A Constitutional Amendment to Constrain Rent-Granting and Rent-Extraction.

• Author: Hanley, James E.

Political economists have given the problem of rent-seeking a prominent position in their analyses since Gordon Tullock (1967) brought it to attention by highlighting the tendency for the efforts of seeking it to compete away the rents sought, and Anne Krueger (1974) gave the concept its common name. This has naturally led to many proposals to mitigate the problem; however, they tend only to attack the problem indirectly. They promote changes in rent-seekers' strategy while leaving the essential nature of the game unchanged.

In the first section of this article, I review the concepts of rent-seeking and rent-extraction. In the second section, I discuss the improbability of eliminating rent-seeking through normal politics, then argue for the theoretical and historical legitimacy of using Constitutional-level rules to limit the granting of economic privilege to limit rent-granting and rent-extraction. In the third section, I suggest text for an amendment to the United States Constitution to limit rent-granting by government and consider how such an amendment might be applied in various policy contexts. I also address the challenge of creating substantive constraints that may be eroded by procedural legal interpretations.

Rent-Seeking and Rent-Extraction

Rents are created by grants of special economic privileges, which are undesirable for several reasons. In terms of economic efficiency, although rents themselves are only transfers, rent-seeking produces dead-weight economic loss as the rents are dissipated through the effort spent seeking them, as well as in the resources that must be spent to preserve them, and those used to fight the political battle against such privileges, both before and after they are granted (appropriately understood as "directly unproductive economic activity"). They reduce consumer surplus by reallocating resources away from uses beneficial to consumers, such as research and development or entrepreneurial investment, and toward producers (Cowen and Tabarrok 1999). And their effects often fall most harshly on the poor, particularly minorities, who often lack the political capacity to defend their interests (Bernstein 2001; Rothstein 2018). And from the perspective of "clean" politics as an ideal, they create opportunity for politicians to engage in rent extraction, seeking payoffs for themselves, ranging from campaign contributions through more obviously corrupt types of payoffs, in exchange for granting or preserving these privileges (Paul and Wilhite 1990).

Given political limitations on directly coercive rent-extraction by politicians, one means of extraction is responsiveness to the rent-seeking of economic actors on the demand side of politics. A government's favorable response to rent-seeking encourages more of it, which means that granting rents further incentivizes directly unproductive activity. In addition, the special economic privileges are not themselves economically productive. Therefore, an explanation for rent-granting based in the public good theory of government requires the assumption that those who exercise the state's sovereign authority are either irrational or ignorant. Each is possible, but the rent-extraction model, in which those who govern are understood as self-interested actors extracting rents from the rent-seekers themselves, enables us to understand them as rational and aware of the effect of their choices. That is, allowing favored economic actors to capture rents through the creation of economic privileges is rational strategic behavior on the part of politicians. As Murray Rothbard pointed out, "one method of securing [political] support is through the creation of vested economic interests" (2009,19). Sam Peltzman notes that favorable regulations can result in "campaign contributions, contributions of time to get-out-the-vote, occasional bribes, or well-paid jobs in the political afterlife" (1989, 7). And Fred McChesney (1997) showed that these extractions are not one-time events, but that by threatening to retract the economic privileges, political actors can continue to extract rents from a past grant, a strategy that may be particularly attractive to those who come into office after the original deal has been made (23). Due to the endowment effect (Thaler 1980), the threat to eliminate existing rents may grieve the rentiers more than the prospect of not gaining rents, possibly inducing greater returns for the political actor. In McChesney's analysis we can clearly see the justification for Charles Tilly's (1985) description of the state as a "quintessential protection racket."

Publicly, few in a democracy are so crass as to admit such personal motives. Taking a page from Vincent Ostrom ([1988] 1999a), we can note that sometimes the real purposes of these grants of privileges are obscured by legitimating rhetoric, in this case by talk about the public good. For example, subsidies for sports stadiums are claimed to spur economic development, tariffs are purported to protect American jobs, and occupational licensing is offered as critical consumer protection. Even regulation that constrains firms' profit-making activities can create rents because compliance costs are more easily borne by larger firms than smaller competitors (Stigler 1971). With some regulatory rules, the self-interest of rent-seekers and extractors is particularly easy to obscure by talk about consumer safety. As Bruce Yandle points out: "A carefully constructed regulation can accomplish all kinds of anticompetitive goals ... while giving the citizenry the impression that the only goal is to serve the public interest" (1983, 13).

Constraining Rent-Granting and Extraction Constitutionally

We cannot expect to use the normal political process to eliminate these special economic privileges, because they are themselves a product of that process, resulting from political bargaining between the supply side of politics (the political actors who have authority to grant such privileges) and the demand side (the economic actors who seek the privileges). It is not simply endemic to politics but foundational to the normal political process, being one of the means by which politicians try to maintain their opportunities to continue participating in the political game. Although on particular occasions certain privileges may be eliminated, there is no incentive on anyone's side to eliminate economic privileges in general. If a large number of privileges were targeted simultaneously, legislative log-rolling would ensure that none were actually limited, as each legislator would vote to preserve others' rent-extraction opportunities in exchange for those others' votes to preserve their own. This dynamic is overcome only rarely, as in the Base Realignment and Closure process for closing military installations, where the rules prohibit log-rolling. But the notoriety of this process's success indicates how unusual it is, and the persistent failure of Congress to use it as a model indicates how little chance there is of broader application of that rule-set to other sets of policies.

Additionally, as Anne Krueger (1974) noted, any rent-granting intervention in the market system causes people to perceive the system as not functioning well, which produces calls for more intervention with the ostensible goal of correcting the problem. This creates more opportunities for rent-seeking under cover of correcting market imperfections, but then creates more imperfections that produce calls for more intervention that create more opportunities for rent-seeking, in a ratchet effect, or what Krueger calls a "vicious circle." The logic of this demonstrates the difficulty of using normal politics to break out of a political cycle.

The political difficulty is exacerbated by the sheer number of loci for the granting of special privileges in a country such as the United States, with not only the federal government but fifty state governments and over thirty-nine thousand general purpose municipalities, counties, and townships having regulatory authority. Finally, there is a temporal issue, in that what is done through normal politics can also be readily undone, and once a rent opportunity is eliminated, there is a continuing incentive on both the supply and demand side of politics to recreate it.

Further, any statutory attempt to limit the demand-side activity of lobbying is constitutionally dubious, as it would likely conflict with the First Amendment rights of speech, press, and petition. Even if such a statute would pass muster, it would have either minimal or troublesome effects. It would be odd, for example, to argue that the First Amendment would allow prohibitions on lobbying government for regulations for public safety. But many economic privileges are advocated for under that cover. And if, as we would hope, the courts interpreted the boundaries of antilobbying law narrowly, such safety or public good rhetoric would be generally successful in defending privilege. The alternative is for the courts to interpret any such law broadly, with unpredictable but likely negative effects on freedom of speech. One can argue that "national economic welfare interest" can justify some limitations on lobbying government for the purpose of seeking rents (Hasen 2012), but the idea that a particular problem is so important that the First Amendment...