Political Rent Seeking

Mention the word rent to a layman and it congers up images of the payment for temporary use of an apartment, house, car or other type of property. A renter simply pays for the temporary use of a piece of property while actual ownership remains with the owner who rents out the property in exchange for a stream of payments.

However, to an economist the term rent seeking, or political rent seeking as it is often called, has a different meaning.

Here one is not talking about an owner seeking someone to rent his property, but, rather, an individual or, more commonly, a group seeking the enactment of legislation that is economically favorable to them.

Unlike a tax cut or removal of a restrictive regulation that benefits those paying the taxes or those operating under the restrictive legislation, rent seeking is the enactment of tax or regulation that benefits a special interest group at the expense of the rest of society.

For instance, American consumers as a group pay millions of dollars more than they have to for sugar (the cost includes both direct purchases of sugar for consumption as well as the added costs of goods that contain sugar).

To protect American sugar growers, laws have been passed to limit the importation of sugar. Since farmers in some foreign countries can produce sugar at a lower cost than American farmers, the American consumers are denied access to the less expensive foreign sugar and are thereby forced to spend more for sugar.

Further, American sugar producers, lacking competition from the foreign producers, have no incentive to become more efficient in order to reduce both their costs and prices.

While the total cost of the program costs American households, as a group, millions of dollars every year, each American household only pays a few cents more each time they purchase sugar or products containing sugar.

However, this adds up to a few hundred dollars per year for each household. While much larger, a few hundred dollars per year is still less of a burden than the cost in terms of time and money it would take to lobby for a repeal of the laws that give sugar producers their protection from foreign competition.

Sugar producers, on the other hand, are a relatively small group, and when the millions of dollars in extra revenues are divided among these people the amounts per producer and worker are significant.

As a result, while consumers have little incentive to try to get rid of the program, the producers have a strong financial incentive to devote significant time and money to lobbying politicians to keep the restrictions in force.

This is similar to the plot in the Harrison Ford movie The Firewall in which a gang of thieves hatches a plan to run a computer program on the computer of a major bank.

The program is designed to transfer a few dollars from millions of individual customer bank accounts to their account. The amount taken from each account is very small and will not be noticed by most people while the total sum deposited to the thieves account will be in the millions.

As a result, the thieves are willing to risk everything to execute their plan. The difference here is that it is a crime to take money in this manner, while rent seeking, as in the case of sugar, is perfectly legal.