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Archive for the ‘rent-seeking’ Category

McCutcheon

There has been much coverage of last week’s Supreme Court decision on campaign finance (McCutcheon v. Federal Election Commission), most of it negative (insert shocked surprise here) given that it will provide more opportunities for the wealthy to shape public policy. As Senator Tammy Baldwin (D-WI) observes:

“It is far too often the case in Washington that powerful corporate interests, the wealthy, and the well-connected get to write the rules and now the Supreme Court has given them more power to rule the ballot box by creating an uneven playing field where big money matters more than the voice of ordinary citizens.”

Perhaps one should not be too quick to fault the “powerful corporate interests, the wealthy, and the well-connected.” They are only being rational. They clearly understand that there are largely two ways to thrive economically: (1) produce more of the things that people value or (2) seek a variety of policy-related privileges that allow you to lay claim to what others have produced and/or create impediments to what your competitors might produce. Over time, the second of these paths—rent-seeking or transfer-seeking has grown in importance in shaping economic outcomes. It is effective, often invisible, and the costs are borne by taxpayers and consumers. As long the elected officials of both parties are in the business of selling privileges, there will be buyers. The rent seeking society will thrive, even as it throttles growth and economic dynamism and contributes to our long-term fiscal problems.

One should not be surprised that the critique of the McCutcheon decision has begun to merge with the attack on the Koch brothers. This morning, a Google search for “McCutcheon and Koch” generates 364,000 hits (I am assuming this number will grow rapidly). Apparently, some believe the best way to frame the decision is to connect it to the Koch brothers, creating a compelling tale of a new plutocracy. (more…)

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If you see corruption in the upper tiers of government as a major problem for an economy’s health in the long run (and the balance of evidence suggests that it is, at least at high levels in capitalist countries), then externally imposed austerity might be the only way to root it out. Syracuse prof Glyn Morgan passes along this story from Spain:

Rato, Castellanos and others jointly own a commercial lot near Madrid that is leased to a third party, according to Ayala’s Jan. 10 statement to the court. They also controlled a company together while Rato, 64, was running Bankia, Ayala said.

At the same time, Lazard billed Bankia 9.2 million euros ($12 million) for work either assigned or executed during Rato’s 27-month tenure at the bank, court documents show.

Their relationship exemplifies how a network of leaders from the governing People’s Party helped their associates among the financial elite to profit while the country’s savings banks, known as cajas, racked up losses. That toxic combination flourished during the boom fueled by Spain’s entry into the euro in 1999 and served to deepen the crash that resulted in a 41 billion-euro bailout of Spanish lenders, according to Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington.

Whether harsh spending cuts are a good idea or not for countries like Spain, Italy, and Greece depends in part on how one values the long run versus the short run. Also from the story:

“The things that we need to do to make Spain work require pulling the rug out from under the core interests of everyone” in power, Ken Dubin, a political scientist who teaches in Madrid at IE business school and Carlos III University, said in a May 22 telephone interview. “This is a political racket run for the benefit of politicians who suck the marrow out of the citizenry.”

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Last night the U.S. Senate played host to naked special-interest politics, as agricultural subsidy interests won vote after vote on the floor. As this story from Politico notes,

the sugar program stands out as one of the most intrusive of the commodity programs still on the books: a mix of price supports, import quotas, and since 2008, a feedstock program under which sugar can be purchased by the government to be used in biofuels.

The amendment Wednesday sought to end these purchases and roll back the price-support level from 18.75 cents per pound to 18 cents.

The amendment failed, 53-46. Some Republicans voted to keep the subsidies, including Marco Rubio of Florida. Even non-sugar-producing states’ senators voted to keep sugar subsidies:

And as a member of the Agriculture panel, Sen. Heidi Heitkamp (D-N.D.), warned her colleagues against unraveling the commodity coalition behind the farm bill.

“We forget that this is much bigger than a sugar program. It’s much bigger than any one single commodity,” said the North Dakota freshman, who hails from a state that is a major producer of sugar beets. “My concern is when you single out one commodity, whether it’s soybeans, corn or sugar or tobacco or rice, when you single out one commodity, you threaten the effectiveness of the overall farm bill.”

