Showing posts with label rent seeking. Show all posts
Showing posts with label rent seeking. Show all posts
Saturday, August 11, 2012
Tuesday, October 18, 2011
Constitutional Economics: Rent Seeking, Economic Growth, Corporate Power, and Inequality
In other posts I have provided data related to income inequality and economic mobility as well as the concept of rent seeking. In his principles of economics textbook, Greg Mankiw outlines growth promoting policies such as:
1) Reducing corruption in the legal system
2) Increasing reliance on market forces
3) Increasing foreign investment
4) Encouraging trade with other countries
5) Increasing the percentage of GDP devoted to savings
In this post, I attempt to integrate many of these concepts.
While the data show that income inequality is not as severe as often portrayed in the media, and that the U.S. has one of the most progressive tax systems in the world, income inequality still exists in the U.S. We know that some degree of income inequality is necessary and desirable (giving us for instance innovations that lead to increased standards of living for the masses). But what are the consequences of unequal distributions of income and wealth?
We can see that negative consequences result if wealthy powerful interests (including high income individuals, wealthy individuals, or corporate interests) are able to utilize the political apparatus to their benefit at the expense of the rest of society. Here in essence we have the specter of rent seeking. Rent seeking, or using the political apparatus to obtain special privileges or benefits ('rents') from government, diverts resources away from innovations and productive investment. It also creates a winner take all or dog eat dog environment (similar to a prisoner's dilemma or Nash equilibrium) that incentivizes everyone to participate (either on the offense to seek 'rents' or on the defense to prevent some law or restriction on activity).
Economic research (Hernando De Soto, The Mystery of Capital; Lane & Tornell, The voracity effect, American Economic Review 1999) indicates that weak political institutions in the presence of powerful special interests are related to stagnant economic growth. How can we design institutions to minimize the prevalence of rent seeking behavior?
When we look at current issues related to the economy, such as bailouts, corporate influence on the political process, and concentrations of power and wealth, we see that these issues arise from the intersection powerful governments and corporations.
In Federalist #10 the founders made it clear that in a free society that we would have an unequal distribution of income and wealth:
"From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results; and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties."
They were also aware that this may lead to populust uprisings, calling for policies that could be detrimental to a free society:
"A rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project…we behold a republican remedy for the diseases most incident to republican government."
Their proposed solution was a government limited in its power to bestow privilege through constitutional restraint. Economist Thomas Sowell, in his essay, Judicial Activism Reconsidered, describes how limited constitutional government serves to protect minorities and individuals from concentrated power and special interests:
"The federal Constitution is "the supreme law of the land," not because it is more moral than state constitutions or state or federal legislative enactments, but because it represents a larger and more enduring majority. Minorities receive their constitutional rights from that enduring majority to which transient majorities bow, not from whatever abstract moral rights are imagined to exist as a brooding omnipresence in the sky."
1) Reducing corruption in the legal system
2) Increasing reliance on market forces
3) Increasing foreign investment
4) Encouraging trade with other countries
5) Increasing the percentage of GDP devoted to savings
In this post, I attempt to integrate many of these concepts.
While the data show that income inequality is not as severe as often portrayed in the media, and that the U.S. has one of the most progressive tax systems in the world, income inequality still exists in the U.S. We know that some degree of income inequality is necessary and desirable (giving us for instance innovations that lead to increased standards of living for the masses). But what are the consequences of unequal distributions of income and wealth?
We can see that negative consequences result if wealthy powerful interests (including high income individuals, wealthy individuals, or corporate interests) are able to utilize the political apparatus to their benefit at the expense of the rest of society. Here in essence we have the specter of rent seeking. Rent seeking, or using the political apparatus to obtain special privileges or benefits ('rents') from government, diverts resources away from innovations and productive investment. It also creates a winner take all or dog eat dog environment (similar to a prisoner's dilemma or Nash equilibrium) that incentivizes everyone to participate (either on the offense to seek 'rents' or on the defense to prevent some law or restriction on activity).
Economic research (Hernando De Soto, The Mystery of Capital; Lane & Tornell, The voracity effect, American Economic Review 1999) indicates that weak political institutions in the presence of powerful special interests are related to stagnant economic growth. How can we design institutions to minimize the prevalence of rent seeking behavior?
When we look at current issues related to the economy, such as bailouts, corporate influence on the political process, and concentrations of power and wealth, we see that these issues arise from the intersection powerful governments and corporations.
As public choice economist Dennis Mueller is quoted in the article Public Choice Revolution:
"The larger the state and the more benefits it can confer, the more rent-seeking will occur. The entire federal budget...can be viewed as a gigantic rent up for grabs for those who can exert the most political muscle."
In Federalist #10 the founders made it clear that in a free society that we would have an unequal distribution of income and wealth:
"From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results; and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties."
They were also aware that this may lead to populust uprisings, calling for policies that could be detrimental to a free society:
"A rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project…we behold a republican remedy for the diseases most incident to republican government."
