An Economic Failure on the Liberal Side

I spent some time last week discussing where Romney's economic plans will fail - how he ignores the problems of positive and negative externalities, imperfectly informed and rational agents, and the effect of wealth differences on the "invisible hand" of the market.

Today, I will explain a failure on the other side.

It is a failure to recognize that big-budget government agencies will be hijacked to provide massive benefits for those who have the resources to manipulate the system. Well-intentioned bureaucrats cannot prevent this. The economics make it far too easy for those with resources to loot the public trough.

One manifestation of this is the way that regulated industries take over the agencies that regulate them. It then becomes a tool for stifling competition by increasing the cost of forming a new company and entering the market. It also becomes a tool for regulations that add to everybody's costs and funneling that money into the pockets of a few.

Simply imagine a hypothetical program that will take $1 out of each of our pockets and give it to Company C. We each are $1 poorer. Company C is $300 million wealthier. For $1, it is not even worthwhile for you or me to even know that this program exists. The 15 minutes it takes us to read the basic description already represents a net loss. Investing the time and paying the money to campaign against it is foolish.

Yet, Company C can invest $50 million in campaign contributions, lobbying, paid advertisements, phony studies, talking points handed out to sympathetic media personalities, getting "findings"posted on sympathetic web sites, hiring people to cruise the web looking for discussions to "contribute" to - all of this, and still make a $250 million.

In fact, using these hypothetical numbers, the company can invest in 5 projects of this type, fail 5 out of 6 times, and still make a substantial $50 million profit. It can afford to set up departments geared specifically toward this type of profit-seeking.

Most of the bills that legislators present are not written by the legislators or the staff. They are written by lobbyists who present the text to the legislator saying, "I want you to support this bill."

We do not need to imagine a corrupt legislator. The lobbyist as done her job and can bombard the legislator with arguments as to why the bill is a good idea. "It helps the economy." "Our company will produce more jobs." All of this ignoring that the money taken out of the pockets of others and funneled into the corporate bank accounts is money they will not be spending and jobs that will not be lost as a result.

Where is the legislator going to find the counter-arguments? It does not pay for anybody else to go through and do independent research. The companies that make these proposals get wealthier and "invest" some of that wealth in more proposals. Anybody doing opposition research gets poorer with every proposal they investigate. Even a person who takes up this task out of a sense of civic responsibility will find themselves unable to afford to continue.

The effectiveness of the corporate lobbying is augmented by the revolving door between the regulatory agency and the business. The business uses some of its profits to hire those who leave the agency. These people then have connections with those in the agency. They understand its inner workings. They know the people they leave behind - know how they think and what motivates them. They know the regulations and the weaknesses in enforcement. They know how to bring about a success rate of better than 1 in 6 - and that makes them worth a great deal of money to the companies they regulate.

Even those who remain in the agency understand these rules. "If I anger these companies I am supposed to be regulating, I can kiss goodbye any hopes of a high 6-figure salary with stock options when I leave."

We do not need to postulate "corrupt" regulators in the classical sense to get these results. People judge their conclusions at least as much on emotion as they do on evidence. They believe what they want to believe - and the potential for huge salaries and other benefits provide a lot of weight for what one wants to believe. The arguments that will ultimately allow a person to profit simply "feel" better than those that do not. They "make sense" and "seem true".

An examination of climate change denial shows this phenomena. The mere fact that these truths cut into some people's profits causes them to see climate change as a hoax and to see problems that reason alone would never accept. They are not seeking to cause harm. They are simply refusing to accept the fact that their behavior (what profits them) produces harm.

A lot of the work is not even done on the legislative level. Rules have to be interpreted. It is worthwhile for the company to hire the lawyers and "experts" to argue for one interpretation, while the harms are so spread out that it is not worth it to anybody to argue against it.

We can well bet that since Obamacare was passed, the medical industry has been hard at work fighting for interpretations that will cost each of us $1 here and $5 there - but which will funnel hundreds of millions of those dollars into the pockets of the companies making the investments. Yet, neither you nor I have the resources to even keep track of what us happening in the lower reaches of the agencies managing this program.

The industries being regulated are sure watching, and certainly investing money to get the results they want.

The rest of us - we lose $1 here, $5 there . . . a couple of thousand of these programs getting through a government bureaucracy and we have a lot of money being transferred from the poor and middle class to the rich.