After we saw what rent seeking was, we’re going to look into the different ways in which it can be carried out. Our first example is lobbying, which is often done by corporations to sway the decisions of politicians in their favour.
An investment with a 19900% return – sounds absurd, and even impossible, but this was the return in taxpayer cash that the Fortune 100 received from their spending on lobbying. The companies in the Fortune 100 spent over $2 billion on lobbying campaigns to block or push bills, laws and decisions that could affect or improve their business, returning over $400 billion in taxpayer money in the form of government contracts, subsidies and other forms of corporate stimulus. One disclaimer for this stat is that some of this money may have gone to the companies without lobbying, but it is clear that lobbying is the main cause of such an excessive figure.
Lobbying essentially works by hosting discussions, making donations and various other forms of winning the favour of politicians. This is much more of an issue in the United States than the UK, as there is much less regulation and scrutiny on this behaviour in America. Although it is illegal to pay a politician to vote for a bill that you want to pass (this is quite literally bribery), there is supposedly no problem with talking to politicians and then making donations to their campaign. The main premise for why this is seen as more favourable than the bribery mentioned earlier is that the politician can still do whatever they want when they make the decision, as a donation (at least officially) does not have any conditions attached to it.
However, this is just poor reasoning and wishful thinking, as politicians know that if they go against the lobbying then the money will stop coming, and despite their elected role, most politicians still act in their own self-interest. Due to this system of essentially turning a blind eye, companies have been able to lobby as much as they want, landing excessive government contracts for things that may not even be needed and subsidies for an industry that is failing or just refusing to innovate. This leads to inefficient allocation of tax revenue, where money which could have been spent on projects that actually needed the investment and were vital to the economy ends up in the hands of corporations who didn’t need it at all.
This is a perfect example of rent seeking, as these Fortune 100 companies have made a return of $398 billion on their lobbying expenditure, yet no additional productivity or output has been added as the companies still make the same thing and provide the same services, and the government has essentially paid extra for nothing. It is not just the Fortune 100 that do lobbying though, as companies across the world, big and small, carry out lobbying from a national to a local level. Although it is less prominent in the UK, it still happens, and one such case is an event that is still fresh in British political history – Liz Truss and Kwasi Kwarteng’s botched budget. In this case, the lobbyists were free-market think thanks, such as the IEA, the UK’s largest think tank. They were present at various Conservative conferences and campaigned with senior politicians, leading to the decision to cut taxes and implement various other radical free market policies. This threw the UK into chaos, as it was completely the wrong time to do such a thing. Inflation was climbing rapidly, and these actions would have exacerbated it, and yet lobbying (as well as incompetence) led to the irrational decision that caused even further harm to the UK economy.
As I have covered in this article, lobbying is a very prominent and visible example of rent seeking, and one that can be seen in the United States and sometimes also in the UK. We have also seen how it can cause irrational decision-making, and negative externalities due to missed spending opportunities and catastrophic side effects. Next time, we’ll take a deeper look at government contracts, which I’ve already mentioned here, but there is a lot more to go over and many case studies to observe and learn from.
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