Posts Tagged ‘rent seeking’

I’m from the government and I’m here to help you

December 30, 2012

Private charity, for the most part, is a good thing because the donors tend to be careful in deciding who is worthy of support. There is a big difference between the deserving and the undeserving poor, and private charities tend to be strict in directing aid only to the former

Government, in contrast, finds it difficult to make such important distinctions, especially when special interests fuel the campaign coffers of self-seeking politicians to put the money where they best can extract it for their own gain.

Let me illustrate the failure of the US government in this regard by reference to two examples.

First, is housing. For more than two decades, government policy attempted to make it easier for households with modest incomes to secure mortgages in order to purchase houses. Both the Clinton and the Bush administrations pushed hard on this button. The special interests in the realty market and in the construction industry just loved this charitable instinct, and supported it with campaign monies.

Unfortunately, those responsible for implementing the policy – FHA, Fannie Mae, Freddie Mac – forgot the distinction between deserving and undeserving applicants. Fueled by an indiscriminant love for minorities, mortgage monies were pumped into households that had no clue about how to control a budget. The collapse of the sub-prime market in 2007 brought about the worst recession in the United States since 1929.

Second is higher education. For more than three decades, government has subsidized college loans in a way that has pumped money into the nation’s colleges and universities. The justification was that higher education was the road to success for young people brought up in poverty. The special interests in the colleges and universities, together with all the contractor who fed off their expansion just loved this policy. It opened up a lucrative avenue to extract wealth from the nation’s taxpayers.

The result is little less than catastrophic. Lazy and incompetent students flood higher education, indulging themselves in degree courses devoid of market-value, partying off taxpayer dollars, loading themselves with debt, taking ever-longer to graduate, if indeed, they graduate at all. In the meantime, as I know from first- hand experience, university bureaucrats transfer the loan monies into their own fat pockets. Administrators now exceed faculty in numbers and administrative salaries are roughly double those of faculty at state universities across the country.

And guess what, folks, most administrators are failed academics, who cannot write publishable papers, and cannot teach effectively in the classroom. That is exactly how the worst tend to get on top.

The problem is not one that can be corrected by good governance. The problem is endemic in democratic politics. When government rushes to the aid of those in need, it surely does not do so through the impulse of Christian charity. It does so for the campaign funds, folks, and for the votes that surely follow.

And they come with very serious strings attached.

Hat Tip: Michael Barone, ‘When government offers help, it often makes a mess’, Sunday Examiner, December 30, 2012

Americans should learn from the fall of the Mogul Empire

November 21, 2012

The Taj Mahal, in northern India, is widely ranked as the most beautiful building in the world. Yet, it was a prime cause of the collapse of the Mogul empire.

“Like most visitors to northern India, I visited the Taj Mahal.  Unlike most visitors, I asked economic questions.  Reports of his tax policies suggest that Shah Jahan may have  appropriated as much as 40 per cent of what we now call gross domestic product to support a lifestyle of exceptional ostentation and self-indulgence.  He was overthrown by his son, who was exasperated by his father’s penchant for monumental building, anxious to maximize his own share of the loot and concerned by the scale of the levies on the population.  But it was all too late.  The Mogul empire was in irretrievable decline.’ John Kay, ‘Learn from the Moguls: rent-seeking will destroy your empire’, Financial Times, November 21, 2012

As John Kay notes, the activities of Shah Jahan epitomize rent-seeking – the accumulation of a fortune not by creating wealth through serving customers better but by the appropriation of such wealth after it has already been created by other people. Unfortunately, such activities are not confined to India.  Indeed, they run rampant across 21st century America.

As John Kay also notes, the primary locus of rent-seeking in the United States is the over-blown financial sector, where burgeoning trade in existing assets has overwhelmed the creation of new wealth, attracting scarce talent from elsewhere and creating instability. Parallels between the  Wall Street of Lloyd Blankfein,  Jewish CEO of Goldman Sachs,  and the court of Shah Jahan are too close to be ignored.

