Rent Seeking 101

In our highly polarized political environment, we sometimes overlook areas of agreement between otherwise warring portions of the political spectrum. A recent post at Political Animal pointed to one such area between libertarians and liberals: opposition to “rent seeking” aka “corporate welfare.”

Those of us who genuinely value markets and market economies understand that much of what passes for capitalism these days is anything but, and that the influence of the “haves” is routinely used to ensure that they “have” even more. Libertarians protective of true capitalism and market economics see this state of affairs as undermining the integrity of the economic system; liberals note that it exacerbates the widening gap between the 1% and everyone else.

They are both right. Per a lengthy paper by John Teles of Johns Hopkins, a few examples:

Car dealers, for instance, have a sizable presence in the top 1% of earners, have a major lobbying presence in almost every state capital, and have made contributions to almost every member of Congress. That should not be surprising, because regulations (again, often at the state level) protect car dealerships from competition by limiting direct sales, restricting the termination of franchises, limiting the entry of new dealers, and preventing manufacturers from offering preferential pricing to larger franchisees. Together, these rules, economists Francine Lafontaine and Fiona Scott Morton found in a 2010 study, “almost guarantee dealership profitability and survival,” while simultaneously driving up costs to consumers…..

A concentration of high incomes also characterizes the field of government contractors, such as private-prison managers, defense contractors, and for-profit colleges. All these industries are characterized by dependence on government as a nearly exclusive source of revenue, by extraordinary levels of lobbying, and by asymmetries of power between firms and their government counterparts.

Or consider the field of management consulting, which attracts an extraordinary percentage of Ivy League college graduates. As Christopher McKenna shows in his book, The World’s Newest Profession, the outsized incomes of consultants do not come from their ability to recommend innovative practices to firms. Instead, they come from the rent they extract from performing a legally mandated due-diligence ritual for firms or from performing tasks that could otherwise be done at lower cost by public employees. These are not, in short, meaningfully “private” firms at all, despite their high profitability.

You should really read the whole thing….

There is a compelling case to be made for properly operating market economies—“properly operating” meaning markets operating in economic areas where buyers and sellers have equal access to relevant information (a characteristic that would exclude health care and other goods and services involving inescapable asymmetries of information), and where the sorts of creativity, hard work and entrepreneurial prowess that improve life for everyone are incentivized and rewarded.

There is no case—compelling or otherwise—to be made for the rent-seeking that characterizes American economic activity in the 21st Century.

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Why Haven’t We Heard About This?

Back in March, the British newspaper The Spectator ran a troubling story implicating free speech, feminism, Islam…all subjects that typically command a lot of attention in the U.S. 

Margot Wallström, the Swedish foreign minister, denounced the subjugation of women in Saudi Arabia. As the theocratic kingdom prevents women from travelling, conducting official business or marrying without the permission of male guardians, and as girls can be forced into child marriages where they are effectively raped by old men, she was telling no more than the truth.

Wallström went on to condemn the Saudi courts for ordering that Raif Badawi receive ten years in prison and 1,000 lashes for setting up a website that championed secularism and free speech. These were ‘mediaeval methods’, she said, and a ‘cruel attempt to silence modern forms of expression’.

She also opined that Swedish cooperation with the Saudi military was unethical.

Following her remarks, Saudi Arabia withdrew its ambassador to Sweden. It also stopped issuing visas to Swedish businessmen. The United Arab Emirates joined it. The Organisation of Islamic Co-operation, which represents 56 Muslim-majority states, issued a statement accusing Sweden of failing to respect the world’s ‘rich and varied ethical standards,’ and the Gulf Co-operation Council condemned her ‘unacceptable interference in the internal affairs of the Kingdom of Saudi Arabia.’

And how did Sweden–a country most of us think of as a bastion of democracy and a defender of free speech–react?

Thirty chief executives signed a letter saying that breaking the arms trade agreement ‘would jeopardise Sweden’s reputation as a trade and co-operation partner’. No less a figure than His Majesty King Carl XVI Gustaf himself hauled Wallström in at the weekend to tell her that he wanted a compromise. Saudi Arabia has successfully turned criticism of its brutal version of Islam into an attack on all Muslims, regardless of whether they are Wahhabis or not, and Wallström and her colleagues are clearly unnerved by accusations of Islamophobia. The signs are that she will fold under the pressure, particularly when the rest of liberal Europe shows no interest in supporting her.

My question is: why has the American media failed to cover this? Why has social media been silent?

Have I missed an outcry? A public debate over the relative importance of free speech and diplomacy? Or could it be that this effort to silence Wallstrom is different because she’s a woman, complaining about the treatment of women?

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The Issues We Face in Indianapolis

Here–as promised–is the panel discussion held at Central Library last Tuesday night. This was the second of the three-part series “Electing Our Future.”

