is even more powerful in replacing even white-collar labor than it has been in the past.6 The solution to inequality, therefore, is massive increases in education that will allow workers to perform more cognitively skilled work that cannot be replaced by routinized and performed by machines.

While they imply very different policy responses, both of these theories assume that spiraling incomes at the top are driven by the market. If inequality at the very high end is significantly a product of state action rather than its absence, then any agenda to attack creeping plutocracy must have a deregulatory component. Not simply deregulation, of course, because market-rigging is mainly an explanation for the top of the income distribution. The decline in living standards of the middle and bottom lead me to standard liberal remedies like more labor organization in private firms, more social insurance, and reforms to criminal justice. But inequality cannot be remedied just by pulling up the bottom; in fact, spiraling incomes at the very top represent a distinct problem that is troubling even if one is not moved by the Gini coefficient.

II.     A Quick Trip Through Regressive Rents

While there are certainly large parts of the 1 percent made up of entrepreneurs and innovators, the image of the United States as a free-market paradise is hard to square with the actual composition of the top strata of the American income distribution. Start, for simplicity’s sake, with a breakdown of the occupations of the top 1 percent done by The New York Times in 2012.7 What immediately jumps out from this analysis is the huge over-representation of financial services (both directly and within other occupational groups like lawyers and managers), doctors, dentists, and lawyers—all fields characterized by a very high percentage of members with incomes in the top 1 percent. The occupational concentration of the wealthy in rent-suffused sectors is even more dramatic when you examine the top .1 percent.8 Doctors, dentists, and lawyers are all licensed professions, and licenses are an obvious barrier to entry and competition. In addition, the specific regulatory structure of some of these licensed professions (regulations that are almost always state-level) serve to redistribute upward. For instance, dental hygienists (typically female and less well-off) typically are required by state law to practice in the offices and under the supervision of a licensed dentist (typically male and wealthier). This allows dentists to extract a percentage of the incomes of hygienists simply as a result of the characteristics of regulation—as well as preventing hygienists from providing competition by setting up independent offices, and poaching on (higher-paid) parts of dentistry that hygienists are technically (but not legally) able to perform.9 A similar pattern is found in medicine, where the law often specifies tasks that only licensed doctors can perform, even though nurses are technically capable of doing so. Dean Baker has shown that the incomes of doctors and dentists (and optometrists, as well) are artificially inflated by constraints on the number of practitioners trained in any given year, the number of foreign-trained practitioners allowed into the country, and limits on third-party compensation for services provided abroad. Finally, medical organizations play a central role in determining their own compensation through their control of prices paid by Medicare.10 While numerically smaller, the owners of car dealerships—who are protected from competition by state regulations requiring franchises rather than direct sales—make up an intriguing part of the 1 percent.11 The laws that have allowed many car dealers to accumulate enormous fortunes share features with other forms of regulation that artificially constrain market consolidation and prevent competition by outsiders (including scale and more efficient business models). While such artificial market fracturing may be worth the cost in particular sectors where macro-stability is at issue (one thinks particularly of banking, where the consolidation and securitization of the mortgage market played an important role in the housing bubble and crash), no such justification applies in most markets. For example, similar regulations protect undertakers, who benefit from a panoply of laws that insulate them from competition and that artificially prevent market consolidation.12 Interestingly, these regulations tend to protect incumbents both from competition from above (think about Walmart going into the cremation business) and from below (from outsiders with cheaper business models, who are kept out by regulations requiring a high level of equipment that is unnecessary for safety). Unsurprisingly, owners of car dealerships and undertakers, while not particularly visible to political scientists, actively contribute to political campaigns, are a major presence in Congressional districts, and are powerful players in state capitals.12 In fact, some have made fortunes large enough to help themselves to seats in Congress, like Virginia’s Don Beyer, who owns several car dealerships. While the business models (and returns) of car dealers have been under stress because of the entrance of national firms like CarMax (illuminatingly focused on the secondary market for cars, not the more densely regulated primary market) and greater price transparency due to the Internet, these trends are limited by the political power of car dealers. For instance, even when well-resourced car manufacturers like Tesla Motors, armed with their own lobbyists, have attempted to eliminate franchised car dealers, they have found themselves stifled by powerful coalitions of franchised dealers. Those dealers have enjoyed the support of self-professed pro-market, conservative Republican governors in states like Michigan.13 A concentration of high incomes also characterizes the field of government contractors, such as private prison managers, defense contractors, for-profit colleges, and others whose almost exclusive dependence on government revenue raises question about whether they are “private.” Or, consider the field of management consulting, which attracts an extraordinary percentage of Ivy League college graduates.14 As Christopher McKenna shows in his book, The World’s Newest Profession, the outsized incomes of consultants do not come from their ability to recommend innovative practices to firms. Instead, they come from the “rent” they extract from performing a legally mandated due diligence ritual for firms, or by performing tasks that otherwise could be done (at lower cost) by public employees in governments under pressure to suppress the numbers of workers on formal government payrolls.15 Rent also plays a critical role in the increasing concentration of wealth as distinct from income. In a widely discussed analysis published in the Brookings Papers on Economic Activity, economist Matthew Rognlie shows that the real driver of increased wealth of the top end is not return on industrial capital, but housing price appreciation. Housing is a highly regulated and subsidized sector of the economy, and constraints on housing supply relative to demand are especially severe in the areas with the highest concentration of high earners, like San Francisco, New York, Washington, Seattle, Boston, Los Angeles. Estimates by Edward Glaeser put the impact of constraints on housing supply on price as on the order of 50 percent. In other words, “insiders” in the housing market, by preventing housing supply from equilibrating with housing demand, are able to use regulation to transfer resources from housing “outsiders.”16 The same constraints on supply that enrich already-wealthy homeowners also generate rents for those in real estate development with the political connections to acquire permission to build, a considerable amount of which are redistributed back to politicians through political contributions (of which real estate developers are almost always the largest participants).

At the very highest end, rent is pervasive in finance, entertainment, and technology. Regulations that subsidize large banks in their trading through the “insurance” of too-big-to-fail status, the creation of a huge pool of assets for investment managers through a variety of tax-advantaged savings devices like 401ks and IRAs, and the construction of a massive, highly liquid securitized finance market all have created a field with enormous profits not connected to productive contribution to the economy.17 The pool of rents available explains why finance went from the source of 4.5 percent of the fortunes in the Forbes 400 in 1982 to 20.3 percent in 2011.18 As Thomas Phillipon has shown, “The unit cost of intermediation does not seem to have decreased significantly in recent years, despite advances in information technology and despite changes in the organization of the finance industry.”19 Whatever advances have been made in finance, they appear to have been captured by the producers of financial services, not their consumers.

While a full analysis of the political source of financial rents is beyond this paper, two stand out. First is James Kwak’s argument that the financial sector has prevented attacks on its rents through what he calls “cultural capture,” the perception among regulators, legislators, and others that practitioners of financial engineering are unusually intelligent and engage in activities sufficiently beyond the capacity of ordinary decision-makers to understand that deference should be paid to their preferred policies.20 Second, the collapse of Congressional decision-making capacity (and, to a degree, that of regulatory agencies, as well) has made policymakers exceptionally dependent upon the financial sector for knowledge of the impacts of regulation.21 This is consistent with the widely accepted finding that lobbying operates primarily through informational subsidy, which is particularly important when a policy domain is highly complicated and technical.22 Combined with the extremely limited countervailing organizational capacity on the other side when detailed regulatory decisions are made,23 finance has (at least until very recently) a massive informational imbalance that it has been able to use to preserve a supportive regulatory climate for growth.

