Has the war between the rent seekers escalated?

• Author: Sobel, Russell S.
• Position: Critical essay

In their 1991 paper in Public Choice, "The War between the Rent Seekers," Richard Vedder and Lowell Callaway develop and test a unique theory about the interactions between the levels of spending captured by rent-seeking interest groups. Their model hypothesizes that at low levels of government spending and/or political influence, interest groups complement each other. Multiple groups can simultaneously push for new taxes and higher levels of government spending that benefit all groups. They point to many states enacting new income taxes in the 1960s and 1970s as an example. In this part of the interaction, additional political pressure by one group results in the pie growing for all rent seekers.

At some point, however, this relationship switches from complementarity and cooperation to conflict, competition, and a war between die groups over funding. In a Laffer-curve-type relationship, at some point revenue maximization occurs, new tax sources become satiated, and beyond that point a rent-seeking group can only gain at the expense of other groups. They depict their model graphically, and argue that the groups most well suited for testing the model are public school teachers and welfare recipients. We recreate their original graphical model in Figure 1, which illustrates that as public school teachers initially push for higher salaries, the pie expands and public welfare recipients also gain additional government spending. However, as school teachers continue to push for higher salaries, the positive relationship turns negative, and higher teacher salaries only come at the expense of funding and benefits for welfare recipients. (1)

Vedder and Gallaway empirically test their model using data for 1986 (or fiscal year 198.5-86 where appropriate). They find strong support for their model:

The results suggest that beyond $474.58 in per capita welfare spending, teacher salaries are negatively associated with increased public assistance expenditures; at lesser amounts, a positive relationship is observed. Five jurisdictions--New York, Massachusetts, Rhode Island, Alaska and the District of Columbia--had welfare spending in the negative range. In those states, the evidence suggests that gains to welfare recipients occur in conjunction with income losses to teachers [Vedder and Gallaway 1991: 287],

They proceed to argue that because state and local government spending is growing through time, this Laffer-type relationship should be getting stronger through time, with more states moving into the upper portion where rent-seeking interest groups are at...