In other words, there’s a logroll among senators from subsidized states. My guess is that if you ran a logit model of votes on the sugar amendment, both sugar production and production of other subsidized commodities would enter the equation negatively. I wonder whether ideology or partisanship would factor in. I count 20 GOP “nays” (out of 45), meaning that a little over 60% of Democrats voted nay. And will Tea Party activists hold people like Rubio to account? I’m not holding my breath.

My last intemperate rant against agricultural subsidies here.

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All 50 states ban the direct sales of motor vehicles from manufacturers to consumers. The politics of this regrettable policy are clear: auto dealers are powerful political players in every state, while only a few states actually have manufacturing facilities. Banning direct manufacturer sales benefits dealers while hurting manufacturers and consumers.

State governments continue to insert themselves into the contractual relationships between car manufacturers and dealers, typically to the ostensible benefit of the latter. The New Hampshire Senate recently passed a bill regulating the terms and conditions of dealer contracts with manufacturers, prohibiting manufacturers from requiring dealers to alter the appearance of their showrooms, for instance. (Disturbingly, the state director of Americans for Prosperity in New Hampshire supports the bill.) The bill is actually unlikely to change any “balance of power” between automakers and auto dealers. Automakers will simply respond by vetting potential dealerships far more closely and perhaps charging higher franchise fees. The onus of this response is likely to fall more on new dealerships than on incumbents. So the real losers from the bill are going to be potential entrants into the car dealer industry and, of course, consumers.

These are not the only examples of “state protectionism,” in which state governments adopt laws meant to reduce competition from out-of-state businesses for the benefit of local incumbents. Some states still prohibit certain out-of-state direct-to-consumer wine shipments. Regulatory barriers can accomplish the same ends. States have widely varying regulations on insurance products, making regulatory compliance a huge barrier for a company trying to market a standard policy in multiple states. For a long time, major life insurance companies lobbied Congress to adopt a national life insurance regulatory regime, pre-empting state laws. They were opposed by local life insurance agents, for whom knowledge of and compliance with distinctive state regulations were a significant source of competitive advantage. In the end, no national legislation materialized, but Congress authorized the formation of an interstate compact, essentially a contract among consenting states that sets up a single insurance regulator. More than 40 states have joined the Interstate Insurance Product Regulation Commission, which regulates life insurance and annuities.

Such state protectionism potentially runs afoul of the so-called “dormant commerce clause” of the U.S. Constitution. The commerce clause allows Congress to regulate trade among the several states. By implication, then, states are presumptively prohibited from burdening interstate trade, unless authorized by Congress. Unfortunately, courts have been reluctant to scrutinize state economic regulations that have an essentially protectionist character, although especially blatant discrimination against out-of-state imports has been overturned. (more…)

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I agree with pretty much everything Marc has to say on the deal below. (For my own thoughts, see here.) Nevertheless, from a political point of view, something very like this deal was inevitable.

First, the Republicans held a bad hand. All the Bush tax cuts were going away, so they had very little leverage. The only leverage they had was over letting unemployment benefits, stimulus tax credits, and corporate welfare expire, and letting the sequester take effect immediately. However, Republicans are scarcely fonder of the sequester than are Democrats, both because of its cuts to defense and because of the blunt, across-the-board nature of the domestic discretionary cuts. As soon as the negotiations turned to dealing with taxation and spending separately, Republicans were never going to get significant spending cuts out of a taxation deal, because they had very little to offer Democrats on taxation. In the end, Republicans got a higher income threshold for tax increases, but paid for it with extensions of the foregoing expenditure programs.

Why were Republicans not willing to give a little more on tax increases on the rich in exchange for cuts in tax expenditures? Here the optics play a role. Pushing hard to let the low-income and higher ed tax credits expire could easily be demagogued. Letting extended unemployment benefits expire when Republicans continue to insist that the economy is weak would also be jarring. On the corporate welfare side, the diffuse-costs, concentrated-benefits logic applies in full force. Besides people who read sites like this one and the concentrated interests who benefit from such programs and spend literally hundreds of millions of dollars a session lobbying for them, no one cares about corporate welfare, and many even think of it as “pro-business” (as I’ve read journalists oh-so-neutrally describe them in articles on the deal) and therefore somehow pro-recovery.