If you weren’t able to attend in person, watch six of the most knowledgable people in our community talk about the challenges that we will expect our next set of elected officials to tackle!

The Complicated Perquisites of the 1%

It’s amazing what you can learn from research. Recently, the Brookings Institution took note of the oft-made assertion that the corporate tax rate in the U.S. (at 35%) is too high. The usual response is to point out that 35% may be the statutory rate, but many of our largest and most profitable corporations take advantage of tax breaks that substantially reduce–or even eliminate–federal taxes.

This report, however, looked at a different issue.

Corporations used to be the dominant form in which business was done. Partnerships and other “pass through” entities–so named because the income “passes through” and is taxed as the partners’– were far fewer.  In 1980, only 20.7% of all business income was earned by pass-through entities; in 2011, the share had grown to 54.2%.

So a band of number-crunching economists at the U.S. Treasury and some academic partners, with access to far more data than outside researchers can see, set out to answer two simple questions: Who is getting all this partnership income? And what tax rate do they pay? They offered their answer Thursday in a paper presented at a National Bureau of Economic Research conference in Washington.

The findings are significant. And troubling.

*Pass-through business income is even more concentrated among the richest Americans than traditional corporate profits. “Overall, 69% of pass-through income earned by individuals accrues to the top-1%. Corporate income is similarly concentrated, but other business income (typically considered very concentrated) is substantially less concentrated.

* The average federal income tax rate paid by individuals who report pass-through business income was 19% in 2011. In part, that’s because so much of that income is considered capital gains or dividends, which are taxed at preferential rates.

* Across all business entities except for sole proprietorships, the average tax rate of U.S. business income in 2011 was 24.3%, they estimate. That’s lower than is often assumed in debates over corporate tax reform.

* “The migration of business activity out of the C-corporate sector and into the pass-through sector has likely substantially reduced U.S. tax revenue,” the economists conclude. If pass-through activity had remained at the (low) level of the 1980s, then the average tax rate on total U.S. business income in 2011 would have been approximately 28% rather than 24%, and tax revenue would have been at least $100 billion higher.

Who was it who used to say “A billion here, a billion there–pretty soon, you’re talking real money”?

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Go Back to Wherever You Came From is Not a Policy and Not in America’s Interests

Pew recently issued the results of its in-depth research on immigration.

First, a few “factoids.”

When we include the children and grandchildren of those who have immigrated to the U.S. since 1965, immigrants have accounted for 55% of America’s subsequent population growth. (They’re projected to account for 88% of the population increase over the next 50 years.)

Nearly 14% of the population is foreign born.

Compared with U.S.-born adults, recent arrivals are less likely to have finished high school, but they are more likely to have completed college or to hold an advanced degree.

As with so many other issues, American attitudes are polarized: Some 45% of adults say immigrants in the U.S. are making American society better in the long run, while 37% say they are making it worse.

A recent op-ed in the New York Times offered some useful perspective on the issue:

History provides some clarity about the relative costs and benefits of immigration over time. Fifty years ago this month, Lyndon B. Johnson signed the Immigration and Nationality Act of 1965 at the foot of the Statue of Liberty. By any standard, it made the United States a stronger nation. The act was endorsed by Republicans and Democrats in an era when cooperation was still possible. Indeed, the most serious opposition came from Southern Democrats and an ambivalent secretary of state, Dean Rusk. But it passed the Senate easily (76-18), with skillful leadership from its floor manager, Senator Edward M. Kennedy, and Johnson himself….

The flood of new immigrants also promoted prosperity in ways that few could have imagined in 1965. Between 1990 and 2005, as the digital age took off, 25 percent of the fastest-growing American companies were founded by people born in foreign countries.

Much of the growth of the last two decades has stemmed from the vast capacity that was delivered by the Internet and the personal computer, each of which was accelerated by immigrant ingenuity. Silicon Valley, especially, was transformed. In a state where Asian immigrants had once faced great hardship, they helped to transform the global economy. The 2010 census stated that more than 50 percent of technical workers in Silicon Valley are Asian-American.

Not to mention that our food choices have improved immeasurably….In short, any rational analysis demonstrates that immigration has been (and continues to be) incredibly beneficial to the country.

I suspect that it is another “factoid” from the Pew survey that really explains “the Donald”– and for that matter, most opposition to immigration: By 2055, the U.S. as a whole is projected to have no racial or ethnic majority.

Let’s be honest: much of the animus expressed toward immigrants (and protestations to the contrary, that animus is not limited to those labeled “illegals”) is based upon the “otherness” of some of them. To be blunt, much of it is racist.

As I’ve noted previously, my son-in-law is a (legal) immigrant, and in his thirty-plus years in America, has never experienced that animus. I’m sure it’s just coincidental that he’s a very pale Brit….

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