Rent-Seek and You Will Find

Rent-Seek and You Will Find

(HUD), the federal agency charged with improving home ownership and low-income housing availability. Fifteen years ago, when I had this conversation, I didn't understand what he meant.

As Director of the Master of Public Administration Program for UNC-Chapel Hill in the early 1990s my job was training city and county managers, sending them out to serve the public weal. Public grants were the mother's milk of city management; why would any city official think twice about getting free money to help citizens?

The answer is one of the paradoxes of public choice: free money isn't free. In fact, you have to pay for free money twice: first you have to collect the money, out of tax revenues. And then you have to pay for the money again, because the benefits are dissipated by what economists call "rent-seeking." Let me explain.

The technical definition of rent is any return to investment, or effort, that exceeds the opportunity cost rate of return. So, Alex Rodriguez of the New York Yankees earns a large rent, or premium, because of his scarce talents as a baseball player. He could earn a living as a banker, or a waiter, or something else. But it is unlikely that he could earn anything close to the $25 million per year he makes as a baseball player. Those rents encourage competition. And in most economic situations, that competition for profits produces benefits. But in politics, competition for those rents is often destructive.

The greater the rent, the greater the costs people are willing to incur to win it. When government hands out what appears to be free money, people are going to scramble to get some of it, incurring costs as long as those costs raise the chances of winning the "free" money sufficiently.

Robert Tollison, one of America's premier students of public choice and government, defines rent-seeking this way: "Rent seeking is the expenditure of scarce resources to capture an artificially created transfer." Competition for government goodies-rent-seeking-is a wild goose chase, no matter how well- intentioned the goose or the chasers.

The city official told me that his office employed 15 people whose sole jobs were to identify and win federal grants. Their total salaries, and the staff and utilities required to support them, exceeded one quarter of the federal funds they had secured in grants the previous year. It seems like a pretty good deal to spend only 25 cents to win a dollar. But if you think about all the other cities doing the same thing, you realize that this system of distributing grants has some pretty perverse costs.

And the costs were climbing. Other cities around the nation, in the mid-1990s, had begun to get better at the HUD-grant game. At first, Charlotte had been able to win grants with a relatively short proposal, and some supporting documents. But as time passed, the amount of effort and resources required to win was increasing. Not only was Charlotte spending more and more city tax dollars just to win grants funded by federal tax dollars, but Charlotte was winning less and less often. It did sound like a dysfunctional system.

But I was stumped: this just seemed like competition. Isn't competition supposed to be good? How could the outcome seem so bad? It turns out that rent-seeking "competition" is a contest for a fixed price, a zero-sum problem that works like a transfer, at best. Competition in markets has no fixed price, and is robustly positive-sum. In politics you try to move money around and take credit for it. In markets you try to create value and make profits.

Competition in Other Places

My understanding of competition, after all, was that of the economist who studies markets. Lots of choices, lots of choosers, prices driven down toward the cost of production. New goods and services come constantly to the market, because producers' self-interest forces them to think of new and better ways to serve customer needs.

Can public policy work the same way? To put it in other terms, is competition always good? Is an increase in competition always the first solution we should think of, to any problem?

In political markets, there is good competition and bad competition. The fundamental human problem is to foster the good and block the bad. If the design of the institution fails to render the clash of self-interests beneficial to the community, then competition can make bad things happen to even the best people.

Not all political competition is bad. Madison, in Federalist #51, famously argued that a government characterized by separation of powers among its branches would be more stable and more reliable than other forms. The reason? Competition! "Ambition must be made to counteract ambition .... " But, as we will see, not all political competition works this way.