Out of Control Policy Blog

Rent Seeking in the Bailouts

We have repeatedly stated that a problem with creating federal bailout and stimulus programs is that you open doors for waste and fraud, but you also run the likelihood of throwing off competition in the marketplace by favoring one firm over another with taxpayer support. For instance, GM is getting an advantage over Ford in dealing with is financial mess, allowing it to unfairly compete using money from the very people who work for Ford to take business opportunities from Ford.

In this vein of complications is rent seeking behavior from companies trying to piggy back on Uncle Sam's "rescue" of the economy. (Rent seeking is essentially when one company or group of people tries to make money or gain a benefit from a political program, regulation, or other law without actually having to do work.) This has been a serious problem thus far with the stimulus, especially with alternative energy groups looking to gain market share on traditional energy services by using taxpayer money to gain an advantage. 

Another story emerged recently, from the Washington Post, about how money from electronic health records got into the stimulus bill:

"The inclusion of as much as $36.5 billion... represented a triumph for an influential trade group whose members now stand to gain billions in taxpayer dollars. A Washington Post review found that the trade group, the Healthcare Information and Management Systems Society, had worked closely with technology vendors, researchers and other allies in a sophisticated, decade-long campaign to shape public opinion and win over Washington's political machinery.

"[...] As the downturn worsened last year, advocates helped persuade Obama's advisers to dust off electronic records legislation that had stalled in Congress -- legislation that (medical technology industry) advocates had a hand in writing, the Post review found.

"Their sudden success shows how the economic crisis created a remarkable opening for a political and financial windfall: the enactment of a sweeping new policy with no bureaucratic delays and virtually no public debate about an initiative aimed at transforming a sector that accounts for more than a sixth of the American economy."

In short, the companies that make products for electronic health records had failed for years to get Congress to mandate a system that would provide them business. So they used the economic crisis as leverage to get their ideas in on the stimulus wave with little debate and huge upside. And just like that Congress has demanded America give this industry money. Read the whole story here.

It's a little upsetting. But there is more to come. 

This weekend's Wall Street Journal had an op-ed from Scott Carlson, CEO of Boeing. In his piece he talks about how his company has reduced carbon emissions on their planes over the past few decades:

"...airlines have demanded increased efficiency from airplane and engine manufacturers. And manufacturers have responded big time. Over the past 50 years, the efficiency of commercial jets has risen an astounding 70%."

Great! That's how markets are supposed to work. That's how market-based, pro-environment activity is supposed to happen. But then the piece takes a turn:

"That said, we believe properly structured regulations could be useful. It's not often that an industry asks for additional regulation, but Boeing, GE and other airplane and engine manufacturers are convinced that a fuel-efficiency standard for new airplanes is an effective way to drive the development of fuel-saving technologies.

Specifically, we're advocating for an efficiency standard for new airplane designs... it would help ensure that we continue to see the kind of technological and environmental breakthroughs we pioneered with the 787."

Now wait a second. Didn't he just say that they reduced emissions by 70% without a government mandate? How would an efficiency standard "ensure" technological breakthroughs? Mr. Carlson said himself that his firm responded to the demands of his clients. And airlines continue to want more fuel efficient planes--both for fuel economy and to market their airlines as green. It's not like there isn't a desire to have change. Why would the industry want the government to "drive" them towards developing new technology?

Short answer, they don't. They just don't want other firms coming along to take away their business. See, over the past 50 years it has been companies like Boeing that have developed the capacity and capability to make technological breakthroughs. They have the knowledge and sunk cost on developing that. But it would be easier for them to have limited competition. What Boeing is asking is for rules that would make it difficult for new players to enter the market. They are asking for standards that meet their capabilities developed over 50 years--something that would be hard for an upstart to achieve. In economic terms this is called barrier to entry. I'd like to give Mr. Carlson the benefit of the doubt, that he doesn't see how this will reduce competition for Boeing, and really is pushing for this standard in good faith... but I'm skeptical. 

The airline manufacturing industry is doing now what the medical technology manufacturing industry was successful at earlier this year—using government and the taxpayer to promote their business, instead of working hard to create wealth in a fair world of competition. The frustrating thing is that they will probably be successful.

Anthony Randazzo is Director of Economic Research


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Comments to "Rent Seeking in the Bailouts":

GFS | May 26, 2009, 11:35pm | #

Right on. You understand the corporate thinking of the Boeing Company. Keep up the good analysis.



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