Finally, consider the distributive impact of intellectual property in the fields of technology, pharmaceuticals, and entertainment. It is not overstating matters to observe that nearly all the returns in these fields are due to patents and copyrights, since the marginal cost of producing copies in these areas is close to zero. While some intellectual property protection is necessary to incentivize production in areas like entertainment and the arts, the same is not the case with (for instance) pharmaceuticals, where other policy regimes (like prizes for drug development) are possible with different distributive effects.24 What is most interesting for our purposes is that IP protection has increased substantially over the last third of a century, and it has done so in highly obscure, largely uncontested ways.25 For instance, the Copyright Term Act of 1998 extended protection of existing copyrights (that is, of products that already exist and, therefore, for which incentive effects are impossible), substantially increasing the wealth of all existing copyright-holders. Remarkably for a law that redistributed such an enormous amount of wealth, there was almost no lobbying among opponents.26 Even more dramatically, a series of trade deals since the late 1980s extended the reach of American IP law globally. The Office of the United States Trade Representative provided American technology and content companies with exceptional access, and helped frame the issue in quasi-mercantilist terms.27 By entrenching such rules in trade law, which would have to be renegotiated multi-laterally, the beneficiaries of strict IP among Hollywood and pharmaceutical companies have made the destruction of their rents all but impossible.

We do not currently have good estimates of the share of rent in the income or wealth of the top strata of American society, but there is sufficient evidence across these areas to look to the suppression of competition as a core part of our explanation for skyrocketing inequality. After all, there is evidence that there has been an overall increase in protective regulation at the top of the economy. Land use regulation has increased over the last third of a century. IP protection is stronger than it once was. The size of banks is larger, as is the pool of securitized finance and subsidized private savings. We have seen a huge increase in occupational licensing. Contracting and privatization have increased. The last third of a century, in short, has been an era in which inequality has been driven at least as much by an expansion of regulation as by the emancipation of markets.

III.    The Political Economy of Rent-Seeking

The evidence is very suggestive that upward-redistributing rents are pervasive, growing, and rooted in fundamental problems in the American political system. What, if anything, can be done about them? If one consulted only the economists who pioneered the idea of rent-seeking, the answer would be terribly depressing. Starting with Mancur Olson, economists have traced the political success of rent-seeking to the unbalanced incentives that rent extractors and those they seek to exploit have to organize. While those with concentrated interests have a strong incentive to invest in political activity and to engage in surveillance over political actors, those with diffuse interests do not. The organized are better able to aggregate their strength as individuals, and to organize to apply that strength strategically. Thus, rent extraction is a natural law of democratic political systems, limited only by constitutional constraints. An entire academic industry has been built just playing out this insight.

In some ways, the problem is even worse than what public choice would imply. As Baumgartner and Jones have argued, “policy monopolies” (a concept that overlaps closely with rent-seeking coalitions) protect themselves through more than disproportionate organization—they do so through control of institutional venue and policy image. As we saw in the short cases discussed in the previous section, many of the most powerful forms of upward redistributing rent-seeking are characterized by obscure decision-making contexts. Occupational licensing operates through state licensing boards. Development decisions are made at the state and local level, often by governmental entities that are almost the definition of low visibility, such as historical preservation commissions. Financial regulation operates through multiple separate regulatory bodies in highly technical rule-making processes. Intellectual property decision-making has, for the last couple decades, been pushed into international trade deals that operate under unusually closed rules, and then controlled by global trade bodies. Many of these institutional venues are especially susceptible to capture by regulated entities with a much greater incentive to engage in surveillance of their proceedings and participate in decisions about their membership. And they are—intentionally—difficult for outsiders to understand or participate in.

These rent-seeking arrangements also are protected by positive policy images. Upward-redistributing rent-seekers invest considerable resources in convincing policymakers that they are sophisticated, intelligent, and responsible—the source of the “cultural capture” that Kwak identified in finance. They often rely on the public-interested reputation that comes with professional status, as in medicine and dentistry. In housing, urban anti-development interests draw on an association with environmental protection and the perception that development only serves the interests of developers and wealthy gentrifiers. Defenders of strict intellectual property rules claim that they are protecting the preconditions for economic and cultural creativity, as well as providing an incentive for the preservation of culture (such as movie prints). Real estate agents spend considerable energy convincing Americans that their very high, collusive fees ensure that American homebuyers are well-advised and informed. While these policy images typically are lacking in merit, they do not need to be if there is a dearth of highly motivated, organized, and informed advocates on the other side actively seeking to puncture these images.

When you combine organizational imbalance, venue control, and protective policy images, you have an impressive set of defenses for upward-redistributing rent-seeking. And, this is all without saying anything about the greater wealth possessed by those who benefit from these rents. As Martin Gilens has shown, there are strong associations between the political preferences of the wealthy and the outcomes of public policy, and none with those of the middle- and working-class. Gilens demonstrated that this association is not simply a function of representational inequality—that is, the interests of the wealthy are advantaged independent of their capacity to project them through political activities like lobbying.28 Public officials tend to be disproportionately drawn from the wealthier strata of society and, thus, are likely to share the educational and social experiences that shape the preferences of the wealthy. While this may not matter on the most severely contested issues, the signal feature of rent-seeking politics is that it operates in the shadows, where what is most needed from public officials is disinterest—a willingness to keep these rents on the non-agenda.

The good news is that the disorganization of the diffuse is not a law of nature. Under certain conditions, even where their opponents are well-resourced, diffuse interests are capable of organizing and undermining the advantages of the organized. As Jack Walker first argued, democratic politics since the 1960s has been pervasively populated by “public interest organizations” funded by third parties (those who do not primarily benefit from the organization). At a minimum, organizing the diffuse requires some form of subsidy, since potential organizational entrepreneurs cannot count on those they claim to represent to provide material support, at least initially.29 That means that, counter-intuitively, efforts to claw back upward-redistributing rent-seeking depends on the willingness of foundations—whose resources come from the very wealthiest individuals in society—to subsidize anti-rent-seeking organization. Changing the organizational imbalance in this area would require some of the foundations interested in inequality to turn from improving the conditions of the poor to making life harder for the wealthy. Not, it would seem, a promising alternative.

That said, the work of Baumgartner, Berry, and Leech shows that countervailing organizations do not have to equalize the amount of lobbying in a particular space to have a substantial impact.30 To prevent rent-seekers from expanding the scope of their ability to use the state for extractive purposes, they just have to generate enough organization to provide a counter-legislative subsidy. But even if parity is not necessary, consider the substantial obstacles to generating countervailing power in, for instance, the significant swathes of rent-seeking entrenched at the state and local level (like the licensing of doctors, dentists, lawyers, and undertakers). To provide effective countervailing power, even at the relatively low level that Baumgartner, Berry, and Leech argue is necessary, would require some form of organization in every state, with the ability to attain mastery of the law, establish relationships with legislators and the media, respond to claims from professional organizations and their allies, produce even rudimentary research, engage in supervision of official decision-making, and, in some cases, at least threaten legal action. Creating one such organization in Washington, D.C.—or even a small network—is one thing. Creating such organizations everywhere is quite another matter. And creating organizations that are able to work over the full range of upward-redistributing rent-seeking, working not only on doctors and dentists, but also on undertakers, car dealers, property developers, and the like, would stretch philanthropic resources far beyond the breaking point.

