Chip Taylor

Rent seeking, rent extraction, and what the ...

This semester I'm taking a course in public choice economics. Public choice applies the principles of microeconomics in analyzing government actions.

According to public choice one of the major functions of government is to provide wealth transfers -- take money from one group of people and give it to another. (By the way, that's a positive statement of what government actually does, not a normative statement of what it should do.)

Interest groups organize to seek beneficial transfers from government. Those that organize most efficiently are the most effective at getting the transfers.

The transfers are inefficient in that they reduce social welfare. The losses come in two forms. You have the deadweight losses of the transfer-producing policies themselves. For example, if taxes are raised to provide a subsidy, you have the deadweight loss of the additional tax. If instead, the transfer is provided by enforcing a monopoly, you have the deadweight loss from reduced production and consumption.

You also have losses due to rent-seeking costs. The interest groups have to expend resources to get the transfer from government. They make political contributions, hire lobbyists, mount public relations campaigns, etc. In seeking the transfer (or "rents") they can afford to spend up to the amount they gain from the transfer. Those expenditures are a social cost. Rather than being used to produce something new, they just transfer wealth from one group to another. If the potential suppliers of the transfer (taxpayers) happen to organize to oppose the transfer (that doesn't happen often) they expend resources that are lost also.

There is a closely related theory concerning rent-extraction. In this theory, government officials -- mainly legislators -- take a more active role. Legislators use threats of adverse legislation to extract contributions and other forms of support from the firms that would be affected.

I mention all this because I'm trying to figure out how to classify these guys:

Washington lobbyist Jack Abramoff and public relations consultant Michael Scanlon quietly worked with conservative religious activist Ralph Reed to help the state of Texas shut down an Indian tribe's casino in 2002, then the two quickly persuaded the tribe to pay $4.2 million to try to get Congress to reopen it.

Dozens of e-mails written by the three men and obtained by The Washington Post show how they built public support for then-Texas Attorney General John Cornyn's effort get the courts to close the Tigua tribe's Speaking Rock Casino in El Paso in late 2001 and early 2002. The e-mails also reveal what appears to be an effort on the part of Abramoff and Scanlon to then exploit the financial crisis they were helping to create for the tribe by securing both the multimillion-dollar fee and $300,000 in federal political contributions, which the tribe paid.

Normally, you think of the lobbyists as brokers matching buyers and sellers of political influence. These guys appear to have taken a much more... um, "active" role in the process.

U.S. Senators are not amused:

Former lobbyist Jack Abramoff and public relations executive Michael Scanlon formed a secret partnership that corruptly influenced Indian tribal elections in order to bilk tribes that operate gambling casinos out of more than $66 million in fees, lawmakers charged yesterday during an unusual Senate committee hearing.

Abramoff, appearing under subpoena before the Senate Indian Affairs Committee, endured blistering attacks from senator after senator, turning aside all questions by invoking his Fifth Amendment right against self-incrimination. Scanlon dodged U.S. marshals who attempted to serve him with a subpoena compelling him to appear, according to Sen. John McCain (R-Ariz.), who with the panel's chairman, Sen. Ben Nighthorse Campbell (R-Colo.), has been leading the seven-month investigation into Abramoff's and Scanlon's activities.

The senators have good reason to crack down hard on this sort of behavior. Abramoff and Scanlon have basically been caught at the equivalent of poaching on the king's game preserve.

There is another article about the hearings here.