Big Government, Big Opportunity For Rent-Seekers

In the 2012-13 financial year, the Australian Labor Party received $55 million in donations. The Liberals received $73 million. The Greens and the Nationals attracted around $8 million each.

Name a large corporate in Australia and their name is almost certainly somewhere on the Australian Electoral Commission’s donations register. Lots of firms even donate to both sides. And of course the Labor Party has a healthy union donor base as well.

But that’s only a fraction of the total amount of money spent on trying to influence government. Federally, Australia has 590 registered individual lobbyists representing 1,708 corporate and non-profit clients.

Then there’s all the money firms spend lobbying with their in-house government affairs staff (who don’t show up on the lobbyists register).

Sounds like a lot? But consider this: the Abbott Government says it plans to reduce the regulatory burden by $1 billion every single year.

Never mind how accurate that figure is. $1 billion is an enormous amount. It makes the amount of money spent on lobbying and rent-seeking in Australia seem tiny by comparison.

Whole industries live and die on the regulations and taxation laws imposed upon them. A new regulation, or a tiny alteration of an existing one, might destroy an enterprise or create a monopoly.

So the real question is, why isn’t there more lobbying? Why don’t firms spend much more money trying to influence the political process than they do?

This is called the Tullock Paradox, named after Gordon Tullock, the great American political economist who died last week at the age of 92.

The puzzle is even deeper because we have lots of evidence that suggests the return on investment from lobbying is enormous.

One American lobby group brags that for the $11 million it charged its clients in fees, it has delivered $1.2 billion in regulatory advantage. An academic study found that $1 of lobbying resulted in $220 in benefits – an incredible 22,000 per cent return on investment.

There are a few possible ways to resolve the Tullock paradox.

Tullock titled the 1972 article where he outlined this paradox “The Purchase of Politicians”. But perhaps politicians aren’t available for purchase, and the examples we have of large returns for small amounts of money lobbying are, in truth, just coincidences – the government was likely to make that decision anyway.

Alternatively, perhaps the returns to rent-seeking are so unpredictable that firms see it as a gamble. If so, then the big lobbying windfalls are extreme outliers. Most experiences with lobbying aren’t as incredibly successful.

Or businesses might not be aware of the opportunities that lobbying presents – they might be irrationally avoiding easy opportunities for profit, or wrongly believe it’s not worth their time to learn their way around the complicated world of rent-seeking.

Perhaps corporate donations are given with no expectation of benefit. Individuals donate to political parties as a form of expression. Maybe corporations do as well. Perhaps, by donating, or even by lobbying, they seek to signal to regulators and consumers than they’re in the tent, rather than outside it. They’re cooperating.

Or perhaps corporate executives just enjoy the access to celebrity politicians that being a big donor can assure. We shouldn’t assume that executives, who decide whether to donate and how much, are always acting in the best interest of their shareholders.

Anyway, lots of possibilities. Some are more plausible than others.

But the Tullock paradox isn’t just a little intellectual conundrum, and it isn’t just about clarifying how much money is spent on politics.

Rather, it’s a window into one of the central dilemmas of government – how can we ensure that government works in the interest of the people who elect it?

Gordon Tullock is most famous for inventing the economic concept of rent-seeking, where private interests influence the government to deliver private benefits. (He didn’t invent the name. That was Anne Krueger.)

The lesson from the vast literature on rent-seeking that has sprung up since is simple: where there is political power, special interests will try to capture that power.

It’s easy to think of ideas for new laws or regulations or government programs that might, on paper, make us better off.

But these laws, regulations and programs won’t be introduced by benevolent and omnipotent dictators. They’ll be introduced by politicians and bureaucrats – plain old humans, swimming in a pool of competing interests.

The more a government does, the more opportunities are presented for rent-seeking. Rent-seekers thrive in the minutiae of policy detail. Corporations know much more about how regulations affect their business interests than regulators or politicians do. It’s not hard for lobbyists to take advantage of that knowledge gap.

Resolving the rent-seeking problem isn’t as easy as banning or restricting donations, putting barriers in front of lobbying firms, or any of those other solutions we regularly hear.

The Tullock paradox emphasises how enormous the gains from rent-seeking are.

With such great windfalls available, money is going to flow into the system no matter how we try to prevent it.