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The Political Racket of Rent-Seeking in America

I expected the article, “How America’s Economy is Rigged by Special Interests,” to tell me nothing new. As expected, it described familiar concepts – special interest groups, monopolistic control… but the discussion of the study, “The Captured Economy”, framed the problem in a new light: rent-seeking.

Rent-seeking is gaining an advantage in a market without engaging in equally productive activity; it usually involves using government regulations for one’s own benefit. The authors state that economists define rents as “excess, undeserved income resulting from barriers to competition”. As discussed in my blog post, “How Focusing on Economics is Killing the American Economy”, profits have been consolidating in every industry; according to this article, “Of the firms that enjoyed returns on invested capital of 25% or more in 2003, 85% were still earning returns that high a decade later”. The article cites banking and corporate law as industries wrought with rent-seeking. To stifle competition, businesses repress opponents in patent courts and merge into monopolies.

The increasing monopolistic control in most industries and government policy that encourages this (namely government subsidies to the financial industry) point to rent-seeking. Essentially, rent-seeking is the method by which unproductive entrepreneurs ‘slice the economic pie’ in their favor. Rent-seeking is a bad economic indicator because it is a product of a greater problem: rentier states.

Rentier states are states in which all or most national revenue is derived from external rents. External rents are payments by foreign investments in exchange for using a resource. Rentier states are notorious for government corruption. Most rent-seeking opportunities are given to government officials and achieved through government regulation. But corruption is not the biggest issue of a rentier state.

Instead of relying on tax paying citizens, national revenue comes from foreign investors, effectively insulating the government from citizen influence. If a government doesn’t rely on citizen taxes, they don’t need to please their citizens. This makes the state entirely separate from the people it governs. Thus, rentier states are undemocratic in nature. If there is rent-seeking in the American economy, does that mean the U.S. is a rentier state? Not necessarily. Allow me to explain why.

A stipulation for rentier states is that the state has to have sole control over the resource from which it derives external rents. This means the resource must be nationalized. The American government doesn’t have a national companies that control the main sectors of the economy. We do have regulatory agencies, but they’re not the same. The Federal Reserve is the closest institution to a national bank, but its purpose is to ensure economic stability through monetary policy, not to directly control profit from other banks. The U.S. government bails out banks, it doesn’t work through them. Also, a rentier state is usually reliant on one resource, most commonly oil; this subjects the economy to the boom bust cycle of the resource curse. The American economy is highly diversified and doesn’t rely on one sole resource. Thus under this definition, the U.S. is not a rentier state.

Although the U.S. is not a rentier state, that doesn’t void the problem of rent-seeking in the American economy. The authors propose two solutions: philanthropy and investing in the civil service. Philanthropy has been effective in advocating for environmentalist policy and better education. The authors of the study call to “give the government back its brain” by investing in a highly trained and expansive civil service. Without well trained government employees to conduct research and suggest policy, congressmen become reliant on the ‘research’ of lobbyists and special interest groups.

Of course, these two options aren’t exactly popular in politics. Philanthropy can easily be framed as special interest groups. Expanding the civil service falls prey to the conservative slippery slope argument that more government salaries would require higher taxes and more intrusive federal policy. For these solutions to work effectively, Americans need to politically realign so that both parties take this cause to heart. However, it might be better for us to politically de-align: weaken our partisan preferences. Considering the integral role of political parties in American politics, this is highly unlikely. But it might be our only option to effectively combat rent-seeking.

To read the article, click here.

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