With the new year, legislatures will soon convene across the country. That means we’ll soon see and read about a phenomenon that economists call “rent seeking.”
“Rent seeking” occurs when a group with special interests seeks legislation to give it a business advantage and allow it to sell more or charge higher prices than before. It’s called rent seeking because it involves getting government, in effect, to grant the favored party a degree of monopoly power they would not otherwise have. Economists have long referred to the undue profits earned by monopolies as “rents,” hence rent seeking.
Rent seeking differs from traditional “pork” in that rent seekers don’t ask for a direct subsidy or special tax break. They just want the law altered to force others to give them business they wouldn’t otherwise have.
Such efforts seem part of human nature, and people engaged in it aren’t necessarily dishonest. But fairness and an efficient economy depend on holding such rent-seeking impulses in check.
Past examples of rent seeking in Minnesota include an effort some years ago to end a state program that rendered minor assistance to stalled cars on busy freeways. The family of the legislator behind the measure owned a towing service that would get extra calls if free assistance were not available.
In the 1970s, before Metro Mobility or other transportation services for the handicapped existed, a group of private ambulance owners famously fought for restrictions on help taxi drivers could give to physically challenged passengers.
By reducing access to taxis, some chronically ill patients would have to resort to ambulances, which cost about 12 times as much. The ambulance companies argued, of course, that the ill and handicapped would not be hurt because such ambulance rides were reimbursable through insurance or Medicaid.
Two sessions ago, a group of landscape companies pressed for a law that would require anyone buying a permanent sprinkler system to install a valve that would prevent the system from operating whenever it’s raining.
Their argument was “water conservation.” But water isn’t that scarce in Minnesota, and the valves added more than $100 to the bill for any new system.
This year’s rent-seeking campaign was kicked off by a Minnesota legislator earlier this week when he said that he’d seek legislation requiring the Minnesota Department of Transportation to buy a new corn-based road de-icing agent produced by a farmer cooperative plant in Marshall. The new product reportedly is less corrosive than salt and thus may cause less damage to roads, bridges, vehicles and the environment.
The legislator apparently has no financial interest in the product, but it would benefit corn producers in his district and elsewhere. A legislative requirement to buy a specific product would bypass any cost-benefit calculation or comparisons by the DOT.
The point isn’t that the legislature is venal. Indeed, it seems cleaner than most. Nor are such actions unique to Minnesota. Readers who’ve lived in other states or countries probably can recall similar examples of rent seeking in other legislative bodies.
Moreover, many government actions inevitably favor some people and disadvantage others. Deciding to build a road in one location rather than another or allocating more money for university construction and less to technical colleges inevitably favors some businesses and hurts others.
It would be foolish if legislatures avoided making any decisions with economic consequences. At the same time, when legislatures mandate the purchase of specific products or contracts with specific vendors, they cross a line.
The executive branch exists to implement policies and programs and to spend funds authorized by the Legislature. The governor, and other elected department heads, are responsible to voters for those duties.
One reason for this division of power is precisely to minimize the misallocation of resources that inevitably takes place when legislators micromanage government procurement.
When all sorts of purchases or contracts are decided by political pressures or when laws are changed to benefit specific businesses, citizens inevitably get less bang for their tax bucks than when such decisions are left to accountable administrators.
Legislative micro-management of resource allocation also is inherently unfair. When vendors are chosen, products selected or contracts awarded through overt politics, the established and powerful are usually favored over the innovative and small.
The problem is that rent-seeking behavior occupies a gray space. There are no rules determining where lines should be drawn.
Anyone, however, who is familiar with U.S. government history before the reform era of 1880-1910, or who has lived in a developing country, knows the waste inherent in systems where limits aren’t placed on legislative action.
Some political scientists refer to Brazil as a “patrimonial” state where politicians seek office primarily to distribute public resources to a limited group of supporters. From there to outright kleptocracy, such as Nigeria had under military government, is only a few steps.
Should Minnesota use corn-based de-icers on its roads? Yes, if accountable administrators in Departments of Transportation determine that’s the best use of public dollars, taking into account the efficacy of the product, any environmental benefits it may have and its cost.
But we’ll be better off as a state if our Legislature keep its hands off such decisions.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.