America's rent-seeking economy: the new normalArticle added by Larry Doyle on June 12, 2013
Joined: January 24, 2013
Ranked: #546 (181 pts)
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 is defined by Investopedia 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.
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.
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.
I done 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 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.
Sound like the subsidy provided to the large Wall Street banks able to borrow money at 0 percent from your grandmother and other savers? But of course.
Another way to think of rent, in a somewhat pejorative sense, is to think of "unearned" profits.
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?
According to Posner, "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 earning the rents is able to stop the forces of competition from driving the rents down to zero."
He 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 health care.
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 writes, "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 uppermost 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.
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