Rent Seeking: Is The Energy Bill Really A Farm Bill?

26 Comments / Economics / By

Lynne Kiesling

Because that’s what it looks like to me. And to Jim Lucier of Prudential Securities, who took the words right out of my mouth on Tuesday’s Kudlow & Company. In all of the commentary and analysis that I have read, very few people believe that this bill will do anything constructive to remove obstacles to competitive electricity markets, reduce our overall energy consumption, or provide valuable direction to energy technology research. Its most noticeable provision amounts to little more than a farm subsidy under a different name. From a recent Reuters article:

To stretch America’s gasoline supplies, the leaders of a joint Senate-House conference committee racing to finish a U.S. energy bill agreed on Monday to almost double production of the motor fuel additive ethanol to 7.5 billion gallons a year by 2012. …

The ethanol compromise is larger than the 5 billion gallons approved by the U.S. House of Representatives, but smaller than the 8 billion gallons called for by the Senate.

Ethanol, derived mostly from corn, is a popular political cause in farm country, where it is regarded as a homegrown answer to oil imports and a boon to farm income.

Ethanol lobbying has paid off, as has energy industry lobbying:

Oil and utility companies such as Exxon Mobil Corp. and Southern Co. spent $367 million over the last two years pushing the U.S. Congress to pass energy legislation. For many, the money was a good investment: lawmakers are poised to pass a measure providing about $11.6 billion in taxpayer subsidies. [NOTE: if you read the whole article, I think the author misunderstands the effects of PUHCA repeal, for what it’s worth.]

Increasingly, we have become resigned to the fact that legislation like this is nothing more than thinly-disguised excuses for subsidies to well-organized parties that are good at lobbying. One comment I’ve heard from folks who are knowledgeable about energy and favor competition and markets is that the most important thing about this bill is getting is passed and over with so we can get on with life. That’s hardly a ringing endorsement!

Why have we allowed ourselves to become so blas? about rent seeking? Even in as large, prosperous, and complex an economy as ours, an expenditure of $376 million on lobbying is a huge waste. And that doesn’t count the lobbying expenditure of ethanol and environmental interests. Pretty much flat-out deadweight loss, with very little creation of new value. Where’s the outrage? Are we so beaten down by the sclerotic bureaucracy of politics that we just chalk it up as essentially another tax, and then get on with our lives?

That difference between the active engagement of concentrated interests who will benefit from legislation and diffuse interests who will pay the price is at the core of Mancur Olson’s analysis of rent seeking. The Rise and Decline of Nations applies his arguments from The Logic of Collective Action to analyzing growth and decline in stable societies (i.e., not being ravaged by war or political unrest). He argues that in stable societies, decline occurs because groups organize to try to capture increasing shares of economic surplus. Sadly, this race to capture requires the expenditure of resources, which is what wasteful rent seeking is.

Note also that the appearance of decline is likely to be slow and incremental, particularly if the society is dynamic and productive in other ways. So we have to compare the drag on the economy that rent seeking produces in our stable society relative to the total surplus that we would create if we were not saddled with the wasteful expenditure of rent seeking. Since we have to compare the very-real results we experience in the presence of rent seeking with hypothetical results we don’t experience, we have a problem of “the seen and the unseen” from Bastiat. We don’t see the true benchmark against which to compare our actual state, so we don’t evaluate it properly.

Also of note: if you look at the the Google news search for recent articles on the energy bill, note how varied the headlines are. There are so many different regional dimensions to this bill, it’s amazing. Something for everyone to love and hate, although for my part I see very little of substance to love. I guess that’s how logrolling, vote trading, and pork barrel politics works. That complex set of incentives is how organized groups take advantage of our indifference.

26 thoughts on “Rent Seeking: Is The Energy Bill Really A Farm Bill?”

  1. The Glittering Eye

    Catching my eye: morning A through Z

    Here’s what’s caught my eye this morning: Post title of the day from ?No Pasar?n!: Some liberals appear to be arguing that our tolerance of our own tolerance is making us intolerant of other people’s intolerance, which is intolerable Mover…

  2. The Glittering Eye

    Catching my eye: morning A through Z

    Here’s what’s caught my eye this morning: Post title of the day from ?No Pasar?n!: Some liberals appear to be arguing that our tolerance of our own tolerance is making us intolerant of other people’s intolerance, which is intolerable Mover…

  3. The Glittering Eye

    Catching my eye: morning A through Z

    Here’s what’s caught my eye this morning: Post title of the day from ?No Pasar?n!: Some liberals appear to be arguing that our tolerance of our own tolerance is making us intolerant of other people’s intolerance, which is intolerable Mover…

  4. Zathras

    This subject is one where Lynne’s comfort with academic and intellectual analyses and distaste for politics is a major handicap.

    Rent seeking is undertaken in proportion to the probability of its being rewarded; outcomes understood in advance to be highly unlikely will probably not be sought through the expenditure of vast quantities of time, effort and money. In Washington, it isn’t necessary for large majorities to think a policy idea is unwise for everyone to understand it isn’t going anywhere. Many times all that is needed is for the President to back up subordinates determined to block it.

