Why Labor When You Can Take Rent?

Thieves in suits.

There are almost as many jokes about economists as there are about lawyers.  Economist jokes are not nearly so nasty because people don't feel nearly as threatened by economics.  Confused, befuddled, and generally perplexed, but the dismal science is nothing like as panic-inducing as a summons or writ arriving in the mail.

Alas, a lack of understanding of economics can be every bit as devastating to your personal fortunes as a lawsuit.  What's more, unlike a lawsuit, economic foul-ups can take down a whole country as we've recently discovered.

Much like Ben Stein's legendarily boring high-school economics teacher in the classic movie Ferris Bueller's Day Off, economists do themselves no favors.  Perhaps their worst crime is in recycling otherwise perfectly good and ordinary everyday words and using them as technical terms with an entirely different meaning.

Thus we come to our theme: the subject of Rent.

Rent: Not Just for Landlords

We all know what rent is, don't we?  It's what you pay to somebody so you can use something that belongs to them.  If you need a place to live and can't afford to buy a house, you rent an apartment from someone who owns an apartment building; when you fly to Florida to pay homage to the Mouse you rent a car while you're there; you can even rent power tools and whatnot at Home Depot.  The landlord or lessor has made an investment in buying a useful asset; they collect a return on that investment by allowing you to use their property for a fee.

This is not what economists mean by "rent."  In fact, as an economic term of art, "rent" means almost the exact opposite.

In the real world, rent paid is basically fair compensation for using someone else's stuff in a specified way for a specified period of time.

In economics, rent is money paid to someone for no good reason other than political power - basically, blackmail money, "protection," "baksheesh," and so on.

In our world today, "rent-seeking" in the economics sense is even more common than normal renting, and it's devastating our economy.

Consider Obama's proposed rule requiring Project Labor Agreements on all government construction projects over $25 million.  A PLA is, basically, a union contract.  In effect, requiring PLAs requires unionized workforces, shutting out 80% of American workers from getting the jobs.

Obviously, if you refuse even to consider 8 out of 10 potential vendors you're going to wind up paying more to get the work done.  Does the government receive better value for that overspending?  No - the building will be just the same, the only difference is that the cost is greater.

This is a textbook example of what economists call "rent-seeking."  The union is collecting economic rent - that is, taking money that has not been earned and for which no value is given, simply because of its political clout.

An economically rational president watching out for our tax dollars would never consider requiring unionized labor because it drives up costs.  Unions support Democrats, though, so Mr. Obama wants to reward them using your money as with the GM bailout that ended up with the UAW owning a big slice of the business.

Rent-seeking is found throughout all levels of government.  We've written about local zoning laws where corrupt politicians grant valuable construction permits in exchange for campaign contributions.

Does a permit provide any actual value or service?  No - it's just a scrap of paper, relevant only because of governmental power.  George Washington, Thomas Jefferson, and James Madison neither had nor needed zoning permits when they built their houses; we also note that they did so much less expensively than you can build anything today.

Customers at Gunpoint

Almost by definition, government taxes are rent-seeking because there is no connection between the tax paid and the service rendered.  To be sure, it's impossible to define a specific benefit to one single individual of having police, fire, courts, and the army to protect them, so in principle there's nothing wrong with government funding itself in that manner.

The serious problem arises when government outsources rent-seeking by using its regulatory power for the benefit of specific private companies or individuals and the harm of others, union requirements being only one example.

Whenever government meddles in the economy, it tilts the playing field in the direction of big business because big business can more readily afford to purchase access to politicians and bureaucrats.

The so-called cap-and-trade law?  A gift to Wall Street, which will now have a brand-new and entirely artificial "commodity" to trade and thereby earn trading fees.

Health-care reform?  All suggested versions of the bill have involved an "insurance mandate," in which all Americans are required to purchase health insurance.  What could be better for the health-insurance companies than for everyone to be forced, under penalty of law, to buy from them?  Is it any wonder that they're now in favor of Mr. Obama's plan?

Consider all the markets that have been vastly enlarged by government fiat.  Auto insurance is required for all drivers in most states.  When purchasing a house, a pest-control inspection certificate is mandatory, as (often) is an appraisal and home inspection.  Many states require emissions and other inspections on vehicles performed by private garages.

This is not to say these various services are necessarily bad things.  It's only logical to have your prospective new home checked for pests and hazards.  Why, though, is it appropriate for the government to force you to?

The favored vendors are simply rent-seeking to a greater or lesser extent.  No inspection could be free; but not just anybody can do an inspection.  You have to be formally certified by the government after having received approved training.  How is that not going to raise the cost?  To the extent it does, that's economic rent.

There's even secondary rent-seekers, such as the companies that provide the approved inspection training.  Who do you think works there?  Why, who but retired bureaucrats!  The ones who wrote the regulations are the most logical to teach them, of course; the more complex they are, the more valuable their expertise.

The way to think about economic rent-seeking is to ask two simple questions:

If the government weren't forcing me to do it, would I do it?


If the government weren't regulating it, would it be cheaper?

Ask these questions as you go about your day... and you'll be frightened by how many rent-seekers you find.  For each of them, there is a government bureaucrat safely ensconced at your expense, working hard each day to make sure you don't have any cheaper options, and the rent-collectors can make more money than they rightfully earn.

Last year, we wrote of labor going out of style in favor of collecting welfare; the easier the government makes it to collect welfare, the fewer people are willing to work.  This year's theme is labor going out of style in favor of collecting unearned rent; the more power government takes, the more bureaucrats there are who can tell us what we can and can't do, the more opportunities for friends and sponsors of government employees to collect unearned rent.

Who needs to get money through honest labor any more if you've got a friend in government?  Do we really want government-sponsored rent seekers running our health care system?

Petrarch is a contributing editor for Scragged.  Read other Scragged.com articles by Petrarch or other articles on Economics.
Reader Comments
Being as I'm just starting in a 'rent-seeking' industry (auto insurance) I thought I would say a bit on benefits that can come from governmental mandates.

Some government mandates can indeed be beneficial. Not requiring liability insurance would be quite devastating for people that get into an accident with someone choosing to opt out.

You could argue that a person can get UM/UIM (uninsured motorist/underinsured motorist) protection. However, if liability insurance wasn't required the cost on UM/UIM coverage would be very high.

This to me seems an issue of not allowing one persons right to trump another persons. An uninsured driver is still, of course, liable for damages that they cause. However, in most cases it would be impossible for the claimant to receive money from the liable party.

It is each persons responsibility to ensure that they are able to indemnify (to restore to a previous condition) for harm that their actions might cause. Your right to take on risks your self can have a very large effect upon my rights. In this case the ability to choose to have insurance or not can have a large and direct negative effect on another person and I therefore see it as a reasonable government requirement to have car insurance.

As to the PLA, I did some research to understand exactly what it was. The characterization of PLAs in the article is slightly misleading. PLAs essentially require short term unionization of workers while they are working on a given project. While I certainly do agree that the government require PLAs is wrong and only serve to increase the power of unions and increase costs it is different than saying that 80% of the work force will be unable to get government contracts.

Here are two websites on PLAs:
Pro: http://www.westcentralbtc.org/project%20labor%20agreements.htm
Con: http://www.nrtw.org/neutrality/na_6.htm
September 12, 2009 12:03 PM
Add Your Comment...
4000 characters remaining
Loading question...