Their proposed solution was a government limited in its power to bestow privilege through constitutional restraint. Economist Thomas Sowell, in his essay, Judicial Activism Reconsidered, describes how limited constitutional government serves to protect minorities and individuals from concentrated power and special interests:
"The federal Constitution is "the supreme law of the land," not because it is more moral than state constitutions or state or federal legislative enactments, but because it represents a larger and more enduring majority. Minorities receive their constitutional rights from that enduring majority to which transient majorities bow, not from whatever abstract moral rights are imagined to exist as a brooding omnipresence in the sky."
Tuesday, September 6, 2011
Rent Seeking in History and Hollywood
Government and the Economy in "The Aviator"
by Dirk MateerRent seeking, the political pursuit of gains that would not be earned engaging in the market process, is a common theme in many films. With clips from the acclaimed 2004 film “The Aviator,” the discussion of rent seeking can be broadened to include the related concept of regulatory capture. After Pan Am leader Juan Trippe (played by Alec Baldwin) is unable to convince TWA’s Howard Hughes (portrayed by Leonardo DiCaprio) not to offer competing flights across the Atlantic, Trippe turns to Senator Owen Brewster (played by Alan Alda) to introduce a Civil Aviation Bill that would hamper TWA’s ability to compete with Pan Am. The clips illustrate the gains, in this case campaign contributions, prestigious committee chairmanship, and personal travel, that politicians can receive from pushing rent seeking legislation such as that favoring Pan Am.
Biotech and Rent Seeking
Bootleggers and Biotechs
Regulation | 2003| Summer
"From the claims of opponents of the new biotechnology, it would be easy to conclude that the biotech industry has vigorously fought government efforts to regulate its products. But in fact, the industry has been anything but a consistent opponent of extensive, and even unnecessary, regulation. It has lobbied for protectionism of various sorts — including public policy that makes regulatory costs excessive – and in the process has forsaken science and common sense. Since the 1980s, large biotech companies like Monsanto, Ciba-Geigy (now Syngenta), and Pioneer Hi-Bred International (now owned by DuPont), along with their trade associations, have actively and aggressively lobbied in favor of certain major regulatory or legislative initiatives that often are more restrictive even than those sought by regulators themselves. The industry’s goal is ostensibly to placate anti-biotech activists"
Regulation | 2003| Summer
"From the claims of opponents of the new biotechnology, it would be easy to conclude that the biotech industry has vigorously fought government efforts to regulate its products. But in fact, the industry has been anything but a consistent opponent of extensive, and even unnecessary, regulation. It has lobbied for protectionism of various sorts — including public policy that makes regulatory costs excessive – and in the process has forsaken science and common sense. Since the 1980s, large biotech companies like Monsanto, Ciba-Geigy (now Syngenta), and Pioneer Hi-Bred International (now owned by DuPont), along with their trade associations, have actively and aggressively lobbied in favor of certain major regulatory or legislative initiatives that often are more restrictive even than those sought by regulators themselves. The industry’s goal is ostensibly to placate anti-biotech activists"
Rent Seeking and Biotechnology
Rent Seeking Behind the Green Curtain
Regulation 1996 No 4
"There is no reason to expect environmental regulations to be immune from the economic pressures that create rent seeking in other contexts. In fact, by their very nature, environmental regulations are conducive to rent seeking, for in the environmental context, both regulated firms and "public interest" representatives stand to gain from reductions in output and the creation of barriers to entry. Regulated firms and public interest groups may not always agree on the nature and design of specific regulatory programs, but they often share a common interest."
Regulation 1996 No 4
"There is no reason to expect environmental regulations to be immune from the economic pressures that create rent seeking in other contexts. In fact, by their very nature, environmental regulations are conducive to rent seeking, for in the environmental context, both regulated firms and "public interest" representatives stand to gain from reductions in output and the creation of barriers to entry. Regulated firms and public interest groups may not always agree on the nature and design of specific regulatory programs, but they often share a common interest."
Rent Seeking and Markey Waxman (Cap and Trade Legislation)
From the Knowledge Problem Blog:
But as the legislation’s chances improve, corporations, environmentalists and other interest groups have worked to put their imprint on the bill. The Center for Public Integrity said its review of Senate disclosure records showed that more than 880 businesses and interest groups have registered to lobby on climate change in the first quarter of 2009 — up more than 14 percent over the same time last year.
The groups include coal companies, investment banks, wind and solar firms, state governments, auditing firms and technology companies that might be part of the proposed trading system for carbon. An item inserted at the behest of Rep. John D. Dingell (D-Mich.) would give the auto industry $1.4 billion worth of extra allowances starting in 2012 when the cap-and-trade system takes effect, according to an estimate by the Union of Concerned Scientists.
But as the legislation’s chances improve, corporations, environmentalists and other interest groups have worked to put their imprint on the bill. The Center for Public Integrity said its review of Senate disclosure records showed that more than 880 businesses and interest groups have registered to lobby on climate change in the first quarter of 2009 — up more than 14 percent over the same time last year.
