InterDisciplinarian

If you Can’t Beat them, Join them: The ‘End’ of Rent Seeking

By Paras Sharma


Biography of Author/Contact Information:

Paras Sharma is an economist and distinguished anthropologist who graduated from the University of Virginia. His specialty is in economic scenarios, future thinking, enacting rapid positive change, anthropology of intuition, public choice economics, demand revelation. Paras has worked at Arlington Court System, The Arlington Institute, a leading think tank, and also in the Private Sector Office of the Department of Homeland Security.


Abstract

Traditional public choice literature has taken for granted that governments are doomed to be forever lost in a whirlpool of rent seeking (a.k.a. lobbying).  However, recent advances in technology and the emergence of social networking on the Internet make it possible to completely eliminate lobbying.  The primary elections of 2008 have shown that small groups of individuals pooling their money on the Internet can outspend traditional donors such as large corporations.  This paper draws on statistics and data from the BLS to illustrate that such efforts can be easily replicated to completely wipe out all lobbying at the federal government level. 

Introduction

 

            Public choice, along with the rest of mainstream economic theory, has for too long taken a descriptive approach to studying rent seeking.  Public choice theorists have sought to describe the phenomena of rent seeking as it is, which is of course, as usual, a dismal failure of democracy.  In 1971, George Stigler showed that small groups of large corporations will seek barriers to entry, such as licensing fees, tariffs and monopolies.  The general electorate, composed of consumers will generally be unwilling and unable to oppose this because of the “differences between democratic political decision processes and market processes” (Stigler 1971 10).  One chief difference outlined by Stigler is that political decisions must be simultaneous.  This “makes voting on specific issues prohibitively expensive” (Stigler 1971 10).  How can a large heterogeneous population be brought to agreement on thousands of issues?  The coordination costs would be tremendous, if not impossible.

 Later, Peltzman expanded Stigler’s model to include the incentives that consumers have to mobilize against corporate rent seeking.  The larger the wealth transfer, the greater the opposition there will be to a corporation’s lobbying efforts.  Peltzman argues that this is an important constraint on rent seeking.  Peltzman and Stigler both take the same approach but highlight opposite features of the same phenomena.  Stigler emphasizes the power of large corporations and Peltzman emphasizes the limits imposed on these corporations by voters.  Neither explores the question, how can rent seeking be eliminated?  How would one go about this?  Instead, rent seeking is taken to be a fact of life.  Neither author includes the possibility of reform as another constraint (letter from Ed Clarke).

 Why?  A descriptive approach would demand that we examine how successful reform has been.   The track record for campaign finance reform is indeed dismal.  Campaign finance reform has followed a very predictable cycle: 

 

Phase One: Legislators impose limitations in response to popular disgust at the role of big money in politics

Phase Two: Big givers devise legal loopholes enabling them to continue giving large sums.

Phase Three: Reformers mobilize another wave of popular disgust and we return to phase one (Ackerman & Ayres  2002).

 

Taking previous failures at face value, public choice theorists have no choice but to accept that rent seeking is one of the many inevitable evils of democracy.  However, following Ed Clarke, I will argue that a normative approach to studying the problem of rent seeking is necessary. 

I will begin by discussing the problems of campaign finance reform, review existing models for reform and then propose a solution, which will completely eliminate rent seeking. 

Impediments to Campaign Finance Reform                                                     

 

In a recent book, Voting with Dollars, Bruce Ackerman and Ian Ayres highlight the chief impediments to campaign finance reform.  First of all, the “Supreme Court has repeatedly resisted” efforts to restrict campaign spending “in the name of the First amendment” (Ackerman and Ayres 3). Secondly, conservatives oppose the idea of publicly financing elections.  The third problem is the “cycle” discussed above.  Politicians just don’t have the self-restraint to pass truly effective legislation.  Any successful campaign finance reform paradigm must transcend these impediments.  Ackerman and Ayres propose their own solution in which every voter receives a patriot card equivalent to $50.  Voters can donate this money to candidates running for office in secret election booths.  Ackerman and Ayres estimate that this system could outspend money from private sources.  In 2001, private donations were approximately $3 billion.  However, if the 100 million people who voted in 2001 had patriot cards their total donations would have been worth $5 billion (Ackerman and Ayres 2002).  Thus, private spending would be overwhelmed. 

 

            Critiques of this Model & The Case of Ron Paul

 

The chief criticism of this model is the following: its government-centric approach. Faced with the prospect of diluted influence, would corporations not lobby to prevent such a system from being enacted?  In addition, it imposes further financial burdens on a government already spending much more than it can afford. 