IV.   Generating Countervailing Power

That is not to say that there is not some precedent for such a broad-ranging philanthropic effort at subsidizing countervailing power. We can look to two examples, associated with the right or left, to see how potent such anti-rent-seeking mobilization can be.

On the left, donors in the late 1960s and ’70s poured huge sums into getting a broad range of environmental organizations off the ground. Pollution can be profitably understood as a form of rent, since it generates excess profits by extracting uncompensated benefits from those who pay its costs in the form of despoiled air and water. Polluters had effectively captured government agencies in the years before the institutionalization of the environmental movement, in ways that closely resembled the institutional control of the rent-protecting coalitions discussed above. Two forces played powerful roles in breaking the influence of polluters. First, a mass environmental movement helped put environmental protection on the agenda, whereas polluter interests thrived primarily by preventing the issue from becoming a matter of public debate. But equally important to public protests was the incredibly deep, donor-subsidized counter-mobilization that helped make agency rule-making more pluralistic and repeatedly damaged the reputation of polluters in the public sphere.

Environmental organizations eventually took root in almost every state, ensuring that polluter interests would not face an organizational vacuum on the other side in state capitals. But, most importantly, environmental interests were able to use their organization to switch political venues from states (where extractive industries had exceptional control) to the federal government, where the organizations funded by foundations had an organizational advantage. In addition, these philanthropic investments helped shift policy venues from the legislative to the judicial branch, where environmental public interest law firms had, if anything, an advantage over polluter interests.

The engagement of philanthropists with organized environmentalism was especially vital at the startup stage of movement organization, when political entrepreneurs had not yet identified a constituency willing to support them financially or generated successes that they could use to appeal to potential supporters. In the 1960s and 1970s, foundations were willing to step into this breach, getting environmental organizations over this critical, initial hump. The result was a correction in the political marketplace that allowed for a surge in environmental regulation, even in relatively challenging times. In fact, foundations were so successful in seeding the environmental organizational landscape that some analysts have argued that there may be too many environmental interest groups for the movement’s own interests.31 That would be a problem that opponents of rent-seeking would be happy to confront.

Equally potent has been the enormous investment in the cause of education reform over the last two decades. Until recently, the politics of education policy in most jurisdictions, as Terry Moe has shown, has been dominated by teachers’ unions.32 The factors that generated this domination were very similar to those identified in the cases of upward-redistributing rent-seeking discussed above. First, in most districts, teachers’ unions faced no countervailing organization whatsoever, so they were the only groups capable of engaging in surveillance of office-holders, generation of information, and production of policy alternatives. Second, teachers had the substantial political advantage produced by the powerful professional image of teachers, which made it easier for them to claim an alignment between their occupational interest, the public interest, and the interests of children. Third, policymaking was controlled by thousands of localized, specialized institutions (like school boards).33 While teachers’ unions could organize to participate in these relatively obscure venues, what few opponents they had could not. While teachers certainly did not get everything they wanted, all the time, control of organization, image, and venue gave them a very substantial advantage.

In just the last fifteen years, the Walton, Gates, Robertson, Arnold, Broad, and Fisher foundations (as well as others) have invested very large sums of money to switch the field of K-12 education from a policy monopoly to one characterized more by pluralism. Donors have invested heavily in research programs at think tanks like Brookings, AEI, and New America, which has made it harder for teachers’ union claims to pass without scrutiny.34 Foundations have put considerable resources into supporting mayoral control of schools, which has centralized decision-making away from teacher-control venues like school boards, while also spending prodigiously on the venue-shifting mechanism of charter schools.35 Also along the lines of venue-shifting, foundations have actively supported Students Matter’s lawsuit in Vergara v. California, which challenged California’s rules for hiring and firing teachers—the core of teacher union interests. In just the last few years, these same foundations have put millions of dollars into grassroots organizing and lobbying, funding state-based organizations like 50CAN and Stand for Children, parent organizations such as Families for Excellent Schools, leadership pipelines like Leaders for Educational Equity and Students for Education Reform, and the advocacy efforts of charter school operators like Success Academy in New York.36 This broad range of third-party-supported education reform organizations has at least partially evened the playing field in education policy, to the point where at least some observers are starting to worry that it is the reformers who have captured the political system.37

The examples of environmentalism and education reform suggest that it is possible to pluralize even very deeply entrenched, rent-addled policy domains. But it also points to the scale of the challenge. These two domains are almost certainly the largest and most sustained examples of philanthropic engagement in building an organizational ecology for policy change over the last fifty years. And, unlike in some areas, foundation interest was sustained over a long period of time. While both challenged entrenched interests, they also focused on areas with a substantial intrinsic appeal to the kinds of people with the philanthropic resources to make such investments. Attacking rents held by doctors, lawyers, undertakers, financiers, real estate agents, and wealthy homeowners is unlikely to have the same attraction.

Creating effective countervailing organization against rent-seeking may not require that funders focus exclusively in the way they did on the environment and education, however. Precisely because rent-seeking is so pervasive and appears in so many different domains of social and political life, it might be possible to generate sufficient countervailing organization if a broad range of funders focus on the problem only in their area of emphasis. There are a number of large foundations concerned, for instance, with health care and housing. If they were to invest only a relatively small percentage of their giving in organizations that fight against regulations protecting doctors and pharmaceutical firms, and if housing-oriented donors put a similar investment into attacking regulations that make it difficult to build in fast-growing areas, that would have a substantial impact on inequality. The same could be said for a broad range of other areas of existing philanthropic interest. But this would require that rent-seeking become a widely recognized cause of inequality, and countering it an expected philanthropic obligation.

There is one other form of countervailing organization that opponents of rent-seeking rarely look to, but should, and that is the state itself. In much of the literature on rent-seeking, the mechanism that produces and perpetuates rents is agency capture—turning bureaucracies designed to police firms into ones that protect them. Recent work by Dan Carpenter and David Moss has argued that agency capture is less pervasive, and more variable, than the classic literature in the area has argued.38 Some agencies, at some times, maintain their public-interest orientation better than others. Designing agencies that could reduce regressive rent-seeking is not, therefore, a hopeless task.

