A State of Inaction: Regulatory Preferences, Rent, and Income Inequality

Abstract

This Article explores several meanings of a regulatory preference for government inaction. It explains the rise to dominance of this inaction preference in the United States and its distorting influence on the perception and understanding of regulation. Specifically, the Article demonstrates how basic terms in regulation, such as “government failure,” “regulatory capture,” and “deregulation,” acquired misleading connotations suggesting that government inaction is always superior to government action. The Article further explains how, through government inaction, the U.S. legal system accommodates rent extraction - the profitable exploitation of market imperfections and favorable laws. Several developments in recent decades have considerably improved the capacity of very small groups in society to collect rents, namely, use talent and positional advantages to gain increasing levels of earnings. The Article argues that the parallel rise of the inaction preference has contributed to this trend, primarily because the availability of rent extraction opportunities draws talent that utilizes them with growing effectiveness. The purpose of the Article is to clarify several aspects of the relationships between regulation and rent extraction or, more precisely, to emphasize that government inaction may entail undesirable income effects.