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Uncle Sam’s Rent-Seeking Economy circa 2013

Posted by Larry Doyle on May 29, 2013 5:22 AM |

Are we in the midst of the greatest transfer of wealth in modern times?

I will allow others to debate the merits of that question, but I propose it in order to address what I see increasingly as the “new normal” reality of our current economic condition here in the United States. What lies at the core of this new normal dynamic? A rent-seeking economy, defined as:

When a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.

An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection. These activities don’t create any benefit for society, they just redistribute resources from the taxpayers to the special-interest group.

Sounds like an all encompassing description of our current Federal Reserve policy of zero interest rates, the Obama administration’s policies and programs to redistribute wealth via an assortment of increased taxes and other giveaways, and Washington’s gifts to Wall Street and other industries as payoffs for exorbitant campaign and lobbying contributions.

I don’t think we have hit the jackpot here. Let’s navigate.

In an attempt to simplify this topic, let’s review an incredibly insightful commentary, Rent-Seeking and Regulatory Capture, written by Barry Posner, Consultant, Department of Meteorology, College of Earth and Mineral Sciences, The Pennsylvania State University:

To a layperson, rent is a term that describes payment made in exchange for temporary use of something, such as an apartment, a store, a car, or a DVD (think Netflix). However, to an economist, rent has a different meaning. An economic rent is defined as a return to a factor that is greater than the return required to incentivize the use of that factor.

Another way to think of rent, in a somewhat pejorative sense, is to think of “unearned” profits.

Sound like the subsidy provided to the large Wall Street banks able to borrow money at 0% from your grandmother and other savers? But of course.

Sound like the subsidy provided to other “friends with benefits” that ply those in Washington more than willing to sell the public out for their own personal benefit? But of course. Let’s keep navigating.

How does a rent-seeking economy develop?

. . . in a theoretically free market, as soon as economic profits appear, competition follows and the profits eventually vanish. This is not a market failure, merely the nature of competition. It is only a failure if the person (entities) earning the rents is able to stop the forces of competition from driving the rents down to zero.

Posner highlights that a primary factor in stifling true free market capitalism and thus promoting the “rent-seeking” new normal reality just so happens to be:

Government protection from competitive forces: This is another source of government failure, once again referring to government failure as actions by government meant to address market failures, but which generally end up leaving worse outcomes than before the intervention. That is, government trying to fix a problem, but only making things worse.

How often have we witnessed this occur? Housing. Education. Now healthcare.

Let us start to look at forms of rent-seeking that arise out of the seeking of favors from government. OK, so now we are talking about government power. Government has the power to pass laws, to write regulations, to collect taxes and to enforce the laws, regulations and taxes. Because members of government have lots of power, they have lots of favors to dole out, and it is the competition for these favors that forms the basis of rent-seeking.

Firms are competing with each other, but instead of competing for customers by offering better products or better service at lower prices, they are competing for government favors. Instead of employing salesmen or engineers or factory workers, they are employing lawyers and lobbyists.

We witnessed a glaring example of this just the other day:

In a sign of Wall Street’s resurgent influence in Washington, Citigroup’s recommendations were reflected in more than 70 lines of the House committee’s 85-line bill. Two crucial paragraphs, prepared by Citigroup in conjunction with other Wall Street banks, were copied nearly word for word.

This specific situation with Citigroup writing a draft for implementation of an aspect of the Dodd-Frank Financial Reform legislation is a clear cut example of the Wall Street -Washington incest. Posner concurs:

One of the most common ways of using government to eliminate competition is what is referred to as “regulatory capture”. This is the case where regulators end up acting in ways that benefit the industries that they regulate.

Why does rent-seeking persist? Concentrated benefits combined with distributed costs.

But who really suffers the most? From my standpoint, this new normal rent-seeking reality is having the greatest negative impact on America’s middle class.

With rent-seeking redistribution programs benefiting those occupying both the upper most and lowest rungs of our economic ladder, America’s great middle class is receding further and further into the rear view mirror. The middle class does not have the huge money nor the group influence to pay off our pols but they do have the income that can and is being increasingly expropriated and redistributed.

I will allow others to weigh in on what the decline of America’s middle class means for the long term health and well being of our nation.

Comments, feedback, constructive criticisms encouraged and appreciated.

Navigate accordingly.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Peter Scannell
  • LD

    Peter,

    Thanks for sharing that commentary and link. Seemingly straight from the Rent Seeking Rulebook, that writer lays out,

    “Much of Dodd-Frank is dying on the vine,” Chilton writes in an email exchange with The Daily Ticker. “Lobbying, litigation and lawmakers who have tried to defund and defang Dodd-Frank have all brought rule-writing to a crawl. Regulators themselves have become overly concerned about finalizing rules. Over-analysis paralysis, fears of litigation risks, and the lack of people-power have all contributed to the slowdown.”

  • fred

    LD,

    I’m going to put a slightly different twist on this topic and then provide specific examples to explain my point.

