A Nation of Rent-Seekers?

08/06/2010 04:05 pm ET | Updated May 25, 2011

Recent economic news has been unsettling. With stimulus funds mostly spent, we still lack sufficient economic growth (2.4 percent) to reduce a stubbornly high unemployment figure (9.5 percent). With economic uncertainty, companies aren't investing, and consumers aren't spending. The personal savings rate has gone from almost zero to over six percent, effectively establishing "the paradox of thrift": saving is generally good -- except when it constrains economic growth.

The congressional midterm elections are less than 100 days away, and our political elites are debating whether we need more government intervention in the economy (another stimulus, tax increases or decreases) or less government and less regulated market activity. One side trusts the private sector to do what it normally does -- with appropriate incentives. The other side trusts the government to do what the private sector is unwilling or unable to do.

Economics is, fundamentally, about human psychology, and we now have a psychological stalemate. Or perhaps worse: the possibility of a deflationary spiral where consumers defer spending today because they expect lower prices tomorrow. At this time, the ultimate direction is unclear.

The outcome of these debates may well be settled in ways that impede innovation, efficiency, productivity and economic growth. At issue is how wealth in this country is created. In the former Soviet Union, the government attempted to create wealth by fiat: five-year plans that dictated production and consumption. The result was a miserable failure.

But perhaps there's another troublesome approach: where the private sector tries to influence government to favor one player over another. The result would be a strange hybrid -- a system where political decisions, not sound economic policy, become increasingly important in allocating wealth.

An example is the Congressional earmark, often criticized by both political parties but an enduring fixture in the annual appropriations bonanza. Obtaining a line-item earmark trumps the uncertainty and cost associated with open competition. Lobbyists and their clients love earmarks as cost-effective ways to "do business." We end up buying weapons the Defense Department doesn't need. Campaign contributions are often associated with successful earmarks. It's a new iron triangle: Members provide earmarks, the recipients provide campaign donations and lobbyists pave the way.

Wall Street's recent excesses and the shortcomings of our own market economy led many to question the efficiency of democratic market capitalism. Whether the area is financial services, energy policy, taxation levels or health care, there are important (and healthy) debates ongoing about the appropriate level and amount of government regulation. At the same time, there is a growing (and unhealthy) tendency toward rent-seeking in this country -- the use of political power to redistribute, rather than to create, wealth. Left unchecked, rent-seeking will lead to more bureaucratic inertia and economic sclerosis.

In addition to congressional earmarks, here are some other examples of rent-seeking in our political system:

  • Republican members of Congress in their "Sell the Fight" plan met with dozens of Washington, D.C., lobbyists to warn that their political contributions are too favorable to Democrats. These Republican congressmen are watching how lobbyists allocate their PAC dollars. The not-too-subtle message is that if and when the GOP regains control of the House, these lobbyists' access will depend on their PAC contributions.
  • Congressional leaders notoriously assign freshmen legislators to key committee assignments that will maximize their exposure to lobbyists, PACs and contributions. Since freshmen are often the most endangered Members of Congress, such positioning helps them build early war chests for re-election.
  • After meeting with an oil company CEO, former Ways and Means Committee Chairman Charles Rangel voted for a tax provision saving the company $500,000,000. Rangel had earlier opposed the same provision. Eleven days later, the CEO sends a $100,000 check to support the Rangel Center at City College of New York.
  • Los Angeles Congresswoman Maxine Waters, in describing her meeting with senior Treasury Department officials to secure bailout funding for a bank in which her husband was a shareholder, portrayed her role as making sure that her constituents get their "fair share" from the federal government.
  • And recently, reports surfaced that four health-care companies were considering the creation of a non-profit to influence regulations being written for the new health-care legislation. The Center for Public Integrity's blog quoted one industry source: "the objective is to make the House more accommodating to concerns that have been raised." By concentrating on close races, the group will "focus resources to influence campaigns."

These health-care companies undoubtedly have legitimate regulatory concerns - and that is precisely why they should retain lobbyists and counsel to articulate their positions through the appropriate and transparent public administrative procedures. So what do they really mean when they want "to make the House more accommodating?" Isn't that a threat?

In 1999, when the Committee for Economic Development launched its campaign-finance-reform work, it said that as business leaders, the goal was to compete in the marketplace, not in the political arena. Accordingly, CED supported ending unregulated soft money and increasing the hard money campaign limits. Much of what CED favored was implemented in the 2002 Bipartisan Campaign Reform Act.

Many companies and their CEOs endorsed CED's work, but many did not. Only one company, however, withdrew its financial support from CED because of its campaign finance reform work. When I asked this company -- a southern-based telecommunications company with a longstanding relationship with CED -- whether its financial support stopped because of CED's position on money and politics, a senior official said absolutely not: The company's philanthrophic priorities had simply shifted. And a few sentences later, this official added: "you have to understand that Mitch McConnell is a very important senator to this company."

Senator McConnell, at the time, was the lead opponent of BCRA and had written directly to some CED Board members urging them to resign from CED. None did, and the only withdrawn support was from this company which, incidentally, was one of the first (and few) companies to skirt BCRA through contributions to a Section 527 political group. And more recently, it has been disclosed (in the context of Congressman's Rangel's response to House Ethics Committee charges) that this same company contributed to the McConnell Center at the University of Louisville.

So this is how today's Washington really works. Bipartisan rent-seekers abound, and our elected representatives like it that way. But what about the American people?

Ending these practices surely is something that right and left can agree on. If the Tea Party movement worries about the threat of Big Government, then perhaps it should channel some of its energy into shutting down this influence-peddling system. And Democrats, indeed all Americans, should remember President Kennedy's most famous phrase about asking what you can do for your country, not what your country can do for you. Or are the late President's words too naïve for today's more modern and sophisticated world?

Charles Kolb served in the first Bush White House from 1990-1992 as Deputy Assistant to the President for Domestic Policy and as General Counsel of United Way of America from 1992-1997. He is now President of the Committee for Economic Development in Washington, D.C. The views in this article are solely the author's.