In fact, it is possible to imagine institutional changes that could cut into some of the more damaging forms of rent-seeking. David Schleicher has shown that constrained urban real estate markets could be broken open by changes in the rules governing building, for instance by compelling jurisdictions to set overall targets for construction rather than simply making decisions on projects one by one.39 Mayoral control of schools, which stripped the power of special-purpose decision-making bodies (school boards), could provide a telling precedent for efforts to challenge the control of special interests over similar institutions, such as occupational licensing boards.40 More generally, we might think of creating new forms of generic review of regulation, such as distributive analysis to accompany cost-benefit review of the kind that federal agencies and the Office of Management and Budget’s Office of Information and Regulatory Analysis regularly perform. As Glaeser and Cass Sunstein have recently argued, we should think about extending such review to the states, where much of the rent-seeking identified in this paper occurs.41 Finally, we need to substantially increase the analytical capacity of government itself, in order to weaken the informational imbalance between organized interests and the state that numerous political scientists have identified as the root of lobbying power.42

Just as important as organization, however, are ideas. The various forms of upward-redistributing rent-seeking add up to a considerable slice of America’s exploding inequality. Both the advantage and disadvantage, from an organizing point of view, is that these various forms of rent-seeking are not naturally connected. State regulation of doctors and Commodity Futures Trading Commission rules for derivatives and local land-use planning decisions rarely, if ever, occur to citizens and policymakers as having anything to do with the larger social debate over inequality. But, if that case is made effectively—if policymakers do start seeing these diverse policies as part of a larger problem—then it would be possible to generate political conflict around issues that are currently sleepy and uncontested. This happened in the 1970s, when policymakers connected regulatory capture in areas like trucking and airlines to the pervasive concern with inflation. It could happen again, if policymakers across the spectrum start to believe that rent-seeking, in all its forms, is at the core of the problem of inequality. Such a discovery would help politicize numerous policy domains that currently are below the radar of policymakers’ concerns.

Engaging the unmobilized is always the key step in the shift from policy monopoly to pluralism, and a change in ideas is the first step.

About the Author
Steven Teles is associate professor of political science at Johns Hopkins University and fellow at the New America Foundation. He is the author, most recently, of the Rise of the Conservative Legal Movement: The Battle for Control of the Law (Princeton University Press, 2008). Professor Teles has also published articles in the New Statesman, American Prospect, Public Interest, National Affairs, The American Interest, Prospect (UK) and Boston Reviews. He received his PhD in government and foreign affairs from the University of Virginia in 1995, and his BA in political science from George Washington University in 1989.

Endnotes

  1. Okun, Arthur. Equality and Efficiency: The Big Tradeoff. (Brookings, 1975).
  2. Derthick, Martha, and Paul Quirk. The Politics of Deregulation. (Brookings, 1985).
  3. Morgan, Stephen, and Youngjoo Cha. “Rent and the Evolution of Inequality in Late Industrial United States.” American Behavioral Scientist, January 2007, 677–701.
  4. The rent-seeking framework is not entirely unproblematic, because it derives from a framework of classical economics in which all institutions beyond the enforcement of contract are suspect. But we could just as easily talk about “distributively perverse institutions,” instead of rents, and end up, normatively, at the same point. That is, whether we use a framework of institutional economics or classical economics, we end up in the same place. The conflict, normatively, comes in the case of institutions whose primary impact is to redistribute downward (as with private-sector unions).
  5. Lemieux, Thomas. “The Changing Nature of Wage Inequality.” Journal of Population Economics 21 (January 2008): 21–48.
  6. Brynjolfsson, Eric. The Second Machine Age: Work, Progress and Prosperity in a Time of Brilliant Technologies (Norton, 2014).
  7. http://www.nytimes.com.
  8. Bakija, Jon, Adam Cole, and Bradley Heim. “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data." .
  9. Kleiner, Morris. “Battles Among Licensed Professions: Analyzing Government Regulations on Labor Market Outcomes for Dentists and Hygienists.” NBER Working Paper 16560. http://www.nber.org.
  10. Sweetland Edwards, Haley. “Sweet Deal: The Shadowy Cartel of Doctors That Controls Medicare.” Washington Monthly, July/August 2013.
  11. http://faculty.som.yale.edu.
  12. http://faculty.som.yale.edu.
  13. http://fortune.com.
  14. Binder, Amy. “Why Are Harvard Grads Still Flocking to Wall Street?” Washington Monthly, September/October 2014.
  15. McKenna, Christopher. The World’s Newest Profession (Cambridge, 2010. On the causes of governments contracting out higher-level functions, see John Donahue, “The Transformation of Government Work,” in Jody Freeman and Martha Minow, Government by Contract: Outsourcing and American Democracy (Harvard, 2009).
  16. Glaeser, Edward, Joseph Gyourko, and Raven Saks. 2005. “Why Is Manhattan So Expensive: Regulation and the Rise in Housing Prices.” Journal of Law and Economics.
  17. Bhide, Amar. “The Hidden Costs and Underpinnings of Debt Market Liquidity.” A Call for Judgment: Sensible Finance for a Dynamic Economy (Oxford, 2010).
  18. Kaplan, Steven, and Joshua Rauh. “It’s the Market: the Broad-Based Rise in the Return to Top Talent.” Journal of Economic Perspectives, Summer 2013. Note that Kaplan and Rauh dismiss the idea that the incomes of top executives are not justified by the profit they produce (for example, through cozy relationships with board compensation committees)—but that is different than arguing that their incomes reflect social value, which depends on some measure of the source of those profits.
  19. Phillipon, Thomas. 2015. “Has the US Finance Industry Become Less Efficient?” American Economic Review.
  20. Kwak, James. “Cultural Capture and the Financial Crisis,” in Daniel Carpenter and David Moss, Preventing Regulatory Capture (Cambridge, 2013), 71–98.
  21. Drutman, Lee. The Business of America is Lobbying (Oxford, 2015); and Lee Drutman and Steven Teles, “A New Agenda for Political Reform,” Washington Monthly, January-March 2014.
  22. Hall, Richard, and Alan Deardorff. “Lobbying as Legislative Subsidy.” APSR, February 2006.
  23. Baumgartner, Berry, and Leech in Lobbying and Policy Change: Who Wins, Who Loses, and Why (Chicago, 2009) emphasize that it is in areas with little or no countervailing organization that lobbying is most likely to have an impact.
  24. Baker, Dean. The Myth of Loser Liberalism: Making Markets Progressive (DC: CEPR, 2011), Chapter Ten.
  25. Benkler, Yochai. 2002. “Intellectual Property and the Organization of Information Production.” International Review of Law and Economics, 81–107.
  26. Boldrin, Michele, and David K. Levine. 2008. Against Intellectual Monopoly. Cambridge: Cambridge University Press. While opposition did emerge, it did so only after the law was already passed, through a lawsuit led by Larry Lessig, which failed.
  27. Michael, Gabriel. 2014. “‘To Promote the Progress?’ Explaining the Global Diffusion of Intellectual Property Law, Dissertation." George Washington University.
  28. Gilens, Martin. Affluence and Influence (Princeton, 2014).
  29. This process is analyzed in greater detail in Steven Teles, “Organizational Maintenance, The Funder-Grantee Nexus, and the Trajectory of American Political Development.” Presented at Duke University Roundtable on Philanthropy and Politics, February 12, 2015.
  30. Baumgartner, Frank, and Jeffrey Berry et al. Lobbying and Policy Change: Who Wins, Who Loses and Why (Chicago, 2009).
  31. Bosso, Chris. Environment, Inc.: From Grassroots to Beltway (Kansas, 2005).
  32. Moe, Terry. Special Interest: Teachers Unions and America’s Public Schools (Brookings, 2011).
  33. Henig, Jeff. The End of Exceptionalism in American Education: The Changing Politics of School Reform (Harvard Education Press, 2013).
  34. Reckhow, Sarah. “More Than Patrons: How Foundations Fuel Change in Education Policy.” Unpublished Manuscript.
  35. Reckhow, Sarah. Follow the Money: How Foundation Dollars Change Public Schools (Oxford, 2013). Reckhow is skeptical of the value of the venue shift of mayoral control, which she thinks papers over, rather than transforms, the organizational basis of school politics, but she is more optimistic about the influence of charter schools.
  36. Kelly, Andrew. “Turning Lightning Into Electricity: Organizing Parents for Education Reform.” 
  37. https://www.washingtonpost.com.
  38. Carpenter, Daniel, and David Moss, eds. 2013. Preventing Regulatory Capture: Special Interest Influence and How to Limit It (Cambridge: Cambridge University Press).
  39. Schleicher, David. 2013. “City Unplanning.” Yale Law Journal, 122 Yale L.J. 1670.
  40. Jeff Henig discusses the decline in special-purpose institutions in education in The End of Exceptionalism in American Education: The Changing Politics of School Reform (Cambridge: Harvard University Press, 2013).
  41. Glaeser, Edward, and Cass Sunstein. “Regulatory Review for the States.” National Affairs, Summer 2014.
  42. Drutman, Lee, and Steven Teles. “A New Agenda for Political Reform,” Washington Monthly, March/April/May 2015.

