Rent-Seeking: Examples 457 and 458

Amazing.  Also totally unsurprising.

Imagine filing your income taxes in five minutes — and for free. You'd open up a pre-filled return, see what the government thinks you owe, make any needed changes and be done. The miserable annual IRS shuffle, gone. 

It's already a reality in Denmark, Sweden and Spain. The government-prepared return would estimate your taxes using information your employer and bank already send it. Advocates say tens of millions of taxpayers could use such a system each year, saving them a collective $2 billion and 225 million hours in prep costs and time, according to one estimate. 

The idea, known as "return-free filing," would be a voluntary alternative to hiring a tax preparer or using commercial tax software. The concept has been around for decades and has been endorsed by both President Ronald Reagan and a campaigning President Obama. "This is not some pie-in-the-sky that's never been done before," said William Gale, co-director of the Urban-Brookings Tax Policy Center. "It's doable, feasible, implementable, and at a relatively low cost." 

 So why hasn't it become a reality? Well, for one thing, it doesn't help that it's been opposed for years by the company behind the most popular consumer tax software — Intuit, maker of TurboTax. Conservative tax activist Grover Norquist and an influential computer industry group also have fought return-free filing. Intuit has spent about $11.5 million on federal lobbying in the past five years — more than Apple or Amazon. Although the lobbying spans a range of issues, Intuit's disclosures pointedly note that the company "opposes IRS government tax preparation."

"Government tax preparation"?  Seriously?  That's absolutely breathtaking.  In Chile, they send you a bill.  You pay the bill, or you can figure it out yourself and appeal it.  Either way, it takes about 20 minutes.

ATSRTWT

Example 458:  A nanny "bill of rights."  The effect of which will be to make it impossible to hire nannies, forcing people to use much more expensive means of child care, all of which benefit unions and the health care cartel.

A stealthy welfare system, where those with minor conditions feather their nests at expense of taxpayers and truly disabled veterans

"For a sense of how the U.S. Department of Veterans Affairs is coping with an unprecedented number of disability claims, consider that nationwide nearly 900,000 disability claims are backlogged or sitting in the processing queue...[T]he biggest issue by far is how the current system defines 'disability.'...The reality is that the majority of veterans' disability claims are for post-traumatic stress disorder, depression or minor physical conditions, including common age-related ailments such as hearing loss, lower-back pain and arthritis...By categorizing minor conditions as disabilities, the process threatens to become a kind of stealthy welfare system, where those with minor conditions might feather their nests at the expense of both taxpayers and truly disabled veterans trapped behind them in a line that stretches over the horizon." Daniel Gade, WSJ

As someone said, it's really hard to give away money.  Why would this cluster-firetruck surprise anyone?

Nod to Kevin Lewis

What Happens when you try to give away money?

Prof. Newmark provides a nice set of examples and varieties of rent-seeking.  Well linked, sir.

The video version of my own effort:

What happens when you try to give away money?

I did a short video on the costs of trying to give away money.  Some people were critical of the flippancy of the example.  But remember, I had only four minutes, and I was trying to address college students, so I was looking for something they had experience with.



But, okay, if you want examples, for class or conversation, of the grave damage that can be done if we try to give away money, here you go.  I am willing to admit, for the sake of argument, that these programs might be well intentioned, rather than just cheesy vote-buying schemes.  That makes them WORSE, if anything.  The government simply cannot give away money.

1.  Food stamps kill.  Rhode Island town shows futility of trying to "help" people by giving away money. Here is the WaPo story

2.  Amazingly honest NPR story about supplemental disability Social Security.  From now on, if anyone asks about the costs of rent-seeking, THIS is your go-to example.

But, even if one concedes that the intentions are good, the bad effects should be enough to make people realize, as Bill Clinton did, that the program is a bad one.  The problem is that Nancy Pelosi and Co. sincerely believe that the effects are POSITIVE.

Nod to WH.

Rent-Seeking is the New Profit Center, and DC is its Festering Capital

In the U.S. there have always been centers for frenzied entrepreneurial activity, creating value, wealth, and employment. It's what we do.

New York and Boston were both important trade, financial, and industrial centers. Then Pittsburgh and the Ohio Valley became engines of growth and industrial might. Detroit made iron machines that covered the world with transportation. Silicon Valley, quite recently, produced enormous amounts of hardware and software, and revolutionized the way we think about information.

In all those cases, American entrepreneurs sought out opportunities to create value and collect profits. That's what profits are, the inducement to redirect resources toward higher valued uses.

What does the U.S. produce now? Government contracts, where money is taken from tax-payers at gunpoint and wasted on "information systems," useless consultants and brutal elective wars on faraway and largely innocent populations. A festering hive of rent-seekers has clustered around Washington, D.C.

Rent-seeking and profit-seeking look the same from the perspective of the seeker. Both produce super-normal returns to investment, and create wealth for the winners. The difference is that profits are a sign of value being created. Rent-seeking is a sign of value being destroyed.

(nod to Anonyman, who eats his rents with fava beans and a nice Chianti)

Rent-Seeking

A classic example of rent-seeking. Because the police can "make money" by distorting their efforts to focus more than is appropriate on marijuana busts. As the Wall Street Journal reported.

In private markets you can only make money if you produce something other people value.

But in the presence of artificial rents like this drug enforcement subsidy, the link between "make money" and "produce something of value" is broken. It is an artificial rent. And the resources devoted to seeking the rent, to the extent that such resources are taken away from other useful purposes (preventing property crimes, protecting citizens) are wasted.

