Summer School 4: Who are all these regulations protecting?

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Speaker 2 Welcome back, everyone, to Planet Money Summer School, an economics course so easy you can literally do it with your eyes closed. My eyes are closed right now.

Speaker 2 This season on summer school, we are tackling the role of the government in our economic lives.

Speaker 2 We've looked at government as the big spender who buys all the drinks and as the sneaky pickpocket who uses the tax code to remake society. Today, we look at the government as, where's my whistle?

Speaker 2 Here we go.

Speaker 2 A referee.

Speaker 2 There are occasional incentives in business that make it very profitable to do bad things. Maybe cheat at the game and steal other people's ideas or cut some corners on safety.

Speaker 2 The government as referee steps in to make the rules and enforce them, manage competition in a way that hopefully makes things better for us all.

Speaker 2 But you have to ask, when is the government protecting you and when is it protecting the already rich and powerful? These rules always create winners and losers, as we will see today.

Speaker 2 Every summer school has a few classic Planet Money case studies, we'll have those coming up, and a worldly professor to help us figure out the big ideas.

Speaker 2 That professor today is Joanne Ricard Uget, an associate professor who teaches political science at Loyola University, Maryland.

Speaker 2 But more importantly, a listener to Planet Money who heard past seasons of summer school and encouraged us to look at the economics of government. So good to have you on, Juan.

Speaker 3 Hi, Robert.

Speaker 2 So far in summer school, we've talked about the things that only a government can do. Pay for national defense, create social security, redistribute wealth with a tax code.

Speaker 2 But often the government jumps into the free market and says, wait a minute, we should put rules on competition and businesses, things like patents and safety regulations.

Speaker 2 Joan, why is the government involved in business to begin with?

Speaker 3 Well, in any complex society, we have a government. And what it means by definition is that social and economic relations are very complicated, right? And so

Speaker 3 government intervenes in a variety of things, like regulating private property, of businesses, both physical and as we'll discuss today, I think, intellectual property, that if we left private agents to their own devices, might be very hard to solve.

Speaker 3 In other words, governments solve a lot of collective action problems at once, and some of these collective action problems are very much related to businesses.

Speaker 2 A collective action problem, we should say, is something that affects everyone and that we all have to agree on to solve. So one classic collective action problem is private property.

Speaker 2 We don't want to spend our days clubbing each other over the head, trying to take our neighbor's stuff. So we agree that government and the courts will help enforce who owns what.

Speaker 2 And there is a form of this we're going to talk about today called intellectual property, which is like physical property but has some strange consequences.

Speaker 3 It is different, and not everyone agrees that government should regulate intellectual property. But let me say, what is intellectual property?

Speaker 3 So, intellectual property, contrary to say land, right, is non-physical property. And it's something that results from a person having, or a company having an idea that is deemed novel or original.

Speaker 3 So, to answer your question, why is the government in the business of regulating intellectual property? Well, the obvious argument that many have made is that it takes time and money to innovate.

Speaker 3 So intellectual property rights give people and companies some incentive to innovate by providing legal protections against what we may call copycats.

Speaker 3 Just like for land, you may say, well, if someone can take my land tomorrow, why would I plant an expensive crop? People can make the analogous argument for intellectual property rights.

Speaker 3 If someone can print my book or copy my medicine tomorrow, why should I invest years in developing it?

Speaker 2 Intellectual property makes sense when we're talking about life-saving medicines. We all have an interest in having those be developed and protecting those.

Speaker 2 But on the show today, we wanted to look at intellectual property in the realm of things you might not think of as useful life-saving inventions. That you think, can you even have a patent on that?

Speaker 2 For instance, can you patent a piece of meat? A steak, to be precise. And does the cow mind that you own part of their hide as intellectual property? We'll answer those questions after the break.

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Speaker 2 Back in the classroom with Planet Money Summer School. Time now for our first case study.

Speaker 2 And this was prompted by the news back in 2015 that someone had patented a new way of cutting a piece of meat off a cow, a new beef steak that no one had apparently carved out before in the thousands of years we've been eating cows.

