In recent months, the idea of "regulatory capture"--which holds that the interests of regulators become aligned with those of the businesses they regulate--has been enjoying its star turn. Bernie Sanders has done more than perhaps anyone to spread the idea, with his succinct maxim, "Congress does not regulate Wall Street, Wall Street regulates Congress." Earlier this year, the Government Accountability Office revealed that it had (at the urging of two members of Congress) begun investigating whether the New York office of the Federal Reserve is too close to the financial institutions it is supposed to regulate. This is, apparently, the first GAO investigation of its kind.

Occasionally, even corporations themselves will charge that regulators have been captured. Telecom, cable, and broadband companies recently griped that they don't get a fair shake from the Federal Communications Commission because it has become too cozy with Google. And the idea of capture, initially aimed at government, is now often extended to describe other institutions' behavior. A one-day conference at Columbia University in April explored "media capture"--the idea that business interests control the media that cover them--while the Booth School of Business economist Luigi Zingales recently suggested that economists themselves are subject to capture.

For all the ubiquity of charges of capture, however, it can be difficult to grasp exactly what capture is, or how serious a social and economic problem it represents.

As it is commonly used, "capture" seems malleable enough to fit into the worldviews of both the left (evil corporations outfox, outspend, and manipulate regulators) and the right (state regulation is harmful to businesses). And yet, historically, capture theory embodies a more collusive view of the relationship between government and enterprise. Classic capturists argue that regulations don't primarily exist, as the left usually argues, to protect public health and safety, or, as the right usually argues, to inhibit or harass businesses. Rather, capturists maintain that businesses accept regulations because they ultimately help improve profits. Most contemporary discussions of this issue stem from a seminal 1971 paper on regulatory capture, in which George Stigler, a Chicago School of Economics professor who was later awarded the Nobel Prize, wrote: "As a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit."

A frequently cited example of this form of capture is state licensing of businesses such as hairdressers and plumbers. By making it harder for just anyone to enter those professions, state licensing laws help incumbent players protect their current advantages. Sometimes the protection of incumbents reaches extreme levels, seeming to undermine any pretense that regulations exist to protect the public. Take the fight being waged by car-dealership groups in some states to prevent the upstart carmaker Tesla, which retails directly to consumers on the internet and has been trying to open its own brick-and-mortar stores, from selling vehicles there. The overt rationale is that only licensed dealers--intermediaries--should be able to sell cars. But the underlying one is that Tesla's direct-sales model poses a threat to car dealers.

Intuitively, though, we know that not all regulation benefits companies. Regulators are penalizing Volkswagen billions of dollars for deceiving them about diesel emissions in its cars, for example, to no obvious benefit to the company.

Similarly, there are clearly instances in which businesses actively lobby to undermine the independence and effectiveness of regulators. Banks and other financial institutions, for example, spend millions of dollars annually to loosen the grip of federal regulations. And the idea that the Dodd-Frank law passed after last decade's financial meltdown exists primarily for the benefit of the banks would be rejected by most banks.

There are other signs that regulatory capture is a fuzzy concept. Usually, once economists have identified an issue, at least one of them will figure out a way to value it. Yet is very hard to find any estimate of how much regulatory capture costs the country, or any state, or even any individual industry. Zingales, who heads a research center at the University of Chicago dedicated to regulatory capture, says he knows of no such study. (He is, however, working on a paper that will try to put a price on capture in the mobile telephone industry.)

Some scholars are urging that we rethink the entire idea. A 2013 essay by William Novak, a law professor at the University of Michigan, offered a revisionist history, arguing that the theorists who formulated the idea of regulatory capture in the 1960s and '70s were overreacting to a particular era of government regulation of business, which had arguably begun in 1887, with the formation of the Interstate Commerce Commission. Had they considered earlier relationships between business and the state, Novak maintained, they would have realized that the modern regulatory regime was part of a long history of responses to business influence over government--to corruption.

Novak accepts that regulatory capture exists, but he offers two refinements to make the theory more understandable in the real world. One is that capture may be more likely among "vertical" regulators, who enforce rules within a single industry, such as trucking, than among "horizontal" regulators, those whose mandates apply broadly across society, such as the Environmental Protection Agency and the Occupational Safety and Health Administration.

The second is that while capture can quite clearly be harmful, it is far from proved that regulators are any more prone to it than other institutions. The financial crisis, which was precipitated by numerous misdeeds related to how financial institutions packaged and sold their products, was a regulatory failure, to be sure. But, as Novak said in an interview, "Entire sectors of the government became enamored with financial interests, including Congress."

And thus, if we intend to tackle the problem of capture, we need more precise definitions and measurements. There is a risk of either weakening regulations that genuinely protect the public, or allowing some incumbents to continue their unearned free ride and squash disrupters. The increasing popularity of capture may thus be a double-edged sword: We need to talk about capture; we also need to avoid being captured by it.

Published on: Jul 28, 2016