From: allin
Regulatory capture, defined by 1982 Nobel Prize winner in economics George Stigler, describes a phenomenon where regulation, as a rule, is “acquired by the industry and is designed and operated primarily for its benefit” [08:42:53]. This means that a special interest is prioritized over the general interest of the public, leading to a net loss for society [09:27:07]. Venture capitalist Bill Gurley asserts that “regulation is the friend of the incumbent” [08:50:59].
Mechanisms of Influence
Two primary mechanisms are typically used in regulatory capture: limited market entry and price protection or increases [09:43:08]. The mechanisms of influence that enable this include:
- Money: Direct contributions, made worse by Citizens United [09:53:05]. Gurley recounts an early experience where a congressman required $5,000 checks from 10-12 people, including spouses who didn’t even need to attend the meeting, just provide the money [01:07:07].
- Exposure: Time spent around key individuals in government [09:56:06].
- Revolving Doors: Individuals moving between industry and government positions [10:00:07].
A 1999 Morgan Stanley research study concluded that landmark regulatory action tends to improve returns for the largest players in the targeted industry [10:33:04]. Many attempts to increase competition or improve customer experience through deregulation have failed, reinforcing Stigler’s findings [10:45:00].
Case Studies of Regulatory Capture
Telecommunications Industry
Bill Gurley’s fourth venture capital investment was in Tropos Networks, a company developing industrial-grade mesh Wi-Fi that could “bathe a city in Wi-Fi Broadband” [02:20:00]. This technology excited hundreds of mayors across the country who wanted to provide free Wi-Fi service to their downtown areas for public safety, economic development, and to address the digital divide [02:39:00].
However, these plans “collided with commercial interest” [03:31:00]. Verizon successfully pushed a bill through the state legislature to thwart Philadelphia’s wireless plan [04:15:00]. Comcast, headquartered in Philadelphia, also put a bill on Governor Ed Rendell’s desk, drafted by lobbyists for telecommunications companies [04:30:00]. David Cohen, Comcast’s Chief Lobbyist, was described as “Philadelphia’s most powerful unelected official” by The Inquirer [05:40:00]. Gurley likens challenging Comcast and their lobbying power to “a second grader challenging Michael Jordan” [05:59:00].
Within two years, AT&T joined this fight, leading to the outlawing of municipal broadband in over 22 states, taking power away from local decision-makers in the interest of commercial entities, not citizens [06:16:00].
The Telecommunications Act of 1996 was heralded as the most important telecommunications reform in 62 years, with two goals: to promote competition and to encourage the rapid development of new technologies [06:47:00]. However, the market saw the opposite effect:
- In 1996, the top four telecom players controlled 48% of the market; four to five years later, after the legislation, they controlled 85% [07:18:00].
- Venture capital dollars invested in telecom equipment, which used to be 15% of VC activity, dropped below 1% within 10 years, and the market for innovation in telecom equipment essentially disappeared [07:37:00].
Healthcare: EHR Software
Epic Systems, a large private company in Wisconsin, is the largest player in Electronic Health Record (EHR) software [11:14:00]. Its CEO, Judith Faulkner, was the only corporate representative on Obama’s Health IT Council in 2009 and a major donor to Obama [11:28:00].
Tucked within Obama’s American Recovery Act (stimulus package) was the HITECH Act, which created the ONC agency to oversee health information technology [11:51:00]. Under this act, doctors would receive 38 billion in payments [12:14:00]. Additionally, doctors received an extra $17,000 to prove “meaningful use” of the software [13:12:00].
The ONC decided the threshold of features required for software to comply with this mandate, which Gurley speculates was based on Epic’s feature set [13:30:00]. The Department of Justice then enforced this, resulting in record fines against Epic’s lesser competitors for not having the mandated features [13:47:00]. This created a “brick wall” for startups that typically disrupt by offering simpler products with key features [14:09:00]. Obama later called this the “most disappointing part of Obamacare” [14:28:00]. Gurley rates this a “10” in the “Olympic regulatory capture competition” [14:50:00].
COVID-19 Rapid Antigen Tests
The COVID-19 rapid antigen test is based on lateral flow assay technology developed 80 years ago in 1943, making it a commodity [15:15:00].
- Europe: Germany evaluated 122 vendors and validated 96, leading to five tests costing 3.75 Euros, or 75 Euro cents per test [15:39:00]. The UK distributed tests to homes, having acquired them cheaply in large numbers [16:07:00].
- United States: The US fought the adoption of rapid tests, partly because hospitals profited greatly from PCR tests [16:16:00]. The New York Times listed only three available vendors, including Abbott [16:34:00]. Timothy Stenzel, who worked for the FDA overseeing antigen test approvals, previously spent four years at Abbott [16:52:00]. When President Biden authorized 23.99, while in the UK, they were about 1.60 per test [18:53:00]. This 6x price differential prevented citizens from benefiting from cheap, commodity tests [19:16:00].
Banking Industry
The number of new banks in the U.S. significantly decreased after 2009, notably due to the Dodd-Frank Act [10:57:00]. This demonstrates the repercussions of regulatory policies on venture capital and market growth and market entry.
Broader Implications
Impact on Innovation and Competitiveness
Gurley argues that regulatory capture gives capitalism a bad name, particularly where capture is highest, leading to price increases in sectors like healthcare and education, unlike the decreasing prices in competitive tech products [22:40:00]. He fears that regulation acts as a blocker to innovation, which in turn kills prosperity [23:29:00].
AI Regulation Debate
Concerns are rising about the impact of AI regulation on innovation and global competitiveness. Incumbent AI companies are actively meeting with government officials and spreading negative messages about open-source AI, perceiving it as their biggest threat [21:15:00]. Sam Altman, CEO of OpenAI, testified proposing a new regulatory agency similar to the Atomic Energy Commission, with standards for AI software release [27:41:00]. This approach, according to Gurley, could turn software into the next “Big Pharma” or “military industrial complex,” with Washington running the software industry and stifling startups [28:38:00]. This echoes the EHR example where the government mandated software features [28:57:00].
Potential Solutions
Bill Gurley believes that the U.S. is “not very good at regulation” as most case studies show failures and a net loss for society [21:43:00]. He advocates for:
- Massive Transparency: Mandating and increasing the transparency of financial contributions to politicians, similar to Open Secrets, to expose obfuscation [25:39:00].
- Addressing Revolving Doors: The “rotating door” phenomenon, where individuals move between government and lucrative private sector roles, is a “massive problem” [26:27:00].
- “First Do No Harm” Principle: Drawing from Senator Patrick Monahan’s view, Gurley suggests Congress adopt a Hippocratic Oath-like principle to prevent unintended negative consequences of legislation, citing the example of mental health institution closures in the 1960s and their link to the homeless situation [21:52:00].
- Awareness: Increasing public awareness about how regulatory capture operates and how legislators operate [29:18:00].
Gurley notes that the U.S. federal government is now the largest consumer and distributor of capital in human history, fearing that this concentration of power, combined with regulatory capture, contributes to national decline and could cause democracy and capitalism to “kill each other over time” [29:57:00]. He believes Silicon Valley’s success is partly due to its distance from Washington D.C. [23:56:00].