Speaker 2 Professor Ricard Uget,

Speaker 2 as our students listen, what should they listen for?

Speaker 3 Oh, they should step back and think of

Speaker 3 how patents and the drive to innovate might be central to an economy.

Speaker 2 And in this case, extremely central to the cow. David Kestenbaum and Jacob Goldstein hosted this episode about the steak patent, Take It Away.

Speaker 5 David, last week you and I, we went and visited a guy who is kind of a big deal in this weird little world of meat patents. His name's Gene Gagliarti.

Speaker 5 He's 82 years old and he works in an old house in rural Pennsylvania across the street from a cornfield. Hi.

Speaker 6 Hi, Eugene.

Speaker 7 Nice to meet you. Gene told us that he started cutting meat when he was six years old.
His dad was a butcher. They had a family business.
And his dad used to play this game with him.

Speaker 7 He would lay out random pieces of meat for Gene and say, tell me what part of the animal that one came from.

Speaker 5 Gene grew up and took over the business from his father. They sold hamburgers and other meat to restaurant chains in the Philadelphia area.
But, you know, they weren't really selling anything special.

Speaker 5 It was basically the same thing everybody else was selling. And by the late 1960s, the family business was on the verge of going under.

Speaker 5 And this, this problem, this threat to the business, it's actually what drove Gene to become an inventor.

Speaker 6 Yeah, I'm lying in bed saying, how am I going to save this company? I thought I've got to come up with something innovative, something unique that nobody else has.

Speaker 7 Gene starts to think about the Philly cheesesteak, which is really, really popular in Philadelphia. But the sandwich is not perfect.

Speaker 6 The meat was so tough that you couldn't chew through it.

Speaker 7 You'd end up accidentally pulling the meat out from the bread when you tried to take a bite. So Gene wanted to solve this problem, and it led him to his first big meat idea.

Speaker 6 It came to me at three o'clock in the morning, so I got up out of bed and went to the plant and tried it.

Speaker 5 The meat in a Philly cheesesteak, it's made of these thin kind of sheets of beef. And Gene, what he wanted to do was he wanted to make those sheets less tough, make them easier to chew.

Speaker 5 And his idea for doing that, it was really complicated.

Speaker 5 He put the meat through a grinder, then he put it through the grinder again, then he mixed it and he put it in a mold, he froze it, he tempered it, he sliced it, and finally he cooked it and ate it to see if it was any good.

Speaker 6 Tasted great.

Speaker 6 I said, wow, we're going to make it.

Speaker 7 He just needed one more thing. Needed a good name.
And he was obsessed with this. So he went on a road trip with his friends, and it was all he could talk about.

Speaker 7 One of his friends, whose name was Jigs, was in the back seat getting drunk on bourbon.

Speaker 6 He said, I am so sick and tired of hearing you coming up with the name. He says,

Speaker 6 them, stick them with steak em

Speaker 6 so when he said steak'em, I picked up on it and I kept saying it for 600 miles all the way home. Steak them, stake them, steak them.

Speaker 5 And so steak'em was born. It not only saved Gene's family company, it blew up.

Speaker 8 It became a huge hit.

Speaker 5 Well, here it is at 16 slices per package. It's finally time to tell the neighbors you're having steak tonight.
Steak them, America's favorite sliced steak.

Speaker 7 These were sold in grocery stores from Puerto Rico to Hawaii. I mean, I remember them very fondly from my childhood.
We used to eat them in particular at my friend John's house after school.

Speaker 7 You could fry them up really quickly. That was their great advantage.

Speaker 7 The TV ad for it, I remember the tagline was something like, you can steak them in the north, you can steak them in the south, but the best thing of all is when you steak them in your mouth.

Speaker 5 I'm cringing, David. I don't even know what that means.
What does that even mean? I don't know.

Speaker 7 I never thought about what it meant. It meant I would really like a steakum.

Speaker 5 All right. So in 1980, Gene sold what had used to be the Little Family Business for $20 million.

