Bureaucracy Promotes Inequality
“The internal effects of a mutable policy are still more calamitous. It poisons the blessing of liberty itself. It will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man, who knows what the law is to-day, can guess what it will be to-morrow. Law is defined to be a rule of action; but how can that be a rule, which is little known, and less fixed?
Another effect of public instability is the unreasonable advantage it gives to the sagacious, the enterprising, and the moneyed few over the industrious and uniformed mass of the people. Every new regulation concerning commerce or revenue, or in any way affecting the value of the different species of property, presents a new harvest to those who watch the change, and can trace its consequences; a harvest, reared not by themselves, but by the toils and cares of the great body of their fellow-citizens. This is a state of things in which it may be said with some truth that laws are made for the FEW, not for the MANY.”
In 2010, the Federal Register was 81,405 pages long. This is the official “newspaper” of the US Federal Government in which agencies of the executive branch publish regulations. Annually, the government compiles these into the Code of Federal Regulations.
Ignorance of the law may not be a defense even if it is a fact. How are economic actors supposed to stay on top of all of this? It is extraordinarily difficult. It is expensive.
Only those who can afford to stay apprised of developments in real-time can do so. Only the rich can pay for this luxury. Everyone else is at the jeopardy of a capricious authority. This means that influence is important. Political sway is valuable, not just for the ability to influence the rules that government ends up promulgating, but also for influencing the selection of enforcement targets.
The justification for much of this policy intervention is the need to reduce economic inequality of outcomes.
But historical precedents contradict this sophistry. They suggest that excessive, arbitrary regulation can exacerbate inequality. Worse, it can also depress the standard of living. These are the iatrogenic wages of intervention.
From 1970 with the enactment of the Industrial Licensing Act through 1991, India endured a so-called “License Raj.” Here is a definition from Business Standard, a leading magazine in India.
“’Licence Raj,’ also known as ‘Permit Raj’ or the ‘Licence Permit Raj,’ is pejorative for a system Under this system, businesses in the country required licences to operate. These licences were difficult to get, which led to the term ‘licence raj,’ which reputedly was a play on the term ‘British raj.
“According to an article by the BBC in 1998, due to high restrictions, businesses sometimes had to receive approval from up to 80 agencies before they were granted licences to produce.
“Moreover, the state would decide what was produced, along with the quantity of production, market price as well as the course of the capital used in the production. Additionally, the government also restricted firms from conducting layoffs and closing factories.”
It was almost impossible to start new businesses in India. It was challenging to keep existing ones afloat.
Cui bono?
The beneficiaries were people, wealthy Indians, who owned already significant businesses. They had money to “persuade” the bureaucrats to rule in their favor.
“The strong and often unhealthy rivalry among the companies to gain licenses was the breeding ground for growing corruption and intermixing of politics and business affairs.”
Money begets money. The rich become richer. The more capital in hand, the easier it was to accommodate the rules, if not to bend them in one’s favor. Large corporations had a significant advantage over small businesses.
Each solution creates its own subsidiary problems. Government became skeptical of large business, with the Monopolies and Restrictive Trade Practices (MRTP) Commission discouraging expansion. The government weaponized antitrust law to address the natural consequences of their own inequitable policy.
“The Commission aimed at preventing the concentration of economic power in the hands of a few rich companies and public sector enterprises were exempted from this scrutiny. In effect, the Act completely stopped the growth and expansion of private sector industries.”
Names like Tata, Birla, Thapar, Kirloskar, Goenka, Mafatlal, and Shri Ram adapted, preserving their position. If possible, they sought growth abroad in developing Asia and Africa, assuming they could get permission to do so and they could obtain foreign exchange regulatory carve-outs.
The key factions here were the most economically successful families. This is what Madison warned when he talked of the benefits for the Few.
The cost to the Many was a lower standard of living, fewer choices in the marketplace, and weaker economic growth. Economic growth per year failed to keep up with population increases.
All of it was done in the name of Fabian socialism whose purpose was to “advance the principles of social democracy and democratic socialism via graduated and reformist effort in democracies.”
It was an equality of poverty for everyone but the rich and connected.
Cato describes India pre-1991:
“In its first three decades after independence in 1947, the Indian economy averaged just 3.5 percent GDP growth, which was derisively called the ‘Hindu rate of growth.’ That was half the rate achieved by the Asian tigers.
“Indian socialism reached its zenith in the 1970s, when the banks and several major industries were nationalized. The top income tax rate rose to 97.75 percent, and the wealth tax to 3.5 percent. The Garibi Hatao (Abolish Poverty) slogan of Prime Minister Indira Gandhi (1969-77) aimed to cut fat cats to size and create a paradise for the poor. In fact, the poverty ratio did not fall at all until 1983.
“Meanwhile, the population had virtually doubled since independence in 1947, meaning that the number of poor people virtually doubled in this socialist era. There could scarcely be a crueler demonstration of how policies in the name of the poor could end up impoverishing them even further. GDP growth improved to 5.5 percent in the 1980s because of some very modest liberalization plus a government spending spree. But the spending spree was unsustainable and ended in tears and empty foreign exchange reserves in 1991.”
India dismantled the license raj on July 24, 1991 because it had no other choice. It needed the economic growth of a vibrant private sector. The theory of trying to convert India into a modern economy by using central planning had failed in the real world. The success of deregulation made it irreversible, at least until the next generation forgets..
Today, we think of India as a vibrant competitor on the global stage with growth upwards of 8%. It hosts G20 meetings. It lands on the moon. Its IT services industry is a global leader. This was only possible because of the economic growth that liberalization enabled. Here’s Brookings:
“The point is when a country is performing below its potential, it does not require much to unlock inefficiency to boost the growth rate. Small changes can turn into big outcomes.”
India is a lesson for us all.
Regulatory uncertainty and excessive intervention cater to factions with political influence that have the resources to lobby in favor of their own interests at the expense of broad-based, equitable economic growth that rewards industry and virtue.
The good news is that we can spur significant economic growth that addresses inequality with deregulation. A rising tide lifts all boats.