“The success of market economies is not achieved by policies that encouragfe people to be greedy and imposing as few restrictions as possible on what the greediest of them do. That was the world of Shah Jahan and it produced very little in the way of economic advance…. The excesses of rent-seeking meant the Mogul empire was in effect ended within two generations. The ensuing sacking of Delhi left a political vacuum only filled by the British Raj.” John Kay, ibid.

Even Lloyd Blankfein might feel a little queasy at the prospect of a British re-colonization of America. So do try to keep your fat greasy fingers out of the money-pot,  Mr. Blankfein, and all you greedy Wall Street financiers who fill your pockets with other people’s hard-earned wealth. The Empire State Building is no Taj Mahal.  And even the Taj Mahal was not worth the immiseration of the Indian sub-continent and the collapse of the Mogul empire..

Why do big government projects escalate in price?

August 22, 2012

John Kay (Financial Times, August 22, 2012) notes that  price increases for  big government projects systematically exceed the general inflation rate by enormous orders of magnitude. Most though not all of his examples are British, but the phenomenon itself is world-wide.

The general price level in Britain increased by a factor of 10 between the Victorian era and 1960 and by another factor of 10 in the 50 years that followed.From this perspective let us review two of John Kay’s several examples.

The London Olympics of 1908 cost just 20,000 pounds. The London Olympics of 1948, allowing for price inflation, should have budgeted out at no more than 160,000 pounds, especially as it was supposed to be a post-war austerity event. In fact, it budgeted out at 750,000 pounds. On a similar calculation, from 1908 to 2012, the London Olympics of 2012 should have budgeted out at 2 million pounds.  The current estimate for that spectacle is 12 billion pounds!

The earliest underground railway lines in London – and in the world – cost half a million pounds a mile to build.  The cost of the Victoria Line , built in the 1960s, rose almost exactly in line with general inflation, coming in at 7 million pounds a mile.  A short decade later, the Jubilee Line cost 36 million pounds a mile to build – way above the interceding rate of price inflation.  and its extension in the 1990s cost 360 million pounds a mile, many degrees of magnitude above the interceding rate of price inflation.  In 2012, the tunnels for Crossrail – the newest underground railway connection in London – are budgeted at 1 billion pounds a mile!  Exponential budget increases of this magnitude raise serious questions about the accountability of big public sector projects.

For sure, increases in the number of events scheduled for the Olympic Games and heightened risks of terrorist interventions play some role in justified cost increases for the Games.  Equally, changing public views on construction safety and on mitigating adverse environmental consequences, play some role in justified cost increases for underground construction.  However, given the magnitude of the budget increases outlined, something else must be in play.

John Kay acknowledges this reality in his column, gently skirting around the  real culprit:

Only a few global companies are now perceived as capable of running mega projects, and they are hired by often inept public sector purchasers.  These clients change their minds frequently and are prone to insist on idiosyncratic specifications. Perhaps the principal culprit is technological overkill.  The argument that we need the best and latest is powerful in political decision making, even among people who would never behave that way in their everyday lives.” John Kay, ‘Why do we need to pay billions of pounds for big projects?’ Financial Times, August 22, 2012

Public choice scholars are a tad more blunt than the gentlemanly Oxford scholar, John Kay.  Rent-seeking, we call such behavior. Rent-seeking is the process whereby well-heeled bidders invest in politicians and government agencies, lashing out money in the form of campaign contributions and personal bribes in return for government favors of one kind or another.The objective, of course, is to get back significantly more than what they have outlayed, and to protect those fruits from their less-well-heeled competitors.

The result is a 12 billion pound Olympic games and 1 billion pound per mile for digging  holes in the ground. And public debt rising to unsustainable levels.


The IRS and well-heeled lobbyists crush competition from independent tax preparers

August 18, 2012

Given the complexity of U.S. tax laws, tax preparation has become a profitable business. Information technology provides considerable scope for entrepreneurs to enter the market and compete down prices. The IRS and its crony capitalist lobbyists are determined to use government regulations to squeeze out this threat to their big  bottom-lines.