Speaker 5 This made it clear there was lots of money to be made in meat inventions.

Speaker 7 Gene went on to invent all kinds of other things to do with meat. In fact, on the wall behind him as he's telling us the steak'em story are all these picture frames.
And in the frames...

Speaker 7 are patent after patent after patent, dozens of them from different countries. There's one for method of making a food product from the thigh of a bird.

Speaker 7 Gene sold that idea to KFC back in the 1990s, and it became popcorn chicken.

Speaker 5 And we should say here, Gene is not actually patenting the meat itself. Obviously, he did not invent the meat.
He's inventing a method of cutting meat.

Speaker 5 And, you know, when we step back and think about patents, I feel like we usually think about patents as being all about technology, right?

Speaker 5 But at their core, patents are about encouraging and protecting new, useful ideas.

Speaker 5 And yeah, those ideas can come from some 16-year-old trying to make a genius new iPhone app in his bedroom, but they can also come from an 82-year-old guy in a converted garage trying to figure out a better way to cut chicken.

Speaker 7 Like any good backyard inventor, Gene Gagliardi has turned the garage into a workshop.

Speaker 7 There's a big industrial fridge full of meat, and he pulls out a chicken, starts cutting it up.

Speaker 5 A lot of patents are trying to solve a problem in the world. And Gene says right now there is a problem in in the chicken world.

Speaker 5 Wings are really popular right now, you know, like buffalo chicken wings. You can eat them at the bar with the beer.
But there are only two wings per chicken.

Speaker 5 Drumsticks, on the other hand, are not so popular right now.

Speaker 6 They can't give drumsticks away.

Speaker 5 So Gene's trying to figure out a way to make a drumstick more like a wing.

Speaker 5 He makes some cuts on this drumstick and he actually asks us not to photograph what he's doing because he doesn't have a patent on it yet.

Speaker 5 And then voila, the drumstick has become what he calls a triple dipper.

Speaker 5 It's a chicken leg cut so that there are three little strips of meat coming out from it and it can stand up kind of like a tripod.

Speaker 7 And I have to say, looking at this, it does not seem revolutionary. I mean, I get that the stachem was really complicated, but I mean, this is just cutting up a chicken leg.

Speaker 7 Really, you know, can you get a patent on this? A patent is a very powerful thing. If I get a patent, I get a monopoly.
It says, only I can do this thing.

Speaker 7 Anyone else who wants to do it, they have to pay me or they have to ask my permission. And I have this power for 20 years.

Speaker 7 And most of our laws are trying to do the opposite of this. Most of our laws try to encourage competition.
This one grants you a monopoly. So where do you draw the line?

Speaker 7 What deserves a patent and what does not deserve a patent?

Speaker 5 This is a key question, the central question, really. And ultimately, it's not a question for a guy cutting up a chicken.
It's a question for that guy's lawyer.

Speaker 5 And Gene's lawyer turns out to be a semi-retired guy named Les Caston in Philadelphia.

Speaker 5 We called him up and he told us his favorite patent that he wrote for Gene describes this way where you cut up a hot dog into little strips and then you bread it and then you deep fry it and you kind of wind up with a cross between French fries and a cornd dog.

Speaker 8 I like the Frank Fry's patent.

Speaker 7 What can I search for here?

Speaker 5 I'm in Google patents.

Speaker 8 Method of cutting an elongated meat product or something like that.

Speaker 7 Les told us that patent law is written with the default being to grant the patent. Your idea just has to satisfy three criteria.
One, has to be a new idea.

Speaker 7 Can't be something that's already been patented or discovered before. Two, it can't be obvious.
And three, it has to have some use.

Speaker 7 Basically, unless there's some good reason, the patent office is supposed to give you a patent.

Speaker 5 That's the law.

Speaker 8 That's the way the law is written.

Speaker 7 It errs on the side of saying, okay, I don't know what use this would be, but no one's done it before, and it's not totally obvious.

Speaker 5 So here's your patent.

Speaker 8 Yeah, essentially, yes. There is a provision in there that says it must be useful.

