Franke: Rent-Seeking or Just Honest Graft?

May 30, 2018

by Mark Franke

The discipline of economics is at once both brilliantly simple and obtusely complex. Ask a class of undergraduates taking Econ 101 for a general education elective, and I dare say you will find no takers on the former proposition of simplicity. One does hope, however, that economics majors will place themselves mostly in the simplicity column.

One problem is the terminology economists use to describe theories and concepts. Take rent-seeking. The layman would naturally assume, though incorrectly, this has something to do with landlord-tenant interaction. The term “rent” was coined during the era of classical economics to mean obtaining a payment in excess of what is actually required for that purpose. In layman’s language, getting more for something than what it is worth.

Another definition of rent-seeking can be found on the website of the Library of Economics and Liberty. Baldly stated, it is the use of the political arena to obtain benefits for oneself to the detriment of others.

In a word, connections.

How does this eighteenth century concept affect us today? One obvious example is the use of state licensure requirements to enable one to engage in a specified trade or profession. While some licensing can be seen to legitimately protect the public, such as medical doctors, how much protection does one need when going to a barbershop?

So what, you ask? Think of the time and money spent by the prospective licensee to get the requisite training, complete the seemingly self-procreating government forms, and pay the state fees. These costs can only be recovered through raising prices to customers.

The clear purpose of licensing is to restrict entry into the market, enabling those already on the inside to charge more without too much worry about competition.

Now take this to a larger stage. Tax incremental financing and property tax abatement certainly fall under the definition of rent-seeking. One business gets special tax breaks under the promise of bringing increased economic activity to a limited geographic area. Meanwhile, everyone else including that business’s competitors pick up the tab. The bird in the bush is much more attractive to government officials than all the ones already in hand.

Sometimes the reach of these schemes boggles the mind. Fort Wayne is currently considering a $221 million renewal project to “repurpose” the vacant General Electric industrial campus near downtown. One city councilman calculated the net final completed project value to be only $80 million based on cash flow analysis, and the project underwriter confirmed this. Why would any developer in a truly free market invest his own money on a scheme like this? Obviously no one would, since it appears a huge portion of the funds in this project are coming from the government (read: taxpayers).

This isn’t a one-off case for Fort Wayne. A recent riverfront project cost the city (again, taxpayers) $35 million while a real estate appraiser valued the finished property at only $11 million. One can’t help but wonder if the going rate charged by the rent-seekers is firmly established at three times true value.

Tammany Hall boss George Washington Plunkitt described this kind of activity as “honest graft.” After all, one is only pursuing one’s personal interests in alignment with the public interest. If the skids have been greased in advance, so much the better.

As Boss Plunkitt shrewdly recognized, there is nothing illegal in all this. Unethical, yes to my code of right and wrong. Inefficient allocation of resources, certainly by any application of economic principles. Unfair to those on the outside looking in, you betcha.

This has received almost no investigative reporting by the Fort Wayne newspapers. With traditional journalists either unable or unwilling to fully report on these deals, it is incumbent on Mr. and Mrs. Joe Citizen to hold politicians accountable at the ballot box. It should come as no surprise when “drain the swamp” populist rhetoric resonates with voters.

It sure is hard to avoid becoming cynical these days.

Mark Franke, an adjunct scholar of the Indiana Policy Review, is formerly an associate vice chancellor at Indiana University-Purdue University Fort Wayne.



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