Under new regulations – imposed last year without congressional approval – the IRS now requires all paid tax preparers to become ‘registered tax return preparers’ by paying extra fees, passing a government examination, and taking annual continuing education classes.  Exempted specifically from this mandate are attorneys, CPAs, and politically powerful ‘enrolled agents’.

The big tax-preparation firms such as H&R Block and Jackson Hewitt supported the licensing scheme, as did lobbying groups representing CPAs and others exempted from the new regulation.

The regulatory burden falls most heavily on a targeted group – independent tax preparers – with the intent of forcing them out of business by raising their service costs.  Compliance costs are especially high for seasonal preparers, and the IRS expects most of them to be wiped out by the new regulation.

So, once again, a conspiracy between big government and big business provides monopoly rents by eliminating effective competition.  The fact that the regulation almost certainly will increase the price for tax preparation and therefore deprive some potential clients of access to specialized services does not merit even a flicker of concern in the crony capitalist system that now directs economic resources in the United States.

Hat Tip:  Chip Mellor, ‘How Big Government and Big Business Squeeze Entrepreneurs’, The Wall Street Journal, August 18, 2012

The flat income tax is fair and relatively efficient

September 30, 2011

President Obama claims that billionaires should not pay a lower average tax rate than janitors –  and almost everyone would agree with that remark.  Almost certainly, the remark is reflected in the current reality of the U.S. tax code. Few janitors – with the exception perhaps of those employed by Warren Buffet – pay higher average tax rates than the well-off. Most janitors pay no federal income taxes at all and may even be net recipients from the IRS through the earned-income credit.

If we tweak the President’s words just  a little to say that janitors should pay exactly the same average tax rate as billionnaires, then I am on board for this ride to tax reform. For this is the nature of the flat tax proposal in its most unblemished form.

This would require the elimination of the payroll tax and the corporate income tax. it would require the withdrawal of all tax credits throughout the entire economy. It would require the elimination of all personal exemptions, irrespective of income level.

Such a solution draws all employed  individuals/households into the income-tax  net – bringing all 50 per cent of the households that currently do not pay income taxes – but do pay payroll taxes – fully into the federal income tax system. This is good for democracy, because it confronts everyone with the marginal cost of government as outlined in their regular pay packet. No one, henceforth, will vote for bigger government knowing that it is costless to his own paycheck.

Because the rate is flat, the average equals the marginal rate, mimimizing the excess burden that is always associated with an income tax. Because exemptions are prohibited by law, there is no point in diverting resources wastefully into rent-seeking for special interest sub-groups.  Wealthy individuals who currently support charities in part for the tax deductions, henceforth, would support them because of the benefits that they are perceived to provide. 

GOP presidential candidates have run on the flat tax proposal before; but they have never gained the White House on that issue. However, times are  changin’ and it now may be within the realms of possibility for a Democratic incumbent to run for re-election on the flat tax, as his only hope for victory. That would be an enormous high five for Democracy!

Rent Seeking versus Rent Extraction in the Market-Place of Politics

April 22, 2010

Some economists view lobbying outlays in political markets as a manifestation of free speech – and that is just fine if one is prepared to stretch the meaning of a word or two.  Surely the sweet sound of large dollar bills moving from the coffers of well-endowed  interest groups into the coffers of  well-endowed  political parties and well-endowed individual policians is a manifestation of Amazing Grace:

Amazing grace!  how sweet the sound,

that saved a wretch like me!

I once was lost but now am found,

was blind but now I see.

Through many dangers, tolls, and snares,

I have already come;

’tis grace hath brought me safe thus far,

and grace will lead me home.

(John Newton, 1779)

Well grace, surely lubricates the wheels of politics, ensuring that those who give also shall receive the fruitful  bounty of political harvests. Grace, of course, has nothing in common with the free lunch, even though it manifests itself on many a breakfast, luncheon or dinner table across this generous land.  Grace has something to do with markets, but it surely does not make them free. Grace is the dirty oil that introduces grit into the free market process, grit that builds up and builds up until eventually it transforms laissez-faire into state capitalism and destroys the wealth of a nation.