Speaker 8 And I've seen some very unusual patents in my lifetime that I would say, gee, I wonder what's useful about that.

Speaker 8 But

Speaker 8 I mean, there's patents for people

Speaker 8 for walking dogs

Speaker 8 while holding onto a leash on a bicycle.

Speaker 8 There's patents for dumping the remains of a cremated body

Speaker 8 from an aircraft. I mean, there's some very unusual patents.

Speaker 7 Do you think we'd have fewer inventors like Gene if there weren't patents?

Speaker 8 I think so, yes.

Speaker 5 And we asked Gene about this, and he said, you know, he would probably be working with meat in a world without patents, but he said he wouldn't be able to do it on his own working in a garage.

Speaker 5 He'd probably have to go take a job with a big company.

Speaker 7 And that seems fair and true, up to a point. But there is this potentially dangerous thing about the patent system.

Speaker 7 I I mean, it's supposed to encourage innovation, but at some point, patents, they also can hurt innovation.

Speaker 7 You may remember the stories Alex Bloomberg did here on the show about software patents and about how there are so many software patents for so many completely simple and basic things that Everyone in the technology business is worried that they are violating someone else's patents.

Speaker 7 I mean, Apple has a patent on a device with rounded edges.

Speaker 7 And in the world of meat, you could imagine some young would-be meat inventor getting discouraged, saying, look, Gene Gagliarti has already got all these patents. What is left for me to do?

Speaker 7 So, you know, there's a line somewhere between encouraging people to come up with good, useful ideas and granting patents for anything which can actually discourage innovation.

Speaker 2 David Kestenbaum and Jacob Goldstein from back in 2015. Let's dive now into the meat of the issue.
I know, I know, I'm allowed to do just one of those puns, right?

Speaker 2 The meat of the issue with our professor, Joanne Ricard-Huget.

Speaker 3 Hi, Robert. Great to be here.

Speaker 2 So, Professor, as we heard in this episode, one man was extremely motivated to revolutionize this tiny part of the economy, the stake-creating economy.

Speaker 2 And you can imagine millions of people like him with their own weird obsessions and patents innovating in all these other industries. Why is such innovation important?

Speaker 2 Like, why is it the government's role to encourage people to come up with new stuff?

Speaker 3 Well, it's important because innovation is one of the key factors behind economic growth. For most of our history of humankind, innovation was actually very slow.

Speaker 3 Increases in productivity, which come from figuring out better ways to do the same thing, more efficient ways to do the same thing, or ways of doing something new, right?

Speaker 3 These advances were very slow. But since the Industrial Revolution in the mid-19th century, innovation has picked up big time, and as anyone living on earth knows, so has economic growth.

Speaker 2 And so I guess the real question is, when we talk about intellectual property, the kind of patents here,

Speaker 2 does it actually encourage innovation?

Speaker 3 Overall, the balance of evidence is in favor of intellectual property rights favoring innovation and growth. But it's a bit more interesting than that.

Speaker 3 Quite a lot of research shows that intellectual property rights, like patents, for example, favor innovation and growth, but especially in developed countries.

Speaker 3 And the evidence for poor countries is not so clear. And then the question is, well, why is it that intellectual property rights may

Speaker 3 have not that positive of an effect on innovation and growth in poorer countries?

Speaker 3 And what some people have argued is that some of these poor countries benefit from flexible rules for copying, for tweaking innovations that may not be new patents, but nonetheless allow them to grow faster.

Speaker 2 You seem to be saying that patents work best if you already have these top-notch industries that can develop and monetize the ideas they have. But for developing countries, it's a lot murkier.

Speaker 2 You want sharing of ideas and skills and you want people trying to innovate all the time, even if it's kind of maybe taking some ideas from each other.

Speaker 2 It reminds me actually of the United States of America, the early U.S., when we were first starting our textile industry, we took a lot of stuff from the British and maybe didn't pay for it, but it really helped the United States grow faster.