Boosting Business and Entrepreneurial Performance:

Broad Base Power, Policy Improvements, Contextual Constraints, and Localized Opportunities

By Jeremy M. Goldberg Civic Innovation Advisor Civic Consulting USA
Max Neiman Senior Research Fellow at the Institute of Governmental Studies University of California, Berkeley
Jeremy M. Goldberg
Jeremy M. Goldberg
Max Neiman
Max Neiman

Introduction

Entrepreneurship is a core element of economic performance in all market societies. In this paper, we define entrepreneurs as actors who are willing to take risks in producing or providing something new and are the sources of game-changing ideas. They are able to translate concepts into market-feasible products and services and are willing and able to support and finance the new venture creation process.1 This process involves many individuals working in teams through several critical stages of business innovation or firm creation, and social networks are key elements of a dynamic and exemplary entrepreneurial system. Indeed, entrepreneurship operates in a system of information and values, and its success, therefore, depends on the intensity of information flows and the fit between the individuals, local resources, and local values.

Our understanding of how entrepreneurs emerge is influenced by work from various scholarly disciplines, as well as observations from other human endeavors, in fields as diverse as opera, haute cuisine, sports, and symphonic music. While economic models of entrepreneurship suggest a determinist view in which standard market forces produce a variety of predictable outcomes, we appreciate that there is also a bit of magic or even mystery in the entrepreneurial process. Successful entrepreneurial endeavors are, even in the best of circumstances, quite rare. Individuals may risk their time, energy, self-esteem, family, and future prospects for fairly low chances of success. A market economy, however, depends on a significant coterie of people who are willing to take this risky path. In this paper, we outline an approach to achieving greater numbers of successful entrepreneurs, the policy measures that would foster this growth, the contextual constraints that challenge it, and the opportunities we see for local government.

Broad Base Power

We argue that, to increase excellence in any endeavor, including entrepreneurship, it is important to increase the number of people who participate in the undertaking. Clusters of excellence exist throughout the world at particular times and across a variety of fields, because high participation rates in these fields create circumstances that foster standout success. The broad base of participation in an endeavor creates a significant and invested audience that interacts with those who are most motivated and talented, encouraging them to strive for ever-greater levels of achievement. This argument, which we call Broad Base Power, centers on the role of the large number of participants (the Base) in any endeavor who serve as an empathetic audience for those who are most talented. As the Base is composed of those who have attempted the same endeavor, they have experience and familiarity with the effort, skill, and talent involved and are more likely to be highly attuned to and insightful regarding the abilities of a star performer. The high expectations, support, scrutiny, appreciation, criticism, encouragement, and empathy from the Base motivate the star performers and propel them to higher levels of excellence. Achievement in particular ventures, then, results not only from the quality of people entering a field, but also from the complex interaction between the stars and those who are unsuccessful. In short, greater rates of participation in an activity lead to a higher probability that talented and high-achieving individuals will emerge in the field.

This observation holds true across a wide range of fields, from sports, the arts, and science, to business and government. Several examples may illuminate the phenomenon. In music, for example, individuals who have some training in piano come to appreciate the skill of those who perform at the highest level. Those with training are more likely to understand the attributes of a great piano performance and more willing to support and appreciate the performances of great musicians, even if they are not motivated or talented enough to become renowned performers themselves. 2 Similarly, those of us who have considered science careers after being exposed to interesting courses and teachers in biology or chemistry are more likely to support and express appreciation for those who go on to achieve in these fields. Or, in the world of fine cuisine, we see that the very few renowned chefs have a broad range of support from less-successful chefs, those who aspired to be chefs, and those who benefit from the food they prepare, all of whom take a deep interest in the star chefs’ work and ideas.

Applying this concept to entrepreneurship, we argue that it is beneficial to have large numbers of people who appreciate the entrepreneurial endeavor and engage in it, even if they do not ultimately succeed. As in the examples above, the community of individuals who start new businesses or aspire to entrepreneurial activity become the Broad Base for entrepreneurship, appreciating and motivating each other and, especially, their star performers, and thus facilitating the process of innovation and development.3 By increasing the range of people with entrepreneurial experience, we also increase the effectiveness and empathy of employees and others who subsequently interact with entrepreneurs. For example, venture capitalists who have experience starting new businesses and seeking investors themselves may be especially helpful to the entrepreneurs with whom they work, as they have a deeper understanding of incentives that ensure stronger performance and long-term commitment to excellence.

Policy Efforts that Foster Broad Base Power for Entrepreneurship

Promote Broad Base Power across fields to avoid risk in picking winners. Public policies, as a general matter, ought not to encourage a specific arena for greater participation, as it is very risky for the public sector to bet on specific goods and services they anticipate will be “the next big thing.” The range of potential products and services that could benefit from government investment, of course, is enormous, from typewriter repair or vintage film processing to battery development, solar technology research, and microchip design. Government could create incentives to increase the number of people working in any field, including entertainment, sports, and teaching, among many other possibilities. While there are, perhaps, occasions when there is enough consensus and momentum to engage in such bets,4 we recommend that government focus on factors that increase Broad Base Power across fields, rather than making wagers on specific enterprises, businesses, or undertakings. Government should seek to understand how the invisible hand of the market and individuals’ personal desires draw them to activities in which they are interested and for which they are suited. And public policy should enhance the personal traits of individuals—their health, skills, and intellectual capacities.