The groups include coal companies, investment banks, wind and solar firms, state governments, auditing firms and technology companies that might be part of the proposed trading system for carbon. An item inserted at the behest of Rep. John D. Dingell (D-Mich.) would give the auto industry $1.4 billion worth of extra allowances starting in 2012 when the cap-and-trade system takes effect, according to an estimate by the Union of Concerned Scientists.
Saturday, August 20, 2011
Rent Seeking and Biotechnology
"Yet today we have only a handful of genetically modified crops, primarily soybeans, corn, canola and cotton. All are commodity crops mainly used for feed or fiber and all were developed by big biotech companies. Only big companies can muster the money necessary to navigate the regulatory thicket woven by the government's three oversight agencies: the E.P.A., the Department of Agriculture and the Food and Drug Administration."
Tuesday, May 24, 2011
Rent Seeking
Rent seeking is the act of seeking special privileges or protections from the government. These can come in the form subsidies or regulations that harm competitors but benefit special interests. A good description of rent seeking is given in the Fall 2004 article 'Public Choice Revolution' in the journal Regulation:
"Interest groups will engage in what public choice theorists call “rent seeking,” i.e., the search for redistributive benefits at the expense of others. The larger the state and the more benefits it can confer, the more rent-seeking will occur. The entire federal budget..can be viewed as a gigantic rent up for grabs for those who can exert the most political muscle. Rent seeking does not produce a pure transfer; when individuals or groups compete for some advantage from the state (e.g., a subsidy, a monopoly), they will all use real resources (e.g., ink, paper, travel, meals, time) in trying to grab it. As a result, part of the expected rent will be dissipated, creating a net social loss."
Many times, regulations that are cloaked with the impression of protecting the environment often turn out to provide special privileges to big business. Monsanto enjoys the protections of barriers to entry in the biotechnology sector. Again from the journal Regulation:
'In the end, EPA and the USDA regulatory policies place federal bureaucrats in the middle of virtually all field trials of gene-spliced plants, spelling disaster for small businesses and academic institutions whose scientists lack the resources to comply with burdensome, expensive, unnecessary regulation. The cost of field-testing gene-spliced plants is as much as 20-fold higher than for virtually identical plants crafted with older, less precise genetic techniques.' -Regulation, Summer 2003
An application of rent seeking behavior can also be found looking back at the political climate prior to the failed vote on the proposed Markey-Waxman climate change bill (from the Washington Post):
"But as the legislation’s chances improve, corporations, environmentalists and other interest groups have worked to put their imprint on the bill. The Center for Public Integrity said its review of Senate disclosure records showed that more than 880 businesses and interest groups have registered to lobby on climate change in the first quarter of 2009 — up more than 14 percent over the same time last year."
References:
The Washington Post June 5, 2009.
High-Stakes Quest for Permission to Pollute
Interest Groups Press Congress for Cap-and-Trade Allowances in Climate-Change Legislation
Henry Miller and Gregory Conko. 'Bootleggers and Biotechs.' Regulation. Summer 2003
Public Choice Revolution. Regulation, Fall 2004.
"Interest groups will engage in what public choice theorists call “rent seeking,” i.e., the search for redistributive benefits at the expense of others. The larger the state and the more benefits it can confer, the more rent-seeking will occur. The entire federal budget..can be viewed as a gigantic rent up for grabs for those who can exert the most political muscle. Rent seeking does not produce a pure transfer; when individuals or groups compete for some advantage from the state (e.g., a subsidy, a monopoly), they will all use real resources (e.g., ink, paper, travel, meals, time) in trying to grab it. As a result, part of the expected rent will be dissipated, creating a net social loss."
Many times, regulations that are cloaked with the impression of protecting the environment often turn out to provide special privileges to big business. Monsanto enjoys the protections of barriers to entry in the biotechnology sector. Again from the journal Regulation:
'In the end, EPA and the USDA regulatory policies place federal bureaucrats in the middle of virtually all field trials of gene-spliced plants, spelling disaster for small businesses and academic institutions whose scientists lack the resources to comply with burdensome, expensive, unnecessary regulation. The cost of field-testing gene-spliced plants is as much as 20-fold higher than for virtually identical plants crafted with older, less precise genetic techniques.' -Regulation, Summer 2003
An application of rent seeking behavior can also be found looking back at the political climate prior to the failed vote on the proposed Markey-Waxman climate change bill (from the Washington Post):
"But as the legislation’s chances improve, corporations, environmentalists and other interest groups have worked to put their imprint on the bill. The Center for Public Integrity said its review of Senate disclosure records showed that more than 880 businesses and interest groups have registered to lobby on climate change in the first quarter of 2009 — up more than 14 percent over the same time last year."
References:
The Washington Post June 5, 2009.
High-Stakes Quest for Permission to Pollute
Interest Groups Press Congress for Cap-and-Trade Allowances in Climate-Change Legislation
Henry Miller and Gregory Conko. 'Bootleggers and Biotechs.' Regulation. Summer 2003
Public Choice Revolution. Regulation, Fall 2004.
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