Chip Taylor

The worst sort of rent-seeking

You might say that there are degrees of rent-seeking. Sometimes the politically connected lobby the government and obtain a subsidy for doing something they would do anyway. The losses to society in a case like this are the costs of lobbying and the deadweight loss of whatever tax is used to effect the transfer. That is bad enough.

Much worse is a case in which the subsidized activity itself is the stupidest sort of resource wasting make-work that has no useful purpose whatsoever. In a case like this, society would literally be better off if we just gave the rent-seekers the money and asked them to do nothing in return.

At Economist's View Mark Thoma points to a Time magazine article exposing rent-seeking of the second type. Mark excerpts the article, here is an excerpt of his excerpt:

When oil prices fell, ... the synfuel credit remained on the books, dormant, until a group of enterprising entrepreneurs came across it in the 1990s and saw a way to transform coal into gold. The coal can look and burn like regular coal. The IRS rule for transforming coal into synfuel--and getting the tax credit--requires only that the substance be chemically altered in some way. The alchemy that satisfies the IRS is a simple process: some plants spray newly mined coal with diesel fuel, pine-tar resin, limestone, acid or other substances--a practice that industry critics call "spray and pray." Other operators mix coal-mining waste with chemicals, coat it with latex and blend it with untreated coal to form briquettes. ... Those synfuel operations were a far cry from the state-of-the-art plants that Congress had envisioned ...

For owners and operators, the whole point isn't creating a profitable new energy resource ...; it's about collecting the tax subsidy. Progress Energy Inc. ... reported ... that in 2002-04 its synfuel-production losses added up to $400 million. No problem: the company claimed $852 million in tax credits, magically transforming a money-losing operation into a money-making business with $452 million in profits--courtesy of the American taxpayer. .... And Progress Energy is not alone. ...