There are two ways individuals can acquire wealth: production and plunder. When individuals produce goods or services and exchange them for income, they not only enrich themselves but they also enhance the wealth of the society. Sometimes the rules – or lack of rule enforcement- also allow people to get ahead by taking, or plundering, what others have produced. This method not only fails to generate additional income – the gain of one is a loss of another – but it also consumes resources and thereby reduces the wealth of the society.
Rent seeking is the term economists use when they refer to actions taken by individuals and groups seeking to use the political process to take the wealth of others. Perhaps “favor seeking” would be a more descriptive term for this type of activity, which generally involves “investing” resources in lobbying and other activities designed to gain favors from the government. The incentive for individual5 to spend time and effort in rent seeking will be determined by how rewarding it is. Rent seeking will be unattractive when constitutional constraints prevent politicians from taking the property of some and transferring it to others (or forcing some to pay for things desired by others).
When a government fails to allocate the costs of public-sector projects to the primary beneficiaries (through user fees, for example), or when it becomes heavily involved in transfer activities, people will spend more time organizing and lobbying politicians and less time producing goods and services. Resources that would otherwise be used to create wealth and generate income are wasted as people fight over slices of the economic pie- a pie that is smaller than it could be if they were engaged in productive activities instead. When the government grants favors to some people at the expense of others (instead of simply acting as a neutral force protecting property rights and enforcing contracts), counterproductive activities will expand while productive activities will shrink. As a result, the overall income level will fall short of its potential.
There is ample evidence that rent-seeking consumes a substantial amount of resources. Washington, D.C., is full of organizations seeking subsidies and other favors from the federal government. More than 3,000 trade associations have offices in Washington, and they employ nearly 100,000people seeking to alter the actions of Congress. Of course, business and labor organizations are well represented, but so, too, are agricultural interests, health care providers, trial lawyers, senior citizens, export industries, and many others.
As we noted earlier, income transfers have grown substantially during the last several decades. The government now taxes approximately one out of every seven dollars citizens earn, and transfers it to someone else. Rent seeking is the political “fuel” for most of these transfer activities. Interestingly, means-tested transfers, those directed toward the poor, constitute only about one-sixth of all transfers. No income test is applied to the other five- sixths of income transfers. These transfers are generally directed toward groups that are either well organized (like businesses and labor union interests) or easily identifiable (like the elderly and farmers). The people receiving these transfers often have incomes well above the average person.
Within the framework of public-choice analysis, the relatively small portion of income transfers directed toward the poor is not surprising. There is little reason to believe that transfers to the poor will be particularly attractive to vote-seeking politicians. After all, in the United States, the poor are less likely to vote than middle- and upper-income recipients. They are also less likely to be well informed on political issues and candidates. They are not an attractive source of political contributions. Politicians often argue that their proposed policies will help the poor, but there is little reason to believe that this will be a high priority for most of them.
There are three major reasons why government transfer activity will reduce the size of the economic pie. First, income redistribution weakens the link between productive activity and reward. When taxes take a larger share of a person’s income, the reward
from hard work and productive activity is reduced. Second, as public policy redistributes a larger share of income, more resources will flow into wasteful rent-seeking activities. Resources used for lobbying and other rent-seeking activities will not be available to increase the size of the economic pie. Third, higher taxes to finance income redistribution and an expansion in rent-seeking will induce taxpayers to focus less on income- producing activities, and more on actions to protect their income. More accountants, lawyers, and tax-shelter experts will be retained as people seek to limit the amount of their income redistributed to others. Like the resources allocated to rent seeking, re- sources allocated to protecting one’s wealth from the reach of government will also be unavailable for productive activity. Predictably, the incentives created by government redistribution policies will exert a negative impact on the level of economic activity.
Nov
06