Speaker 3 That's one of the main arguments for weak intellectual property rights and why some people say there shouldn't be intellectual property rights, is that it makes the economy more dynamic.

Speaker 3 Some people have argued the reasons the 70s and the 80s and the 90s were so innovative in software and technology and computers is precisely because law had not caught up with intellectual property rights.

Speaker 2 And we're even seeing a bit of that now with artificial intelligence.

Speaker 2 I feel like those companies are playing a little fast and loose with ownership rules because it's evolving so quickly, no one even knows how it works, much less how to patent it, I guess.

Speaker 3 Yeah, that's actually the analogy of the 2020s, perhaps, to what I was just mentioning in the 80s and 90s when computers were coming up, right?

Speaker 3 Regulation has to eventually catch up, but I don't think it has in many countries, including the U.S. so far.

Speaker 2 And I guess that is the cutting-edge technology game, right? Like, how much can you imitate or even steal in a new competitive industry?

Speaker 2 How many billions can you make before the lawyers and the courts and the politicians figure out who owns what and lock in the patents and lock out all your competition?

Speaker 2 In our next case study, we will look at regulations from the other side, from the side of the underdog. Does a state have a compelling interest in stopping some businesses before they can even start?

Speaker 2 We'll have that case study after the break.

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Speaker 2 Okay, okay, okay, okay. Quiet down class.
Like the government, we have a lot of rules at Planet Money Summer School, but it is all for your own good.

Speaker 2 Don't the rulemakers always say that? It's for your own good? Our last case study, we talked about the government protecting businesses and their inventions.

Speaker 2 Now we turn to a different kind of protection, trying to protect consumers' safety. But even there, there are some unintended consequences on innovation and economic growth.

Speaker 2 Professor, before we start, what should we listen for in this case study?

Speaker 3 Yeah, this is an interesting episode on the

Speaker 3 trade-offs between free market activity on the one hand and safety regulations on the other.

Speaker 3 And on top of it, it will be interesting for listeners to think of the role of lobbies and what we call special interests in affecting legislation.

Speaker 2 Ah, you're such a pro.

Speaker 2 It's like you do this for a living.

Speaker 3 Far from it.

Speaker 2 This episode first aired in 2012. It was hosted by Jacob Goldstein and Alex Bloomberg.

Speaker 9 A few years ago, Justina Clayton started a hair braiding business in her home in Centerville, Utah. She had learned to braid hair as a girl growing up in Sierra Leone.

Speaker 9 And in Utah, she found this little niche working for local families that had adopted kids from Africa.

Speaker 9 Her business let her stay home with her own kids, and in some months, she made enough to pay for groceries. She even put an ad on a local website.

Speaker 9 Then one day, she got an email from a stranger who had seen the ad.

Speaker 11 Said it's illegal in the state of Utah to do any kind of extensions without a cosmetology license. And I thought, no way.
I responded, I said, go ahead and report me.

Speaker 9 But just to be on the safe side, she called the state licensing office, and she found out that she did need a license and that to get it, she'd have to spend more than a year in cosmetology school.

Speaker 9 Tuition would cost $16,000 or more.

Speaker 11 I was really upset. You know, who am I threatening here? I did a lot of talking to my husband.

Speaker 11 He listened. He listened.
He was very kind.

Speaker 5 After she got that email and found out she needed a license, Justina closed down her business. She figured it just wasn't worth the time and money to go to school.

Speaker 5 But she did get to go and make her case to the board that regulates hair braiding in Utah.

Speaker 3 Full name of that board, by the way, the Barber, Cosmetology/slash Barber, Aesthetics, Electrology, and Nail Technology Licensing Board.

Speaker 9 Thank you. So

Speaker 9 to get ready for her meeting with the B C B E E N T L B, Jestina called around to different cosmetology schools in Utah.

Speaker 9 She found out those schools taught little or nothing about the African-style hair braiding that she did.

Speaker 9 And so she took all this and put it together into into a PowerPoint presentation explaining these things.

Speaker 9 And then she went to the board meeting and waited outside the meeting room while the board took care of its other business.