Enforce the rules of economic and business competition to ensure legitimacy and confidence. As one advances higher in the competition in any field, the proportion of those who are viewed as winners becomes smaller, and the proportion of those who have failed to reach the higher echelons becomes greater. There are fewer winners than losers. In order for those who lose to accept their status, as well as the shift of great rewards to those who win, the former must see the outcomes of the competition as legitimate. The empathy, awareness, and appreciation of those who have participated in an activity for those who achieve at the highest level rest on the conviction that the achievement is based on merit alone. Without widespread agreement that merit is the paramount criteria for advancing from the Broad Base up the echelons of achievement, the legitimacy of outcomes declines and the audience’s appreciation of the effort, skill, and talent that must be mobilized to reach the top is likely to evaporate. Instead of support and admiration, there will be resentment, suspicion, contestation of outcomes, and even hostility toward those who are judged to be grabbing larger proportions of rewards and benefitting from a rigged, corrupt process. When envy and suspicion replace admiration, the prospect of conflict and fragmentation increases, the entire competitive process is threatened, and the quality of performers at all levels is undermined. This response can occur in any endeavor, from the outcome of a sporting event or admission to a particular academic program to decisions about hiring and promotion or selection of vendors by a public agency.

To maintain confidence and legitimacy, norms and rules regarding participation in the competitive process must be scrupulously and consistently enforced. Those who have the most to gain from winning and succeeding in some field should be most severely disciplined and penalized if they intentionally break rules. Vigilance is essential in order to detect and obviate efforts to tilt and bias a competitive processes of any kind. In the Broad Base Power approach, merit and excellence must be accompanied by commitments to equal opportunity.

This vigilance is especially important in the realm of entrepreneurship, both for factors that affect the participation rates and those that influence entrepreneurial outcomes. A solid Broad Base for entrepreneurship must be founded on equitable and fair opportunities, minimal barriers to entry, and enforcement of the economic and business competition rules. If they view the process as fair and, therefore, legitimate, the Broad Base nourishes the wellspring from which more new entrepreneurs will flow. Just as the great chefs of France, the preeminent operatic stars of Italy, or the chess masters of Eastern Europe arise from the relatively large base of participants in those arenas, so more skilled and successful entrepreneurial performers emerge from the large audience of less-skilled and less-successful entrepreneurs. A larger base results in a greater likelihood that human resources will produce truly excellent, peak-level business entrepreneurs.

Educate to create a Broad Base. Public education may be government’s most significant opportunity to create a Broad Base that will foster improved economic performance. Education exposes large numbers of people to ideas and fields for which they will maintain an appreciation throughout their lives. Indeed, boosting the skills and education of individuals is seen as a primary means of improving economic performance across the board. Greater national success in technology and engineering, for example, can be achieved by upgrading the STEM (science, technology, engineering, and mathematics) education of our population. These STEM educational efforts, which often are emphasized in efforts to improve economic performance, expose the entire population to these important fields, provide incentives for people to participate, make it more likely that talented scientists, engineers, and mathematicians will emerge, and create a large audience of science- and mathematics-proficient individuals who appreciate and support the performance of leaders in these fields. These efforts may also extend beyond public education, with the development of a variety of platforms that enable individuals to participate in new curricula and develop expertise in specific subjects. In math, for example, we might set a national goal to maximize the number of people who are proficient through calculus and create an online, open-source curriculum, with graphics and chat capabilities, that would allow people to interact with instructors. This effort would create a broad base of people with experience and competence in mathematics.5

While there is an important role for more specialized training programs that focus on particular skills, liberal arts education, as it traditionally has been called, must be a core element of developing the Broad Base. A liberal arts education historically has played an important role in elevating the workforce and producing high levels of economic performance in the United States, at least when the United States was the clear, positive outlier in providing public education (Goldin 2001, Goldin and Katz 2007). The newer focus on STEM education should be a priority, but it must be very broadly understood, and the traditional commitment to a general, liberal arts education should be maintained.

Reduce barriers to movement to encourage Broad Base participation. Public policy should reduce friction that prevents people from moving throughout the country and connecting to places they are drawn to by their talent, interests, and economic logic. Broad Base Power assumes that the barriers to entry in a field are minimized and that participation depends on market signals and the preferences and talents of individuals. At the very least, therefore, policies that privilege home purchases, mortgages, and housing investments over renting should be avoided. These policies that privilege owner-occupied housing tend to anchor households to a specific place, preventing easy movement across the landscape on the basis of individuals’ assessments of their business and employment prospects (Indiviglio 2010).6 Furthermore, when capital is directed toward the building and consumption of owner-occupied housing, there is less capital available for business investment, and investment opportunities are scarcer. (Fischer and Huang 2013).

Manage immigration to grow the Broad Base. Growing our own base of people with the skills, imagination, and willingness to engage in entrepreneurship is critical, but immigration plays an increasingly important role in that regard, as well. Immigration often is advocated as a way to supplement the existing workforce and meet employer demands, and immigrant students, the children of immigrants, and immigrant entrepreneurs historically have played a disproportionately large role in our economy (Wadhwa, Saxenian, and Siciliano 2012, Stangler and Wiens 2015, Hart and Acs 2011).

The various immigrant diasporas represented in the United States—Brazilian, Chinese, Korean, Taiwanese, Indian, Vietnamese, and Israeli, for example—also provide networks and opportunities for more effective business interactions with other countries in ways we have not anticipated. In their study of immigration networks’ impact on trade between host countries and countries of origin, for example, Aleksynska and Peri (2012) find that clusters of immigrants produce significant and positive effects on trade. Interestingly, they also find that the key variable for these immigrants is not their education level, but the cultural and legal distance between the home and host countries. When the distances are great, they conclude, entrepreneurial immigrants “play a key role of informational intermediaries” (Aleksynska and Peri 2012: 17).

We should, therefore, adopt and implement public policies that increase the base of talented and entrepreneurial individuals through immigration.7 So far, however, the U.S. Congress has not adequately addressed issues related to the green card backlog and the transition from student visas to work visas and green cards. Nor have they been able to create an evaluation system that assesses immigrants’ potential to contribute to our economy. Our peer countries are more aggressive in competing for the best and brightest, and a U.S. immigration policy that is mired in the pervasive partisan swamp in Congress is a potential hazard to our nation’s entrepreneurial vitality.

Create a reasonable safety net to enhance risk-taking. Risk-taking is a central feature of entrepreneurship. Yet, if the consequences of failure are drastic, they may deter people from initiating entrepreneurial activity. A 2010 study by RAND, for example, finds that becoming eligible for Medicare increases the probability of starting a business (Fairlie, Kapur, and Gates 2010). And, Olds (2014a, 2014b) indicates that the availability of food stamps for one’s family and health insurance for one’s children increases rates of entrepreneurship significantly in families not eligible for Medicaid. Similarly, another study finds that more forgiving bankruptcy protection is associated with higher self-employment rates (Armour and Cumming 2008). While an excessively generous and expensive safety net weighs too heavily on an economy, it is possible that some of the United States’ entrepreneurial dynamism is constrained by the perception of how far one falls upon failure.

Contextual Challenges to Policy Development

There is a significant body of research and a long history of U.S. experience with entrepreneurship policies that can guide government efforts to enhance entrepreneurial activity and business innovation. There are, however, now several signals from our economy that suggest a need for more deliberate and effective reforms and policy responses. Key indicators of our economy are showing worrisome signs of weakness, including declining research and development funding, aging infrastructure on virtually every front, and lagging education performance.8 It is worth looking at some key elements of our contemporary political environment and other features of U.S. life that pose challenges for developing the sorts of policies that can improve business and entrepreneurial performance. Specifically, we are concerned about (1) the policy consequences of public anxiety regarding economic outcomes; and (2) the debilitating effects of ideological confrontation concerning the role of the public sector in the economy.