    We have become a nation interested in taking advantage of the “system” rather than a nation willing to add value to the “system”.

    We look for loopholes and take advantage of regulatory failure rather than choose to create value through innovation or process improvement.

    Two prominent examples that come to mind are Apple and Amazon. Apple has billions of $$ in cash stashed overseas to avoid the taxman while Amazon expoits the lack of a state sales tax on internet sales.

    A proposed solution is similar in both situations. For multinationals currently unwilling to repatriate cash why not take a global average national business income tax and apply it to all overseas cash held by all companies payable to the country of incorporation; for internet sales use a national sales tax calculation and pay each locale based upon a percentage of company revenue generation.

    You can go on and on, citing example after example of people/special interest taking advantage of the “system”, rather than adding value. To provide a few more, a state finance audit recently uncovered $$ millions of welfare payments to dead people. Almost every bill moving through Congress includes “pork”, “too big to fail banks” bennifit from lower borrowing costs, etc.

    “Before you can make things fair, you have to make things right”, line item by line item.

    • LD

      Fred,

      Great points and only the need for real leaders throughout our government to make these things happen so that the costs and benefits are more appropriately aligned. The pols are going to have to take a haircut in the process so we will need campaign finance reform factored in here as well.

      But hey that would be capitalism and not the cronyism that has gotten so deeply entrenched.

      Well, every vision starts with an idea so thanks for putting those ideas out there.

  • Van

    LARRY YOU SCARRED YET?

  • LD

    Van,

    Nope not yet. Playing to win here and doing just fine in the process. I make my own rules as to how I determine how I operate within such a crony conspiracy.

    If we are actually playing a different game then we can succeed without subjugating ourselves to the controls that others would like to lord over us.

    Thanks for asking.

  • Virginia

    We prop up the banks with TRILLION$$$$ of U.S. taxpayer money – and they employ foreign labor! They cause the collapse of millions of jobs in the labor market having stripped corporations of their pension funds in the greatest Ponzi scheme ever… What’s wrong with this picture?

    • LD

      RENT SEEKING = wealth transfer

      • Virginia

        You know where I get the biggest laugh on the “rent-seeking” economy??? –

        it’s because I know that most of these investors are “new money” (easy come, easy go) and the majority of these homes are “cardboard, paper doll construction” and not brick and mortar… which means they need constant maintenance, plumbing breaks, siding needs painting, new roof, termite tenting, constant extermination for bugs, bathroom and kitchen cabinet and fixture replacements…

        the list goes on… not to mention landscaping and HOA fees and fines because the renters trashed the property, parked a dead car in the driveway or a boat… fees don’t get paid – HOA sues for foreclosure for $3000 and wins the entire property (because they can)…

        and the landlords can’t get the tenants out even though they haven’t paid rent because of the landlord tenant laws favor the tenants…

        Sure, they’ll hire property managers – but that will soon cost them more than they make – no profit… because property managers make more money fixing things – it’s another racket. Yeah, these new money landLORDS will last less than a decade as the property falls apart and is trashed by tenants that didn’t give a damn….

        Uruguay and Panama are looking good, yeah?

  • Eddie

    This is exactly right.

    Government only has less than a dozen or so means of intervening in a private and peaceful economy but it can appear to be so much more… It’s not.

    It’s taxes, subsidies, price caps, price floors, credits, penalties, restrictions and permissions and any of these can be regulated to add costs or benefits to one of the two parties in a transaction.

    Be damned the people who feel the cost, waste and unintended consequences of the special interest pandering of politicians/officials in our government.

    And be damned those who don’t play this game, it’s coercive and has been spreading like cancer in this government and others before it.

    There is no productivity here, nothing has been made, saved, it’s simply wealth transfers, short term behavioral changes that turn into long term bubbles or recession, black markets and crime.

    I think we’re going in the wrong direction. My opinion only, just sayin’. I could be wrong. Peace!

  • Barry

    Thanks, this is a great post!!!

    Goes in my HOF!

  • Bill

    I have been saying since 2008 that this country has become a kleptocracy.
    The only people who came out of this financial crisis in better shape have been those thieves on Wall Street and government employees (incl. congressmen) who precipitated it.

  • Mitch

    Awesome article on the subject of RENT.

    Is it going to take an uprising or anarchy to bring this country back to its financial sanity? We are bankrupt and we need to let this fact take effect for the future good of this country for our kids, grandkids and future generations.

    However this won’t happen until the Federal Reserve is abolished and sound money policies are again established.

    • Sunforester

      Rent-seeking is an old political game, but it is now on steroids. Corporate cronies like Citigroup pay very well for getting legislation and regulation done to their advantage, which keeps our rent-seeking politicians in office.

      Paying off freeloading voters with our tax dollars keeps rent-seeking politicians in office as well.

      It seems to me that we have had the wrong politicians in office for a very long time, but they keep making sure they aren’t voted out by using and abusing the powers …






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