Speaker 11 And so finally it was my turn and I got in and I was super nervous. I stood up and I started talking and there was this one lady who just kept

Speaker 11 making, you know, just sounds as I would talk. It was like,

Speaker 11 yeah, right. You know, just under her breath.
She kept doing that. And then.

Speaker 9 And what was the impression you got from what she was doing?

Speaker 11 That she didn't believe anything that I said.

Speaker 11 The chair of the meeting, she said that I would have to change the law because as the law is written, if you touch hair for money, if you style hair for money, then you need a cosmetology license.

Speaker 11 She said there's nothing that it can do.

Speaker 9 What happened to Justina happens all the time with all different kinds of jobs all around the country.

Speaker 9 There is this patchwork quilt of state licensing laws, and it covers hundreds of different professions.

Speaker 9 It's not just, you know, doctors and lawyers, it's garage door repairmen, it's interior designers, it's landscapers, athletic trainers, masseuses, and literally hundreds of other professions.

Speaker 12 And the ostensible reason for all these licensing requirements is that these requirements protect the public in some way.

Speaker 12 Charles Whelan teaches public policy at Dartmouth and the University of Chicago, and he says that may be true, but for people in licensed fields, a licensing law can serve an entirely different purpose altogether.

Speaker 10 It's also a way to make your competition go away. And that if you are practicing a profession, anything, so let's use manicurists as an example, and there's a lot of competition, say, from

Speaker 10 Asian immigrants, which was the case in Chicago, and you want to limit that competition, you can go to your state legislature and you can say, you know what, it should be harder to be a manicurist.

Speaker 10 You should have to pass an exam or hold a degree or do a sort of other things.

Speaker 10 And in that case, you've really just built a fence around your profession that keeps out competition, lower supply, and basic economics says that means you're going to do better.

Speaker 10 You either get paid more or you'll have more work.

Speaker 9 And for the rest of us, that is for those of us getting manicures, this means that manicures are more expensive.

Speaker 12 Now, that might not be a big deal. Maybe it doesn't bother you that much.
But there is this other big problem with these licensing laws. They make it harder for people to find work.

Speaker 12 One clear example is Justina, who we heard from at the top. You know, to get work in this profession, now she has to go to school, she has to spend a lot of money.

Speaker 12 But even if you have a license, chances are it's a state license, and it probably won't work in another state.

Speaker 10 Well, licensing is not particularly good for anybody who's trying to switch professions. or trying to move to another location where the economy may be better.

Speaker 10 So we know, in general, mobility is pretty good as a salve for a bad economy because some places are going to be stronger than others. So people may be leaving Michigan when the auto economy is weak.

Speaker 10 They may be going to the southwest if there's a lot of growth there.

Speaker 10 So part of what we like about the labor market is you get price signals and unemployment signals, and people should go where there's demand.

Speaker 10 As soon as you introduce state licensing, it just makes it that much harder for people to do those things.

Speaker 12 You know, we're talking about a big swath of the labor market here. Just to give you a comparison, back in the 50s, one in 20 jobs required a license.

Speaker 12 Today, one in every three jobs requires a license. Aaron Powell,

Speaker 9 we have this situation where, at least in some cases, consumers and the economy are being hurt.

Speaker 9 And it seems like the only people who benefit are actually the ones in the industries that are being regulated.

Speaker 12 Which is interesting, right? You always hear this idea that business is opposed to regulation, that businesses generally want less regulation.

Speaker 12 And as we've talked about in the podcast, and this is one of these examples, businesses are often in favor of regulation. In fact, they love it for exactly the reasons we're talking about.

Speaker 12 It helps make them more money.

Speaker 9 I did call Myra Irizzeri. She works for the Professional Beauty Beauty Association.
This is a trade group. And she actually listed for me all the ways that untrained cosmetologists could harm people.

Speaker 14 There could be open wounds, there could be cuts, pathogens could be transmitted.

Speaker 14 We have people that are practicing this field that could really

Speaker 14 do wonderful things for your appearance and for your face and for your skin, but also could harm you.