Now, if this analysis is correct, then in two months when the spending side of the fiscal cliff is dealt with, Democrats will hold a similarly weak hand, and we should look for essentially zero Republican concessions on taxes. If the outcome deviates from this prediction in either direction, then we will have good reason to think that extraneous factors, such as “negotiation skills,” played some kind of role.(*) But I would look for the Nash Equilibrium to obtain.

(*) Another possibility, of course, is that I misread the (House) GOP’s preferences. They may hate defense spending cuts so much that they are willing to allow more tax increases to prevent them. That would, of course, be a perfectly awful outcome from a limited-government perspective — and therefore very much within the realm of possibility.

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Conservatives and taxpayer groups are ready to fight the $1 trillion farm bill when it comes up for a vote in the new Congress. Agricultural subsidies, price supports, and tariffs in developed countries (the U.S., Japan, and the European Union especially) not only harm consumers at home by hitting them with higher prices, but cause severe poverty abroad by shutting exports from less developed countries (LDCs) out of developed-country markets and by dumping developed-country surpluses on LDC markets at prices below marginal cost. Since the poorest people in the world are farmers in poor countries, and over 15 million people die from hunger and disease each year due to severe poverty, rich-country agricultural subsidies are literally killing poor people on a massive scale.

Here’s just one anecdote from the IFPRI report of how this works:

Harrison Amukoyi’s farm is perched on a hillside in western Kenya. On less than two acres of land, he raises several crops and a dairy cow. To sell milk, Harrison and his neighbors must compete with industrialized countries that dump their subsidized milk on local markets, depressing prices for Kenyan farmers. This unfair contest appears in countless guises throughout the developing world, intensifying conditions of poverty.

And here are some figures from the NCPA analysis on how poor farmers would benefit if cotton subsidies alone were eliminated:

The International Cotton Advisory Committee (ICAC) estimates that ending U.S. cotton subsidies would raise world prices by 26 percent, or 11 cents per pound. The results for African countries dependent on cotton exports would be substantial:

  • Burkina Faso would gain $28 million in export revenues
  • Benin would gain $33 million in export revenues
  • Mali would gain $43 million in export revenues.

We have seen reductions in severe poverty recently. The world’s biggest reduction in severe poverty has come in China over the last three decades. It’s clear that economic reform is the critical, long-term driver of poverty reductions. But where did China’s poverty reductions start? With growing agricultural productivity. The poorest countries of the world can’t just move straight into manufacturing. They need first to generate some agricultural surplus. Making it possible for poor farmers to sell to rich consumers, or even to their own people, is necessary to making that happen.

Removing rich-country agricultural subsidies could also have political-economy benefits. Many LDCs repress their agricultural markets in favor of the urban sector. Thus, their own governments deserve some share of the blame. The typical tool for this repression is a “marketing board” monopsony. The marketing board buys produce at coercively depressed prices and then tries to export it for a profit, plowing the proceeds back into urban subsidies. Rising world prices for farm goods would increase the profits of these marketing boards, potentially allowing them to raise the prices they pay farmers at home. While some nasty governments might find the new revenue reinforces their power, the new revenues would surely build useful state capacity in just as many places. Furthermore, rising farm incomes should increase the political power of the farm bloc in LDCs, which increases the probability of domestic liberalization.

Ending the rich world’s harmful policies would not eliminate global poverty. However, it would make a significant dent and could set in motion economic and political processes that would have far-reaching effects indeed.

Still, agricultural subsidies and trade barriers survive, amounting to well over $300 billion per year in the rich countries of the OECD, dwarfing the aid sent from rich to poor countries. They survive because of the collective-action problem: poor people have no voice at all in the political systems of the rich world, and rich-world consumers barely have one. Producers organize effectively because of the clear benefits they receive from subsidies, and even ideological opposition from both the left and the right cannot effectively fight them.

The only effective way to counter the greed of the few is with the white-hot moral passion of the many. (more…)

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The quotation above comes from page 16 of a public finance textbook by Robin Boadway and Anwar Shah (Fiscal Federalism: Principles and Practice of Multiorder Governance, Cambridge UP 2009).