Public anxiety about the economy. Uneasiness about the economy adversely affects the policymaking arena. Much of the restiveness about the economy today is associated with a growing perception that increased inequality is largely due to government policies and the excessive influence of “people at the top” (Bartels 2008, Hacker and Pierson 2010, Pew 2014, Geidner 2014, Herrnson and Weldon 2014). This suspicion erodes individuals’ confidence and faith in public- and private-sector groups (Pew 2014a), leading them to doubt that these institutions and actors are operating to improve the lives of ordinary Americans. Altogether, these factors weaken the pillars of trust among individuals, making them wary of one another. This policymaking climate is not conducive to building support for some of the necessary responses to our nation’s needs, such as infrastructure and workforce training investments (Jones 2014, Pew 2014b).9 Nevertheless, these policies must be generated, and, as we suggest below, local government offers opportunities in this regard, even when the national government and many states are constrained by partisan gridlock.

Ideological gridlock. Virtually all policy reforms recommended by economists and entrepreneurship advocates require well-designed actions from our public sector. These include revising tax policies, reforming regulation, easing certification burdens, modifying patent policies and ending patent trolling, achieving tort reform, providing startup assistance, boosting education and workforce training support, implementing curriculum improvements, or accomplishing immigration reform, among many others. One of our greatest challenges today, however, is our tendency to hunker down into culturally isolated, partisan cantons. Unfortunately, many policy recommendations for economic growth ignore this institutional and political friction. In the words of The New York Times contributor Thomas B. Edsall (2015), “Many, if not most, of the reforms proposed by economists and other analysts require political action. At the federal level, this would require bipartisan support, an achievement often out of reach in a polarized system.” He goes on to conclude, not implausibly, that, with no relief from our divisive public discourse, “the economy will be held hostage in the battle for supremacy between two ideological poles....” These partisan divides and gridlock now are extending beyond the federal government to the states, as well, as a number of states are now even more polarized than Congress is (Shor 2014).10

Ever since Andrew Hamilton sought to commit our new nation to a policy of promoting manufacturing and enterprise, we have debated the role of government in business matters. The venerable debate largely has been a healthy one, often conducted at sophisticated levels and producing great compromises and policy innovations. The development of voucher systems for delivery of services such as affordable housing or public education, the earned income tax credit, carbon taxes on greenhouse gasses, and a host of other public-private partnerships, emerged from creative compromises between those who advocate for government intervention and those who believe that government should deploy market-like forces in the delivery of public services, if it is to intervene at all. The role of public policy in promoting growth, innovation, and entrepreneurship, however, is a domain that is particularly riven with partisan minefields (Baker, Bloom, Canes-Wrone, Davis, and Rodden 2014).

Local Governments as Arenas for Positive Change

Although there is often gridlock at the national level and even within many states, local governments can be a platform for constructive change. Unlike their warring counterparts in Congress or statehouses across much of the nation, local legislatures often pass budgets and make difficult decisions about service cuts, public employee benefits, tensions among neighborhoods, or conflicts between residents and their public safety personnel. Local officials must manage the highly visible and nearly immediate consequences of many of their decisions, whether these involve natural disasters or fiscal crises. Indeed, constituents experience the consequences of these decisions directly and are able to identify the officials responsible for precipitating, exacerbating, or remedying a particular problem. Nonpartisanship is often the rule at the local level and, even when there is a partisan local ballot, Democrats and Republicans have to collaborate to ensure that hospitals, traffic patterns, roads, recreation facilities, water and power production, and public safety are maintained. Local officials from the two parties often work together to achieve compromises without threatening gridlock and shutdowns.

Given the difficulties we have in making decisions that affect entrepreneurship at the national level and even within many states, local governments, with the appropriate leadership, some impetus, and startup assistance, could be a launching pad for widespread, national political reform, if not structural change. Localized power, in fact, could affect national policy and entrepreneurial activity. Cities, towns, villages, and counties are not simply locations for entrepreneurial activity; they are also underutilized arenas for collective actions that will produce policies more likely to boost entrepreneurship and improve economic outcomes.

Indeed, local governments have long been involved in the economic development field in some form. There is much research identifying key buttons and levers that can be pushed to broaden and intensify both entrepreneurship and economic growth.11 Moreover, recent events suggest that the range and reach of dynamic American places are more expansive than has been suggested by scholars who have observed the increasing divide among cities concerning economic performance (Moretti 2012). Even in parts of the country that may have lagged, we see emerging attractions and a new awareness of pools of talent that might be mobilized to improve entrepreneurship and business innovation.

Steve Case’s recent efforts to seed and stimulate entrepreneurial activity in various regions of our nation highlight the role that awards and prizes can play in stimulating innovation and entrepreneurship. Both public and private sectors historically have been active in this regard (Adler 2011, Williams 2012). Competition and the rising costs of investing in Silicon Valley and in the dominant innovation centers have made it worthwhile for entrepreneurs and investors to seek opportunities in other parts of the country.

Some municipal governments also are leading efforts that enhance opportunities for entrepreneurs to access a growing government-serving startup ecosystem that represents a $140 billion market (Motoyama and Danley 2012).12 The San Francisco Mayor’s Office, for example, announced in 2014 that the city had selected six startup companies to participate in a new Entrepreneurship in Residence program, a voluntary, sixteen-week collaboration to bring together the private sector and San Francisco city departments to explore innovative solutions to civic challenges that can lower costs, increase revenue, and enhance productivity.

Although local governments are making new and innovative efforts in economic development, including business innovation and entrepreneurship, there is also a venerable and growing field of research and literature that focuses on describing and evaluating the efficacy of local, state, and federal policies directed at supporting, attracting, clustering, or funding startups and entrepreneurs. There is, for example, a significant body of research on and evaluation of federal regional innovation clusters, state economic development efforts, tax policies, regulatory reforms, and empowerment zones, among others. Even the newer perspectives on economic development, innovation, and entrepreneurship are a continuation of a history of work focused on what communities or regions can do as they seek to nurture, attract, or retain economic activity (Lewis and Neiman, 2009; Neiman and Krimm, 2009; Kolko, 2009; Busso, Gregory, and Kline, 2010; Duranton, 2011; Glaeser, 2013).

The research literature strongly implies that economic development efforts in general have not produced a commensurate return on the investments and incentives that have been provided by government at all levels. When adding up state and local costs to engage in economic development policies, the burden runs into the tens of billions of dollars each year. In an extensive analysis of local governments alone, it was estimated that local governments expend $80 billion every year to retain and attract businesses, with federal and state incentives to business amounting to another $170 billion per year (Story, 2012). Even conceding the possibility of double-counting some of the federal and state money that devolves to localities, it is clear that a very substantial amount of resources go into individual state and individual local efforts to retain and attract economic activity. Most analysts argue that these efforts, at best, generally rearrange the furniture across local and state boundaries, but do not necessarily create new economic activity. They primarily benefit local economic development officials, relocation consultants, and others involved in the field of business location decisions.