Speaker 12 Now, when it comes to hair braiding, Charlie Whelan, our expert, doesn't buy Myra Irizzeri's argument.

Speaker 12 To him, this is this classic situation where a small group of people have passed a regulation that benefits them.

Speaker 9 And then you have people who want to work in a field but can't. People, obviously, like Justina Clayton.
And for them, the pain of this can really be acute.

Speaker 9 Justina, she talked to me about how she grew up in Sierra Leone in the middle of a civil war, and then she came to America and she had these ideas about America.

Speaker 9 And, you know, when she talks about this, it's a very emotional thing.

Speaker 10 I finally make it here. And,

Speaker 11 you know,

Speaker 11 growing up you just know America is the place to be it's just you have lots of options and just not being able to do that just I don't know

Speaker 11 I don't know I'm gonna be patient I'm gonna be patient I'm gonna

Speaker 11 hope for the best

Speaker 2 That story was from 2012 and just a few months after we did it, we had an update. Justina won her case in court.
The judge said that the cosmetology law should not apply to her business.

Speaker 2 And within a year, the governor of Utah made it official. He signed into law a bill that makes it legal to braid here in Utah without a license.

Speaker 2 But there are still plenty of industries that keep out newcomers through licensing, and the same debate still comes up all the time.

Speaker 2 We'll be back with our professor to talk about the implications of these regulations after the break.

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Speaker 2 And we are back with our professor, Juan Ricard-Uget.

Speaker 3 Hi, Anne-Robert.

Speaker 2 So let's break this down. There are some areas that sort of demand regulation.
You have to tell us which side of the road to drive on. Like the downside to not having that is obvious.

Speaker 3 So there are some regulations that solve what we may call basic coordination problems. Do we drive on the left or on the right side of the road?

Speaker 3 Not all countries of the world agree, but as long as everyone living in the same country agrees, then we're good to go.

Speaker 3 But most things are a bit more loaded and complicated than deciding what side of the road to drive on. Things like food.
Why do we have a food and drug administration?

Speaker 3 We want to make sure we don't consume food that is spoiled. Why are drugs regulated? Because life and death is at stake.

Speaker 3 So regulation usually is very substantive, carries a lot of important implications.

Speaker 2 Now, of course, I have a nose. I can smell if food is bad.

Speaker 2 I can look into different banks, let's say, and see which one has, you know, monetary reserves and which ones are maybe safer to put my money in. I can do all this myself.

Speaker 2 Is it just that there's just too many things for me to do myself?

Speaker 3 That's definitely part of the answer. It's the same reason why we have what's called a representative democracy and not a direct democracy.

Speaker 3 We do not have time to decide on every local, county, state, and federal level issue that is being discussed.

Speaker 3 And so likewise, regulation saves us time, but it also addresses what are called information symmetries.

Speaker 3 Basically, we as individuals don't have time to learn about each thing in detail, but some people in government, including independent agencies, that's exactly their job.

Speaker 2 This all sounds fine and well. They're going to save me time.
They're going to save lives.

Speaker 2 But then we hear an example like the hair braiding one from the case study, and you think it is an enormous amount of power to sort of pick winners and pick losers.

Speaker 2 And in fact, companies often like regulations because they have the lawyers and the experience to deal with the regulations, and it keeps out competitors.

Speaker 2 There is a term that is called regulatory capture. Why don't you define that for me?

Speaker 3 Yeah, so regulatory capture is when a particular agency that

Speaker 3 should act on the interests of the public at large instead advances or protects the special interests of a particular entity, say whether it's a big company or an NGO, right?

Speaker 3 It could be for-profit or non-profit,

Speaker 3 especially one that it is meant to regulate, right? So it's flipping things inside out.

Speaker 3 And so regulatory capture is usually seen as something negative because it goes to the detriment of our public interest.

Speaker 2 And it's easy to understand why this happens. It's not necessarily corruption.
You know, we have an experience at Planet Money at covering banking regulations.

