Tag Archives: rent-seeking

What Happened to Faith In The Market?

I’m a capitalist. A real one, not the Congressional variety. I believe in (properly regulated) markets, with the important caveat that I believe in markets in those areas of the economy where markets work. (Markets only work, I constantly remind anyone who listens, in transactions with a willing buyer and a willing seller, both of whom are in possession of all information relevant to the transaction.)

Being predisposed to competition and markets doesn’t mean I think government’s role is unimportant, or that public assistance is never warranted.Government can help markets in a number of ways: outlawing monopolies and anti-competitive practices or, in compelling cases, granting subsidies or tax incentives to industries deemed critical to the national interest.

It won’t surprise anyone reading this to discover that, in today’s America, subsidies are more often used to suffocate progress and protect profitable, established industries than to move the nation forward.

American business spokespersons can be counted on to profess devotion to markets. They can also be counted on to avoid competition whenever possible, because their belief in the market’s level playing field is wholly fictional.

As Vox recently reported,

The coal industry and its allies in the Trump administration have recently devoted considerable energy to arguing that subsidies to renewable energy have distorted energy markets and helped drive coal out of business. “Certain regulations and subsidies,” says Rick Perry, “are having a large impact on the functioning of markets, and thereby challenging our power generation mix.” You can guess which regulations and subsidies he’s talking about.

This is nothing new, of course. It is in keeping with a long conservative tradition of challenging the economic wisdom and effectiveness of energy subsidies.

At least, uh, some energy subsidies.

Energy analysts have made the point again and again that fossil fuels, not renewable energy, most benefit from supportive public policy. Yet this fact, so inconvenient to the conservative worldview, never seems to sink in to the energy debate in a serious way. The supports offered to fossil fuels are so old and familiar, they fade into the background. It is support offered to challengers — typically temporary, fragmentary, and politically uncertain support — that is forever in the spotlight.

The article goes on to shine that spotlight on those older subsidies, beginning with the twenty billion dollar annual production subsidy we taxpayers provide to the fossil fuel industries that contribute massively to climate change. We provide that financial assistance despite the fact that these companies are very, very profitable.

The twenty billion dollar figure is only a beginning. It subsidizes only direct production costs.  Another $14.5 billion in consumption subsidies also benefit fossil fuel companies–things like the Low Income Home Energy Assistance Program(LIHEAP), which helps lower-income residents pay their (fuel oil) heating bills.

It also leaves out subsidies for overseas fossil fuel projects ($2.1 billion a year).

Most significantly, OCI’s analysis leaves out indirect subsidies — things like the money the US military spends to protect oil shipping routes, or the unpaid costs of health and climate impacts from burning fossil fuels. These indirect subsidies reach to the hundreds of billions, dwarfing direct subsidies — the IMF says that, globally speaking, they amount to $5.3 trillion a year. But they are controversial and very difficult to measure precisely.

Finally, OCI acknowledges that its estimates of state-level subsidies are probably low, since many states don’t report the costs of tax expenditures (i.e., tax breaks and credits to industry), so data is difficult to come by.

The best available estimate is that energy companies get $20.5 billion annually in corporate welfare, of which 80 percent goes to oil and gas, and 20 percent to coal. And we don’t know how much remediation will eventually add to that figure.

Vox’s summary says it all better than I could:

If you ask people in fossil fuel industries, their support staff in conservative think tanks, or fossil-state politicians, they will tell you why these fossil fuel production subsidies are necessary. It’s always been this way. They’re more than paid back by tax revenue. Other industries get them too. (For the record: More than half the $20 billion is available to fossil fuels alone). They create jobs. They’re important for national security. Tax expenditures aren’t subsidies at all, if you think about it. Etc.

If the endless debate over energy subsidies has taught me anything, it’s that nobody thinks their own subsidy is a subsidy — and no one outside think tanks and universities really gives a damn about the economic distortions of subsidies as such. Everyone thinks their favored energy sources deserve support and the other guys’ don’t. Period. They use whatever economic argument is handy — “picking winners” if you’re against the subsidy, “supporting jobs” if you’re for it — but such arguments are always instrumental. As I said recently about coal’s rent-seeking, there are no true free marketeers in struggling industries.

Speaking of rent-seeking, here’s a final fun factoid from OCI: In the 2015-2016 election cycle, oil, gas, and coal companies spent $354 million in campaign contributions and lobbying and received $29.4 billion in federal subsidies in total over those same years — an 8,200% return on investment.

The next time some corporate poo-bah piously invokes the genius of the market, tell him to give it a rest. It’s abundantly clear that no one really wants to “let the market decide.”

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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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