It is likely, nevertheless, that localities and states will continue to compete with one another, even as they experiment with new efforts, including trying to create or incentivize innovation ecospheres, create small venture capital pools, provide free rent for startups, nurture and support clusters, or seek to develop the government itself as a possible innovation sector. The political logic and compulsion for localities to try in various ways to cultivate economic activity is too great. However, states and the federal government should encourage localities to expend less of their scarce resources on inter-jurisdictional competition and far more on education, workforce training, and innovation and entrepreneurial ecosystems.

Although local governments are creatures of their respective states and have no sovereignty in our federal political system, they do have a common interest in vastly improving policymaking at the federal level. Mobilizing the urban interest in this nation around a genuinely nonpartisan policy agenda that provides long-term responses to infrastructure funding, workforce development, education, immigration, and a host of other issues should be a top, sustained, and loudly expressed priority for the organized elements of our nation’s cities.

Conclusion

This paper began with the application of the Broad Base Power framework to entrepreneurship. We argued for an approach that focuses on maximizing the entry-level participation of individuals to create broad audiences and constituencies to nurture business innovation and entrepreneurship. The large numbers of individuals who do not succeed in breaking into ever-higher levels of performance in entrepreneurship, we argued, will support, encourage, and inspire others to achieve. We also spoke to the policy efforts that could enhance the success of this approach and maximize the power of the Broad Base. These included efforts to ensure fairness and legitimacy, improve education, buttress the safety net, and capitalize on the opportunities posed by immigration, among others.

We suggest, however, that the Broad Base Power approach also may illuminate policy challenges. It is often observed that the vast proportion of businesses fail. Sometimes the failure rate is put at 80 percent, sometimes a bit more or less. Something of the sort happens in public policy as well, although it seems we are much less understanding or tolerant of public-sector failures. Of course, we owe it to taxpayers to figure out which policies are worth their costs or obviously fail. Good intentions are not a substitute for positive results. Still, there likely will be a hefty failure rate in public-sector efforts to improve economic performance.

There are, of course, many reasons why the standards we apply for judging private economic conduct are different than those we apply in judging government performance. But, even so, even allowing for that, we should understand that we do have information about the general characteristics that have a chance of improving our economic punch and entrepreneurial dynamism. These are not small items, as we have seen. They will require significant capacity to overcome many of our short-term, narrow interests. This challenge, perhaps, is the knottiest, most mysterious of all the policy puzzles we face.

About the Authors
Jeremy Goldberg serves as Civic Innovation Advisor, at Civic Consulting USA, charged with fostering pro bono partnerships. Jeremy led the effort to create the Silicon Valley Talent Partnership (SVTP). He is a graduate of the Masters in Public Affairs from the University of San Francisco and received his BA in Government from the University of Texas-Austin. He is a proud alumnus of Aspen’s Socrates Program.

Dr. Max Neiman is Senior Research Fellow at the Institute of Governmental Studies of the University of California, Berkeley. He is also Professor of Political Science, Emeritus, University of California, Riverside, and Senior Fellow at the Public Policy Institute of California. 

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Endnotes

  1. Venezuela’s El Sistema serves as a particularly dramatic example of Broad Base Power in the field of music. Adopted in 1975, this program provides classical music training for Venezuelan children on a massive scale, exposing hundreds of thousands of children each year to classical music. As a result, Venezuelan musicians have achieved worldwide visibility at the highest levels. There has, however, been some criticism of these musicians in recent years, suggesting that they have overlooked possible shortcomings in the implementation of El Sistema (Baker 2014).
  2. While we know that society would not benefit if every adult were poised to start a new business, the optimal level of entrepreneurship is debated among scholars, and we do not suggest an optimal level in this paper. Scholars (Gromb and Scharfstein 2002) distinguish between the financing of new ventures in startups (entrepreneurship) and within established firms (intrapreneurship). They have found complex interrelations between the two processes and recognize how their interconnections might complicate our understanding of the process of economic dynamism and growth.
  3. Examples of government efforts to increase participation in certain fields include “land rushes” that attracted farmers and settlers, the establishment of the land grant college and university system, the use of government prizes to increase research and development, and private efforts in telegraphy, transportation, and engine development, government support of rural electrification, and the use of government contracts with trucking companies and airlines to support a base of airlines and pilots.
  4. The notion of investing in clusters or agglomerations is closely related to the idea of Broad Base Power. A Broad Base in any particular endeavor, in fact, produces clusters and agglomerations. A biotech cluster, for example, is identified by the presence of a significant body of educated individuals in a particular place with specific biotech skills. Of course, a narrower (smaller) base will result in fewer clusters for a particular endeavor.
  5. Policymakers historically have been most concerned with labor mobility, but, in our view, all households should be incentivized to move where economic opportunities within the nation are best for them. Privileging home ownership not only as a lifestyle, but also as an investment, savings vehicle, or loan source tends to create friction in labor markets. Of course, much of the critique of pro-ownership housing policy is focused on the inequity of current policies.
  6. There is, however, valid concern that immigration policy could be exploited to undercut the bargaining power of a special interest. It should be emphasized that these policies must be conducted in ways that genuinely maintain or improve the workforce.
  7. Indications of distress also are surfacing in the American media and popular literature. Depictions of American decline in books and in commentary and opinion pieces were evident prior to the Great Recession, but the genre of books focused on American decline or impending collapse is now vast and growing (See, for example, Acharya 2014, Greer 2014, Rupert and Campbell 2009, and Arnold 2013 for an interesting discussion of filmic depictions of American decline; Kennedy 1989). We saw a similar growth in this literature in Japan at the peak of Japanese economic success, just before the collapse of its asset price bubble in the early 1990s and the onset of its Lost Decade.
  8. Apprehension regarding the economy and the quagmire of policymaking at the national and state levels also has wounded our economic fortunes by contributing to downgrades in fiscal capacities by rating agencies. Political gridlock in some states has led to ratings downgrades, independent of the states’ economic conditions. Gridlock was certainly a factor in the series of downgrades that hit California before the state made it easier to enact a state budget. Furthermore, the congressional circus over raising the debt ceiling and the general rancor over virtually every significant policy choice facing the nation has produced ratings downgrades for the national government and even agitated more interest in moving away from the U.S. dollar as the world’s reserve currency (Williams 2013).
  9. Of course, polarization does not necessarily result in gridlock if one of the parties has sufficient control and is dominant enough to push its agenda through the policymaking process. Whether this result is positive or negative is subject to debate and dependent on how one sees the consequences of one party being able to achieve its policy goals. However, as in Congress, polarization in many states has produced much sound and fury, resulting in considerable paralysis and uncertainty in the states’ respective policy environments.
  10. This research, however, is insufficient. Through no fault of Moretti or others who celebrate the knowledge or innovation economy, an increasingly crabbed perception of efforts to broaden innovation activity to other economic sectors has developed, including manufacturing, agriculture, or the government sector itself as sources of innovation and growth (McAnaney 2015).
  11. This FY 2014 total is estimated by combining the spending of the federal government (https://cio.gov) and state and local government (http://breakinggov.com).