Speaker 2 And one of the things we found is when regulators get together to regulate a bank, the people who show up to the meetings are banks and the people in the agency often worked for banks because you need that kind of banking knowledge.

Speaker 2 And then honestly, some of the people who are regulators of banks will end up going to work for the banks.

Speaker 3 Yeah, that's an important point. And it's important to precisely not to lump everything together.

Speaker 3 Oftentimes, words like lobbying and special interests have a negative connotation and probably have in our mind some examples of undue influence.

Speaker 3 But government doesn't have all the expertise it needs.

Speaker 3 And, you know, just like when a president asks an academic for advice, we'd like to think we as academics that we're providing good advice, not necessarily advice that furthers our individual interest, right?

Speaker 3 So there can be cases of organizations or individuals lobbying or pushing government officials for things that enhance societal welfare, right?

Speaker 3 Having said that, it is true that sometimes government can suffer capture from regulatory interests, especially of course in countries where money plays a huge role in politics, and the US is the prime example of that.

Speaker 2 How do we know in an industry if there are too many regulations?

Speaker 3 Yeah, it's hard to know, but there are warning signs in a particular industry or sector that there may be too many regulations, including regulatory capture.

Speaker 3 One of those could be that market concentration has risen. That means that a few firms have most of the market, what we call market power.

Speaker 3 It could be that fewer and fewer younger firms are entering the market and making a significant break-in.

Speaker 3 So these are warning signs that tell us that perhaps the regulatory environment needs to change, old regulation shed, or perhaps new ones instituted that restore a more competitive market-free economy in that sector.

Speaker 2 Okay, class, I feel like we've covered a lot of ground in this lesson. So let's go over a few vocabulary words that you can use as a cheat sheet for the test at the end of the summer.

Speaker 2 Yeah, it's coming. So the idea that was running all through both episodes was this idea of productivity, which has a very specific meaning in economics.
Professor?

Speaker 3 Productivity is the amount of output you get for a unit of input. Basically the more you get for a given fixed amount that you put in, the better, right? So let's take a simple example.

Speaker 3 I have a keyboard in front of me. If I learn how to type properly in the keyboard, I'll become more productive because I can type three or four keys per second instead of one.

Speaker 2 And And this is essential in economics as a way to grow an entire economy.

Speaker 3 It's a foundation of growth, one of the most important ones.

Speaker 2 A coordination problem.

Speaker 3 A coordination problem is something that two or more individuals or organizations

Speaker 3 want to agree on.

Speaker 3 like we mentioned driving on the left or on the right, and agreeing on it is positive for everyone involved.

Speaker 2 Regulatory capture. What is that?

Speaker 3 Regulatory capture is when an agency that should act in the public interest instead advances the special interests of individuals or of entities like companies that it is meant to regulate.

Speaker 3 And that's bad because instead of fostering the interests of society at large, it fosters the interests of a particular group of people with something to protect.

Speaker 2 The rich get richer, the big get bigger.

Speaker 2 Joanne Ricard Huget, thank you so much for being our professor today.

Speaker 3 It's been a pleasure, Robert. Thank you for having me.

Speaker 2 A couple of things before the bell rings and class is dismissed.

Speaker 2 If you want to get Planet Money Summer School episodes a week early so you can lord your economic knowledge over your friends, join Planet Money Plus.

Speaker 2 It also gives you all sorts of extra nerdy content and ad-free episodes. That's at plus.npr.org.
Those early episodes will also give you a chance to study for our final exam.

Speaker 2 If you pass, you get a diploma, not blessed or regulated by any government whatsoever. And don't forget the Planet Money Live Show.

Speaker 2 It's a graduation episode and party where you can compete to become the valedictorian of Planet Money Summer School 2025. Information about the show is in the show notes.

Speaker 2 Summer School is produced by Eric Manle and edited by Alex Goldman. It was fact-checked by Emily Crawford and CRY Damns.

Speaker 2 Devin Miller is our project manager and the show was engineered by Robert Rodriguez. I'm Robert Smith.
This is NPR. Thank you for listening.

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