The primary elections of 2008 have already shown that small groups of individual citizens can readily outspend large corporations.  In the fourth quarter Oct. 1 o Dec. 31 2008, Congressman Ron Paul raised more money, $19.95 million, than any other Republican candidate.  In other words, thousands of grassroots supporters were able to outspend large corporations donating money to other candidates.  I will argue that this example can serve as basis for a model in which individual citizens making small sums of donations can privately outspend lobbyists.  The Internet provides a mechanism which drives downs the coordination costs and makes it possible for subsets of the general electorate to challenge the influence of corporate lobbyists. 

 

Wikinomics & Campaign Finance Reform

 

The Internet has resulted in “profound changes in the nature of technology, demographics, and the global economy” which give rise “to powerful new models of production based on community, collaboration, and self-organization rather than hierarchy and control” (Tapscott and Williams 2006).  More and more people are turning away from hierarchical organizations such as corporations and government bureaucracies.  Instead they are pooling resources, creating new communities and co creating software.  Tapscott and Williams call this phenomenon “Wikinomics.”  Wikinomics is “the new promise of collaboration” “that will harness human skill and ingenuity more efficiently than previously witnessed” (Tapscott and Williams 2006).  I will outline a model in which individuals from the electorate use the Internet to raise and effectively outspend traditional lobbyists.

 

I will begin by detailing how the Internet allows people to surmount previously presumed difficulties:

 

·         Simultaneity: The problem of simultaneity.  Getting the electorate to coordinate their efforts on thousands of spending issues would be very costly.  The Internet allows people to communicate and coordinate their efforts without having to travel.  Furthermore, donating money online takes only a few minutes.  The voters need not research every issue. 

·         Cost of Becoming Informed:  Only a few people managing the website need to research how to divide the money up between different politicians.  Data on lobbyist spending is readily available from the Center for Responsive Politics.  In essence there is only one issue, opposing money from corporate lobbyists. 

·         Reluctance to Pass Effective Legislation:  This model does not need any government intervention.  Citizens spend their own money to dilute the influence of money from lobbyists.

·         Public Financing:  Public financing is not necessary to challenge rent seeking.  Private donations from the electorate are sufficient.

·         First Amendment:  There is no constitutional objection.

 

I will illustrate the model with a simple example.  Individuals create a website called “End Lobbying.”  The web site is committed to donating money to candidates so as to challenge the influence of lobbyists.  I will draw on data from the BLS and US Census to illustrate that income distribution in the U.S. is structured such that it is possible for individual citizens to outspend corporate lobbyists.  Let us assume that all individuals in the income bracket $40,000 to 49,999 donate to this website.  According to the US census bureau in 2005, 17.868 million men and women earned a salary somewhere between $40,000 and $49,999.  If each person donated a $100, the total would be equivalent to $17 billion.

 In 2005, total lobbying spending was $2.41 billion.  The $17 billion would easily dwarf traditional spenders.  In essence, corporations would no longer have any incentive to donate money since there would be no return on their investment. Money would lose its importance in elections and corporations would stop lobbying.  If the anti-lobbying websites disappeared then lobbying would begin afresh.  But then the anti-lobbying websites can be organized quickly to dilute corporate influence.  Eventually, corporations would eventually learn that it would not be worth the cost to start lobbying again. 

 

Limitations to the Model

  • Game Theory: Corporate lobbyists would not just sit back and surrender.  They would at first seek to pass legislation to limit such efforts.  An important constraint to individual spending is that no individual can contribute more than $2,300.   The general electorate consists of a much larger population than of lobbyists.  Even though lobbyists may have much higher incomes, given the $2,300 constraint they would still be outspent.  If there were no constraint, then lobbyists could effectively legislate away the rights of the minority. 
  • We have examined lobbying as it is reported to the government.  This approach would not be able to counter out-right bribes, since data is not available on how much was donated to whom.

 

Conclusions

 

The Internet significantly reduces the coordination costs that have long kept the majority of the electorate from cooperating to dilute the influence of lobbying.  It is indeed a very counter intuitive solution: waste even more resources to eliminate the waste of resources.  Eventually, private online donations would eliminate the waste of all resources.  The threat of online collaboration to outspend lobbyists would be imminent and corporations would be risking starting a price war, one they could never win. 

 

 


References

 

Ackerman, Bruce, & Ian Ayres (2002).  Voting with Dollars.  New Haven: Yale University Press.

 

Malcolm, Andrew (2008).  News Shocker: Ron Paul was biggest GOP fundraiser last quarter.  Online Blog.  Las Angeles Times. 

http://latimesblogs.latimes.com/washington/2008/02/news-shocker-ro.html

 

Peltzman, Sam (1976).  Toward a More General Theory of Regulation.  Journal of Law

and Economics 19(2).  211-240.

 

Stigler, George (1971).  The Theory of Economic Regulation.  Public Choice 2(1).  3-21.

 

Tapscott, Don, & Anthony D. Williams (2006).  Wikinomics. How Mass Collaboration Changes Everything.  New York: Penguin Group. 

 


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