Rent Seeking in Two Examples

As the theory of rent seeking has developed it has become increasingly powerful as an explanation of why our government continues to grow despite protestations of the left and right. Rent seeking is the manipulation (or direction) of profits without the employment of a trade or a production function that would normally be associated with that profit. When you produce a product for $X and sell it at a higher level - the inputs of labor and capital produce something of value and the ultimate price charged between the value of your labor and capital and the final price is considered profit. In rent seeking, what often happens is costs are shifted - in essence often the costs are socialized and the benefits are privitized.

The WSJ had an article this week which argued that the whole cause of global warming is a series of rent extractions. Gore's response to the kerfluffle about his extravagent energy use was a good example. Gore's immediate response to the whole thing was - oh I offset my profligacy with carbon credits - never mind that the average stiff cannot do that. But as you look at the discussions of how to offset this supposed problem each of them involves some transfer of wealth from one group to another; from the energy users to the regulators, from the users of certain energy sources to others, etc. I am a skeptic, in part, because of the inherent distrust that proponents of the theory have of market systems as allocators.

But the left is not the only group guilty of these kinds of hidden transfers. The war on terror is a bunch of transfers that move all over the map. We are asked to spend more time in airport lines, to purchase certain dangerous liquids like shampoo in smaller and less economic quantities, etc. The rationale for all of these changes is "safety." The GOP jumped at the notion of making all of the inspectors public employees (which the democrats have tried to allow to organize). Most normal people can figure out how much risk there is for most airline travelers to do something terrible. But in the government equation, or at least the political allocation of risk and the calculations therein, they can't differentiate between an 80 year old granny and a traveller from Yemen. So we end up spending a bazillion dollars in protecting us from a peril that has about the same potential as getting tagged by a cow falling from the sky.

Smith, in the Wealth of Nations, has some long comparisons between productive and non-productive workers. While I think some of his chracterizations are a bit dated (he relies a bit too much on the relative value of land - the original perspective on rents and on production of physical goods) his initial conclusion that a good deal of government work is non-productive seems about right. It is too bad that much of our public discussions never look at the alternative costs and benefits of policies in these two areas and others.

What concerns me about both areas is the ability to bypass sound decision making for politics. One of the best debated parts of the public finance literature is the theory of merit goods - those things which, in theory, the market would underproduce. A lot of the discussion about moving items into the public sector come down to a distrust of individual decision making - so our policy makers think they can move something to where wiser heads will prevail. Unfortunately, as we have seen in many other cases and as I expect we will see (or have seen) in these areas, the wiser heads turn this into not a discussion of what is best for society but what is best for the decider's buddies. In the end society loses on that deal.