Rent-seeking isn't really about the rent, which is a transfer. The cost of rent-seeking is the wasted resources devoted to capturing the rent.

Here's the bizarre thing to me. You know who IS producing something of value? THE FOLKS WHO GROW AND SELL MARIJUANA! Yikes!

(Nod to Angry Alex)

Small pieces of good news

1. The Federal government is closed for the 4th straight day!

2. Jobless claims fall faster than expected.

3. Randy Waldman actually got something right (only his first point though).

4. OKC Thunder sit in 5th place in the West, riding a 6 game win streak going into all-star weekend.

5. Shane Battier is gangster now!

Markets in everything: Celebrity smells edition

Round up the usual suspects!

I pretty much laughed out loud when I saw the title of this piece from the Atlantic:

"Did Christianity cause the Crash?"

As ridiculous as the premise is, the article itself is actually pretty interesting.

Meet the new Raj, Same as the old Raj?

In a new NBER working paper (ungated version here) Alfaro and Chari ask the question, "India Transformed?" and their answer goes something like this:

Using firm-level data this paper analyzes the transformation of India’s economic structure following the implementation of economic reforms. The focus of the study is on publicly-listed and unlisted firms in manufacturing and services industries. Detailed balance sheet and ownership information permit an investigation of a range of variables. We analyze firm characteristics shown by industry before and after liberalization and investigate how industrial concentration, number, and size of firms evolved between 1988 and 2005. We find great dynamism displayed by foreign and private firms as reflected in the growth in their numbers, assets, sales and profits. Yet, closer scrutiny reveals no dramatic transformation in the wake of liberalization. The story rather is one of an economy still dominated by the incumbents (state-owned firms) and to a lesser extent, traditional private firms (firms incorporated before 1985). Sectors dominated by state-owned and traditional private firms before 1988-1990, with assets, sales and profits representing shares higher than 50%, generally remained so in 2005. The exception to this broad pattern is the growing importance of new private firms in the services sector. Rates of return also have remained stable over time and show low dispersion across sectors and across ownership groups within sectors.

I think this post's title is a pithier abstract, but then I don't work at the Harvard B-School, do I?

Why Rent-Seeking is a Problem

Wow. My man, Alexander Hoffelder, shared a quote from Bastiat that I had never seen before. And that quote is the single best indictment of the rent-seeking society that I have ever seen. It's all there....the rent, the seeking, the damage, and the moral decay.

"When under the pretext of fraternity, the legal code imposes mutual sacrifices on the citizens, human nature is not thereby abrogated. Everyone will then direct his efforts toward contributing little to, and taking much from, the common fund of sacrifices. Now, is it the most unfortunate who gains from this struggle? Certainly not, but rather the most influential and calculating." - Bastiat, Justice and Fraternity

Frederic Bastiat: the Robert Tollison of the 1850s.

UPDATE: Another pretty good quote, from Joe Stiglitz, before he went all Krugman on us:

Public actions, however, are also subject to constraints and limitations, so that the essential problem of public regulatory policy is to determine when government action improves market performance and when, in contrast, private action can take better advantage of information and incentives within the marketplace” (Stiglitz, WHITHER SOCIALISM, 1994, 36)

I think they were off by two

According to Money Magazine, I have the 3rd best job in America: College Professor.

They kind of jumble up two very different kinds of jobs into one entry though:

3. College Professor

Median salary (experienced): $70,400
Top pay: $115,000
Job growth (10-year forecast): 23%
Sector: Education

What they do: Teach and grade papers, of course. But profs also spend about half their time doing research and writing articles and books about their field.

Why it's great: For starters, major scheduling freedom. "Besides teaching and office hours, I get to decide where, when, and how I get my work done," says Daniel Beckman, a biology professor at Missouri State University. And that doesn't even take into account ample time off for holidays and a reduced workload in the summer. Competition for tenure track positions at four-year institutions is intense, but you'll find lots of available positions at community colleges and professional programs, where you can enter the professoriate as an adjunct faculty member or non-tenure track instructor without a doctorate degree. That's particularly true during economic downturns, when laid-off workers often head back to school for additional training. More valuable perks: reduced or free tuition for family members and free access to college gyms and libraries.

Drawbacks: Low starting pay and a big 50% salary gap between faculty at universities and community colleges. If the position is at a four-year university, you'll probably have to relocate, and you'll be under pressure to constantly publish new work to sustain career momentum.

How to get it: For a tenure track position, you'll need a Ph.D. But all colleges want at least a master's degree and prefer plenty of teaching experience.

People, I would wax so bold as to assert that tenured professor at a research university is actually the greatest job in the world!

Meet the new boss, same as the old boss

There is a very clever and interesting article in the inaugural issue of the AEJ: Macroeconomics by Raghuram Rajan (ungated version here) called "Rent Preservation and the Persistence of Underdevelopment" about why basic reforms are delayed in many countries, even those holding elections.

The core of his argument is that:

When citizens in a poor constrained society are very unequally endowed, they are likely to 

find it hard to agree on reforms, even though the status quo hurts them collectively. Each 

citizen group or constituency prefers reforms that expand its opportunities, but in an unequal 

society, this will typically hurt another constituency’s rents. Competitive rent preservation 

ensures no comprehensive reform path may command broad support. The roots of 

underdevelopment may therefore lie in the natural tendency towards rent preservation in a 

divided society.  

P.S. Dan Sutter and I took a crack at why reforms are delayed a while ago (paper is here).