The Corporate State, In One Chart

James Bessen has a terrific article in the Harvard Business Review on the estimated contribution to corporate profits of rent-seeking, or the acquisition of special favors, subsidies, and protections from the government that shelter a company from the normal competition of a free market.  Bessen argues that such rent-seeking is major explanatory factor for recent rises in corporate profits.


This topic will be a familiar one to Coyoteblog readers.   Show me a regulation and I will show you the large corporation that is able to use it to throttle competition.  I remember when everyone claimed the retail minimum wage was going to hurt Wal-Mart, but in fact Wal-Mart actually supported it because it was paying a higher wage than its smaller upstart competitors and thus the minimum wage would tend to hurt Wal-Mart's competition worse than it would be hurt.  Taxi service is one of the most regulated businesses in the country (at least in relation to the complexity of the business) and we are seeing just how much these regulations have supported taxi profits as we watch the taxi companies use the regulations to try to hammer Uber and Lyft.

According to Bessen, the effect is both large and on the rise:

I find that investments in conventional capital assets like machinery and spending on R&D together account for a substantial part of the rise in valuations and profits, especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase....

The pattern around the 1992 Cable Act is representative: I find that firms experiencing major regulatory change see their valuations rise 12% compared to closely matched control groups. Smaller regulatory changes are also associated with a subsequent rise in firm market values and profits.

This research supports the view that political rent seeking is responsible for a significant portion of the rise in profits. Firms influence the legislative and regulatory process and they engage in a wide range of activity to profit from regulatory changes, with significant success. Without further research, we cannot say for sure whether this activity is making the economy less dynamic and more unequal, but the magnitude of this effect certainly heightens those concerns.

Two characteristics make these changes particularly worrisome. First, the link between regulation and profits is highly concentrated in a small number of politically influential industries. Among non-financial corporations, most of the effect is accounted for by just five industries: pharmaceuticals/chemicals, petroleum refining, transportation equipment/defense, utilities, and communications. These industries comprise, in effect, a “rent seeking sector.” Concentration of political influence among a narrow group of firms means that those firms may skew policy for the entire economy. For example, the pharmaceutical industry has actively stymied efforts to address problems of patent trolls that affect many other industries.

I would add two other industries to this list -- medicine and legal.  The reason it likely does not show up in his study is that the returns in these businesses show up to individuals or small private firms.  But heavy regulation, and in particular a licensing process wherein one must get permission from the incumbents in order to compete with them, has always kept prices and returns in these businesses artificially high.

Note by the way that the breakpoint year of 2000 makes this a bipartisan issue, occurring in equal measure in Republican and Democratic Congresses and Presidencies.

And I don't think I need to remind folks, but both of our Presidential candidates are absolutely steeped in and committed to this cronyist, corporatist system


  1. TruthisaPeskyThing:

    Coyote, Valid issue and concern. However, I would throw out a consideration which does not get much attention. Many people think that the initiative flow is from corporation to the lawmakers -- that the corporations start the process for rent-seeking and protection. In my experience with our company's PAC, the initiative almost always came from lawmakers. Sometime subtly, and sometimes quite blatantly, they would send us word that they wanted to introduce legislation for new regulations in our industry -- and we better make contributions to their campaigns if we wanted to have a seat at the table when the ideas were being discussed. I felt very much extorted. Of course, MSM characterized our donations as bribes. Perhaps the truth lies more toward the middle, but by giving government power, you open the door for all kinds of shenanigans, and a lot of those shenanigans come from government officials.

  2. GoneWithTheWind:

    Corporations/businesses would love to simply run their business and sell their product. It is the government who is constantly inserting themselves into the process, rightly or wrongly. The business is forced into spending money to lobby lawmakers and bureaucrats simply to prevent the government from creating regulations that will harm them. If the government did not insert themselves into the business world the business would certainly not choose to spend money to lobby the government or "seek rent". I do recognize that there is a role for government but they often exceed the role and knowingly or through ignorance create the problem and or extort business. A big part of this problem is the government in concert with groups/individuals who oppose business or a particular business create regulations designed to harm the business or favor someone. What it all boils down to is too many politicians enter politics to benefit themselves and not to further the cause of the republic and the citizens.

  3. Markus:

    I agree. Regulations do not write themselves, and they are not written in a vacuum. Many important rules were written with substantial input from interested parties, i.e. lobbyists. There are very few laws/regulations/rules written by disinterested libertarians. Our laws about sucrose were ostensibly to combat Castroism which is headed toward a death from old age, but they certainly kept the price up. They are still selling gasohol. Copyrights now last long beyond the creator's life.

  4. Peter Gallagher:

    Thanks Warren. Just scanned the Bessen paper & I like it too. He has buttressed his model with the right sorts of sensitivity tests and has paid attention to the plausibility of the causal connections underlying the estimates too. Looks like a pretty interesting result that deserves more attention. It's pretty that, if true, the payoff is highest in infrastructure firms where the rents sap the productivity of the whole economy.

  5. Not Sure:

    "and we better make contributions to their campaigns if we wanted to have a seat at the table when the ideas were being discussed."

    In other words... Nice little business you have there. Be a shame if anything were to happen to it.

  6. Jerryskids:

    I've long said the growth of the regulatory/bureaucratic state is a much more dangerous than the growth of the welfare state - the welfare state merely wants to tax the bejabbers out of you to fund their pet projects whereas the bureaucratic state wants to strangle you to death. Add in that the regulators aren't fair and unbiased - you don't wind up working at the EPA by accident, you wind up working at the EPA because you believe one of the greatest threats we face is those greedy corporations raping the planet and the same idea holds true for the regulators at the Department of Agriculture whose priority is food safety and the regulators at OSHA in a panic about worker safety and the regulators at the NHTSA having nightmares about automobile safety and so on with every agency out there - and you wind up with a thousand different regulators with a thousand different reasons why anything you propose doing is a terribly horribly dangerously insane idea and must be stopped lest you kill us all. And now that they've all got their own little SWAT teams and enforcement powers, well, who's going to tell them how far their regulations can go? If the President and the Congress and the Courts don't follow the Constitution and instead defer to the agencies, why should the agencies defer to the Constitution - or to the President or the Congress or the Courts? Forget how bad Trump or Hillary might be as the nominal head of government, we're headed toward a hundred different agency heads acting as warlords with their own little fiefdoms and unconstrained powers to act as they see fit and that's who's really running the government.

  7. wilfranc:

    One that comes to my mind as a good example is Mattel. The toymaker brought China made toys here that became a health concern. Mattel supported tighter regulations that everything for children be tested. Of course, they were exempted from this law. All the little toymakers and resellers were not.

  8. CC:

    One of the problems leading to this is that politicians need friends, both for $ and as a constituency. It is far less work for them to curry favor with a discrete block (churches used to be, unions obviously, but also businesses). Once you do a favor for taxis or Apple or the movie business, that business lets its people know you are their friend (or at least in theory). AND you get campaign donations. Beats going door to door.
    Another factor is that when there is public outcry about some issue (take the toy safety issue), it can make sense for a big company to "support" it because it is easy for them but will hurt their competition. Of course sometimes companies take the initiative to hurt the competition.

  9. markm:

    Mattel isn't exempted from the law - but as the world's largest toy company, it can most easily afford the testing required. A startup, a small toy maker, or a thrift shop cannot. So by getting caught importing toys with lead paint (and probably buying a congressional committee chairman), Mattel was able to eliminate a large part of their competition. There was a low cost, but with fewer competitors they could more than compensate for that by raising their prices.