Is that right? Let me throw out just one counterexample: Bates, Markets and States in Tropical Africa.

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ABC News has done a carefully researched investigative report on the Department of Energy’s billions of dollars in awards to electric car programs that remain years away from profitability. They lead with a headline intended to appeal to the economic nationalism of the mass public — “Car Company Gets Loan, Builds Cars in Finland” — but in my judgment the worst part of the loans is that they simply don’t make good business sense. And in several instances, they are surrounded with the stink of cronyism.

Fisker is more than a year behind rolling out its $97,000 luxury vehicle bankrolled in part with DOE money. While more are promised soon, just 40 of its Karma cars (below) have been manufactured and only two delivered to customers’ driveways, including one to movie star Leonardo DiCaprio. Tesla’s SEC filings reveal the start-up has lost money every quarter. And while its federal funding is intended to help it mass produce a new $57,400 Model S sedan, the company has no experience in a project so vast.

No surprise there.

Yet an audit this year by the Government Accountability Office, the investigative arm of Congress, criticized the Energy Department for not keeping close enough tabs on its fleet of auto loans — including those to Fisker and Tesla — to ensure they meet benchmarks. The funding was issued under the $25 billion Advanced Technology Vehicles Manufacturing loan program, one piece of a giant umbrella of DOE loans and loan guarantees going out the door. “DOE cannot be assured that the projects are on track to deliver the vehicles as agreed,” said the GAO report examining the department’s ATVM program. “It also means that U.S. taxpayers do not know whether they are getting what they paid for through the loans.”

Or there.

The announcement that the plant would re-open followed a heavy lobbying push by Delaware politicians from wesley mouch & co.both parties, who cited the news as a sign of industry’s turnaround. In September 2009, Republican Rep. Mike Castle wrote directly to Energy Secretary Steven Chu, saying the Fisker proposal had “great merit,” and urging Chu to give the company “careful consideration” for the loan.

I’m sure Castle was just wasting his breath, and that the DoE made its decision purely on merit.

Both companies have political heavyweights behind them. One of Fisker’s biggest financial supporters, records show, is the California venture capital firm Kleiner Perkins Caufield & Byers. The firm financially supports numerous green-tech firms, records show.

Kleiner Perkins partner John Doerr, a California billionaire who made a fortune investing in Google, hosted President Obama at a February dinner for high-tech executives at his secluded estate south of San Francisco. Doerr and Kleiner Perkins executives have contributed more than $1 million to federal political causes and campaigns over the last two decades, primarily supporting Democrats. Doerr serves on Obama’s Council on Jobs and Competitiveness.

I’m sure it’s just a coincidence.

Former Vice President Al Gore is another Kleiner Perkins senior partner.

That too.

Tesla brings political pull, as well. A former Tesla board member, Steve Westly, is an Obama bundler who raised hundreds of thousands of dollars for the president in 2008 and for his 2012 re-election campaign. His Westly Group was also a financial supporter of Tesla Motors until Tesla went public in 2010, and Westly continues to back the company.

What do three coincidences make? A super-coincidence?

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This working paper is already getting substantial attention, and it’s not hard to see why. They find that banks that lobbied more in the years leading up to the Troubled Asset Relief Program (TARP) of 2008 received more money through TARP. What’s particularly astounding is the rate of return, which they estimate at between $485 and $585 per dollar spent in lobbying.

I suppose there are two ways to look at this. One is to become outraged at the profitability of lobbying and the fact that money buys influence in Washington — but who is really surprised by that? The other way to look at it is that despite the flood of rents available, rent-seeking seems to be far less than theory would predict. Theory predicts that banks should spend up to about 1/2 the amount they could reasonably expect to receive, and that total expenditures on rent-seeking could even be greater than the rents available. Perhaps the reason standard rent-seeking models don’t apply in this case is that a program the size of TARP was unforeseeable until just days before it happened.

In any event, the findings certainly betray the common assertion from political leadership that the program was simply a practical response to the financial crisis aimed at preventing another Great Depression.

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