    Granted that in a country with a very large government some level of rent seeking is inevitable. Even with that concession there is a vast difference between this Republican administration and President Reagan’s. Reagan was famously disengaged from policy details in many areas, including this one. But he was willing to appoint and empower a number of officials starting with David Stockman and Martin Anderson in 1981 who actively campaigned against it and were known to speak for the President. They did not always win, but they won enough so that many terrible corporate socialism ideas — the Carter energy subsidies, for example — were scrapped and others were severely limited. Support for ethanol was one of these.

    The Bush administration is very different. Such gestures as it ever makes toward free markets and smaller government are only that — gestures. As a practical matter it will support any subsidy for which a sufficiently large number of likely Republican voters or a sufficiently generous group of campaign contributors can be persuaded to favor. It can, and is often eager to, be bought. Democrats seeking political mileage from the charge that the Bush administration is excessively ideological have successfully obscured the fact that it is precisely the small role of free-market ideology in this administration relative to its predecessor that makes Washington so much more attractive to potential rent seekers than it was less than twenty years ago.

    Organized business interests and their clients in Congress therefore have strong incentives for rent-seeking and reduced inhibitions against it.

  5. Lynne

    That is precisely why I appreciate readers like you, with comparative advantages that are complementary to mine! I can lay out the arguments against it, you can spell out the reasons why it persists, and hopefully we can all together come up with ways to have less and less of our important economic activity within the political realm.

  7. FishEpid

    I recall that in a study of political contributions vs. future benefits from Congress the expected returns for business “investments” in politicians was surprisingly uniformly about $10 for every dollar “invested”, whether it was by Gallo Wines, farm cooperatives (ethanol these days vs. milk in those?) or whatever organization. Also interesting was how business split their investments across political parties. Political ideology had little to do with it. An interesting read is “Organizational America” by Scott and Hart. Their thesis way back in the 70’s was that the business organization was surpassing the individual in importance in public policy and that business organizations are amoral by design and function. The most interesting part of their thesis was that the management class adopted the values of the corporation as they rose within its power structure until the personal values held by those at the very top could not be distinguished from corporate values. In business, it isn’t immoral to make wise investments that have a positive return to shareholders.

    On the politicians’s side, how else are those interested in elected federal office going to obtain the funds for campaigns? What does a senate seat cost these days – about $70,000 per week of office? The money has to come from somewhere. Both parties are stuck at this trough so real campaign financing reform hasn’t a ghost of a chance. Why does incumbency have such an advantage? Because the investment risk is lower – assurance of delivery is much higher. Looks like a market to me.

  8. Scott Peterson

    A particularly outrageous example of wasteful lobbying expense is the funds that communities around the USA are allocating to fighting base closures announced in the latest round of BRAC.
    In essence, US taxpayers are spendingg money to force the federal government to spend more money.
    So much for the idea that Americans prefer lower taxes and less government.

  9. Scott Peterson

    A particularly outrageous example of wasteful lobbying expense is the funds that communities around the USA are allocating to fighting base closures announced in the latest round of BRAC.
    In essence, US taxpayers are spendingg money to force the federal government to spend more money.
    So much for the idea that Americans prefer lower taxes and less government.

  10. Scott Peterson

    A particularly outrageous example of wasteful lobbying expense is the funds that communities around the USA are allocating to fighting base closures announced in the latest round of BRAC.
    In essence, US taxpayers are spendingg money to force the federal government to spend more money.
    So much for the idea that Americans prefer lower taxes and less government.

  11. Robert Schwartz

    Congress seldom does anything that is not an incipient disaster. More than physicians, they need to reflect on the motto: “Primum non nocere.”

  16. Ed Reid

    We need to take a few minutes to think about the possible upside of the new energy bill?s expanded ethanol mandate. Doubling ethanol production would also double the availability of ?spent grain?, left over from the process. Un-dried spent grain retains ethyl alcohol. Spent grain is currently used as animal feed, although FDA severely restricts the percentage of spent grain which may be fed to animals. Perhaps, with the greater availability of spent grain in the future, FDA would ease the restrictions, which would present an interesting possibility.

    Japan?s famous, extremely tender Kobe beef is produced by feeding the steers beer, particularly immediately before slaughter, and massaging the steers to keep their muscle tissue supple. The alcohol, immediately before slaughter, reduces the production of adrenalin by the steers; adrenalin in the bloodstream at slaughter toughens the beef. The US version of this very tender beef could be fed higher percentages of un-dried spent grain; and, the massage could be provided by Mexicans, who ?will do jobs even US blacks won?t do? (Thank you, President Vicente Fox!).

    Since the increased availability of spent grain (from the increased ethanol production) would be the result of the legislative equivalent of a carnival sideshow, the US version of this very tender beef could be called ?Kewpie Beef?, after the dolls which carnival game operators grudgingly award to winners at their games. In fact, one of the dolls, Maize Kewpie (http://onceuponatimecollectibles.com/kp_maize.htm), could serve as the spokesperson for Kewpie Beef.

    Of course, this concept makes the energy bill sound even more like a farm bill. Oh, well!

  25. The Commons Blog

    Energy Bill or Farm Bill?

    From my prespective, with so much pork it might as well be considered a farm bill, especially given all the sops to ethanol. Lynne Keisling addresses this question from an economic perspective (and with a bit more seriousness) here….

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