Grace comes to politics in two forms – rent seeking and rent extraction -the former marginally less malign than the latter. Neither form is in any way beneficial to those who strive to  make their living outside the Forbidden City. Let me explain.

Rent seeking is a concept introduced into economics in 1967 by Gordon Tullock, and named for what it is by Anne Krueger in 1974. Rent seeking is the rationale for the emergence and existence of special interests – organizations designed to generate, via  politics,  concentrated benefits for their constituents  while  imposing  dispersed costs on the wider community.  The concentrated benefits are viewed as rents because they are returns in excess of opportunity cost, available only through politically-imposed monopolies, rather than through free competitive markets. These rents are purchased through lobbying outlays.

Rent seeking is socially undesirable because it wastes scarce resources in pursuing redistributive outcomes that are themselves destructive of wealth.  In the limit, when the market in rent seeking is sufficiently competitive, rent seeking may well dissipate the total expected value of the monopoly rent that is sought through wasteful lobbying competition. The winner’s rents will be exactly offset by the negative rents of those who lose out in the competitive battle.

How can such a negative activity survive under conditions of democracy, you may well ask?  Why would it not be eliminated by political market competition?  The answer to that question, in a nutshell, is that political markets do not work like private markets.  Political markets are handicapped by high levels of rational ignorance among  the electorate that stem from the irrelevance of the individual vote. It simply does not pay voters to inform themselves about destructive political behavior because, individually, voters  are helpless to do anything about it.

So when you notice the movement of grace from Wall Street behemoths like Goldman Sachs into the coffers of Democratic members of the Senate Financial Committee, do expect that that grace will be returned in a multiplied form to such donors, even if in plain brown envelopes slipped under the table by faceless  Democratic Party bagmen. Rent seeking is an X-rated movie, unsuited to the eyes of innocents. For those old enough to watch, the game can be tracked. Simply follow the money, and the political responses to the movement of that money, and you understand the  charade.

Rent extraction is the hard core pornographic movie of  political life, much more difficult to discern, sometimes impossible to follow. Rent extraction defines an activity that, at first sight, is simply unbelievable: the movement of grace from special interests in return for nothing!  As Fred McChesney demonstrated in 1987, however, money for nothing is a  widespread phenomenon in political markets. Even when the political waters appear to be still, powerful forces are at work beneath the surface.  The fact that a dog does not bark in the night may well be worthy of investigation.

Consider, for example, Citicorp, one of the country’s largest banking institutions, whose registered lobbyists spend most of their time and money heading off legislation that could harm any one of its multiple financial service operations.  Even to the keenest eye, such outlays induce no political response. Indeed, that is the precise intent.

Rent extraction is the political equivalent of protection racketeering on the part of Cosa Nostra. ‘We are really worried that your house might burn down. If you are willing to remunerate us appropriately, we can ensure that such an event does not come to pass.’   Politicians, desirous of loading up campaign coffers, threaten to legislate against the interests of a target unless said target persuades them not so to do.  Bills of this kind are referred to among the cognoscenti as Milker Bills.  The milk in question is not the healthy opaque white liquid produced by mammals.  Rather, it is that old-time unhealthy grace that we have just been talking about: the mother’s milk of politics.

So as we cast our sights from rent seeking to rent extraction, we  re-focus our analysis from politicians as dishonest agents who broker policies in return for money to politicians who engage in a much more distasteful process:  issuing threats to cause harm in order to be ‘persuaded’ not to implement said threats. Well, few people now argue that the process of politics is pleasant. I suspect that few really understand just how filthy the process has become. Maybe attending the current public hearings of House and Senate Committees on the regulation of financial markets would open eyes and ears.  Of course such meetings are unsuited to the eyes and ears of those under the age of  eighteen years.  The meetings that go on behind closed doors  are suited only to the irremediably  depraved. 

