Welcome to the rent-seeking economy When a free market is replaced by government hand-outs of trillions of dollars, it becomes a rent-seeking economy. Instead of pie-increasing competition, we get costly zero-sum competition for pie-pieces. The outcome depends on the personal interests of the powerful and the interests they represent.
Here's Gordon Tullock:
Under certain assumptions (see Posner 1975) the competitive outlays to establish a monopoly will exactly equal the present value of the profit rectangle. * * * [A] powerful king sells the monopoly privilege in a manner designed to avoid competitive waste and takes the rent-seeking outlay as a personal transfer. There is no waste in such a transaction.
* * * Compare this situation with that of a weak democratic government, incapable of imposing its will on the bidding process for the monopoly that it is purveying, and vulnerable to competitive bidding for the rent-creating mechanism from other would-be governments. Surely, in this situation, the monopoly profits will be dissipated to a much greater degree than would occur under the powerful monarch.
* * * Even if the rich were disposed to have the government take their wealth and redistribute it to the poor, it seemed clear to me that such a process would be vulnerable to moral hazard. Potential recipients would be well-advised to become suitable objects for charity. * * *
The problem worsens sharply once government replaces private individuals in the charitable process. There is no obvious reason why governments driven by a vote motive should stop at the point where the utility of the rich is maximized. Much more likely is the outcome where the median voters coercively transfer, at no cost to themselves, a large part of the wealth of the rich to the poor, or where special interest groups access the political process to transfer the wealth of consumers to their own members. * * *
Now consider a couple of recent news stories. From Lambert:
A couple of weeks ago, Rep. Barney Frank sent a snippy letter to Northern Trust, a Chicago-based bank that caters to very wealthy clients. Mr. Frank and some other Platonic guardians on the House Financial Services Committee were incensed that Northern Trust, a recipient of TARP funds, had sponsored and hosted clients at a California golf tournament. Messrs. Frank et al. wrote:
At a time when millions of homeowners are facing foreclosure, businesses and consumers are in dire need of credit, and the government is trying to keep financial institutions — including yours — alive with billions in taxpayer funds, this behavior demonstrates extraordinary levels of irresponsibility and arrogance. We insist that you immediately return to the federal government the equivalent of what Northern Trust frittered away on these lavish events.* * *
Northern Trust is a healthy bank that participated in TARP at government request (the government needed maximum participation to avoid negative signaling by participants). Northern Trust uses golf tournaments as a very effective way to attract wealthy customers. Yet Thom points out that in Barney Frank’s considered view, having never worked in the industry, “There are cheaper, more cost-effective ways to get to know people and understand them.”
From today’s WSJ:
When Rep. Barney Frank was looking to aid a Boston-based lender last fall, the Massachusetts Democrat urged Maxine Waters, a colleague on the House Financial Services Committee, to "stay out of it," he says. The reason: Ms. Waters, a longtime congresswoman from California, had close ties to the minority-owned institution, OneUnited Bank. Ms. Waters and her husband have both held financial stakes in the bank. Until recently, her husband was a director. At the same time, Ms. Waters has publicly boosted OneUnited's executives and criticized its government regulators during congressional hearings. Last fall, she helped secure the bank a meeting with Treasury officials.* * *
Such potential conflicts of interest are more serious as the banking system's crisis has led the government to take an increasingly active role in overseeing financial institutions, including OneUnited.
* * *OneUnited's executives have donated $12,500 to Ms. Waters's election campaigns. * * *Ms. Waters and her husband, Sidney Williams, were investors in two African-American owned California banks that merged with other lenders in 2002 to form OneUnited. Congressional financial-disclosure forms show Ms. Waters acquired OneUnited stock worth between $250,000 and $500,000 in March 2004, as did Mr. Williams. Mr. Williams joined the board of OneUnited that year. * * * In the lawmaker's most recent financial-disclosure form, dated May 2008 and covering the prior year, Ms. Waters reported that her husband held between $250,000 and $500,000 worth of the bank's stock. Mr. Williams also received interest payments from a separate holding at the bank, also worth between $250,000 and $500,000. * * *
In January, Ms. Waters acknowledged she made a call to the Treasury on OneUnited's behalf. * * * OneUnited eventually secured bailout funds under the government's $700 billion Troubled Asset Relief Program, which was set up later that month. A provision designed to aid OneUnited was written into the federal bailout legislation by Mr. Frank, who is chairman of the financial-services panel. Mr. Frank has said he inserted the provision to help the only African-American owned bank in his home state. He said in an interview that Ms. Waters's interest "had zero impact on the outcome because I would have done it anyway."
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