Even Amazing Grace cannot save such lost wretches.

Gordon Tullock, ‘The Welfare Costs of  Tariffs, Monopoly and Theft’. Western Economic Journal (1967)

Anne Krueger, ‘The Political Economy of the Rent-Seeking Society’, American Economic Review (1974)

Fred McChesney, ‘Rent-Extraction and Rent Creation in the Economic Theory of Regulation’, Journal of Legal Studies (1987)


Why the US Founding Fathers Endorsed the Importation of Slaves

January 17, 2010

In this column, I shall address the nature of the debate in the Philadelphia Convention that culminated in the endorsement of  the continued importation of slaves into the United States. The thrust of the column is that rent seeking played a not inconsiderable role.

The major proponents of  an immediate prohibition on the importation of slaves were members of the delegations from Pennsylvania, New York and  Delaware – states that had relatively small slave populations and that a few years later passed laws providing for the gradual emancipation of the slaves within their borders – strongly supported by members of the delegations from Virginia and Maryland and,  less resolutely, by members of the delegation from North Carolina – states that had significant slave populations.

The primary opposition to banning the importation of slaves came from the delegations from South Carolina and Georgia, both of which had large slave populations.  But, allied to these states were the New England states, led by Connecticut, all of which had relatively small slave populations, and which provided for gradual emancipation of their slaves in the early 19th century. Significantly, the opposing coalitions of states at the Convention, with reference to slave importation, were not arranged on any obvious North-South, or pro-slavery/pro-abolition axes.

The final compromise reached at the Convention was embodied in two clauses of the Constitution.  Article I, section 9, clause 1 provided:

“The migration or Importation of such Persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the year one thousand eight hundred and eight, but a Tax or duty may be imposed on such Importation, not exceeding ten dollars for each person.”

This provision was fortified by the immunity from amendment that it received in Article V of the Constitution, which first outlined procedures for amending the Constitution, and then continued:

“Provided that no Amendment which may be made prior to the year One thousand eight hundred and eight shall in any Manner alter the first and fourth clauses in the Ninth Section of the first Article.”

These provisions were regarded by the representatives of the Deep South and their New England allies as a victory, and by the opposing coalition as a defeat.  At first sight, the composition of the coalitions appears to be inexplicable. From a rent-seeking perspective, however, the coalitions made perfect sense.

To the extent that the continued importation of slaves lowered the price of slaves in the market-place, Pennsylvania, New York and Delaware would be exposed to increased competition from the products of states with large slave populations.  For economic, as well as for ideological reasons, they would be opposed to slave importations. By the late 18th century, slave imports into Virginia, Maryland and North Carolina had declined dramatically. Those states had become major slave-rearers, exporting significant numbers of slaves to the Deep South.  A ban on slave importations predictably would increase the value of their slaves in Deep South markets. Evidence supports this argument, in that the average price of slaves in the deep South would rise to levels  80 per cent higher than in the upper South once slave importations ceased.

The Deep South states, therefore, had a clear incentive to maintain slave importation, since this significantly constrained the ability of the upper south slaveholders to extract monopoly prices for their slave exports.  The New England states were motivated by different economic considerations.  In New England, the shipping industry was rapidly expanding, and influential, in the wake of restrictions placed on foreign shipping (notably from Britain).  A  highly profitable shipping trade had emerged in the form of receiving slaves imported from overseas and transporting those  slaves from the New England ports to the Deep South.

It is, perhaps, unsurprising, from the perspective of public choice,  that two unambiguously disgraceful clauses in the initial United States Constitution were written under  monetary rather than  ideological impulses. Right from the outset of the Founding,  it would appear that wealth,  rather than individual  liberty,  was the driving impulse  of the new country.

Reference:  G.M. Anderson, C.K. Rowley and R.D. Tollison, ‘Rent-Seeking and the Restriction of Human Exchange’, Journal of Legal Studies, January 1988, 83-100.


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