Quote of the Day on Rent Seeking and Regulatory Capture

You think that the predicament of crony capitalism through the unholy stealth relationship between government agencies and big corporations, which results to revolving doors, corruption, regulatory capture and rent-seeking are about ethics or virtues?

It’s not.

Professor Steve Horwitz explains, (bold emphasis mine)

The problem is not regulatory or ethical, but institutional. If you want to change the pattern of outcomes, change the rules. The only possible way to end the corporate control over the state is to reduce the state's sphere of influence down to as little as possible and ideally nothing. As long as there's the dead animal of the state (really: the citizenry) to feed on, the vultures of the private sector will keep showing up to get their share.

Symptoms of Crony Capitalism: Soaring US Financial Profits

This is exactly how crony capitalism looks like.

Following massive support from the US government, US financial firms posts huge profits.

From the Wall Street Journal, (bold highlights mine)

During the darkest days of the financial crisis, when Lehman Brothers and Washington Mutual went belly up and the U.S. government had to bail out other institutions, the finance sector reported an annualized loss of $65.2 billion in the fourth quarter of 2008. It was the only quarterly loss recorded in the government data.

Since then, the sector has come roaring back. The GDP report shows finance profits jumped to $426.5 billion. While profits haven’t returned to their high levels of 2006, the gain in finance profits last quarter more than offset a drop in profits posted by nonfinancial domestic industries.

After rising like the Phoenix, the financial industry now accounts for about 30% of all operating profits. That’s an amazing share given that the sector accounts for less than 10% of the value added in the economy.

Wall Street and banking critics have pointed out the finance industry enjoys government supports not given to other companies. That includes the low cost of funds from the Federal Reserve. As a result, critics say, the U.S. economy is overly skewed toward finance.

Aside from the bailouts and behest loans, the Federal Reserve’s QE programs have had a big influence on this swelling of corporate profits.

Writes Peter Schiff, (bold highlights mine)

But another very large chunk of Treasuries go to "primary dealers," the very large financial institutions that are designated middle men for Treasury bonds. In a late February auction, these dealers took down 46% of the entire $29 billion issue of seven year bonds. While this is hardly remarkable, it is shocking what happened next.

According to analysis that appeared in Zero Hedge, nearly 53% of those bonds were then sold to the Federal Reserve on March 8, under the rubric of the Fed's quantitative easing plan. While it's certainly hard to determine the profits that were made on this two week trade, it's virtually impossible to imagine that the private banks lost money. What's more, knowing that the Fed was sure to make a bid, the profits were made essentially risk free. It's good to be on the government's short list.

So what we essentially have is a redistribution of resources from the real economy to the financial sector.

This is rent-seeking.

The essence of which is, as explained by Alfred Nobel Prize winner Professor James M. Buchanan,

“it extends the idea of the profit motive from the economic sphere to the sphere of collective action. It presupposes that if there is value to be gained through politics, persons will invest resources in efforts to capture this value. It also demonstrates how this investment is wasteful in an aggregate-value sense.

Such is the essence of government interventions or the political distribution of resources via state capitalism. Winners are the politically endowed (concentrated) while losses are distributed throughout the system.

Usury Prohibition: Medieval Crony Capitalism

During medieval Europe, the Roman Catholic Church via Pope Benedict XIV promulgated usury prohibition or Vix Pervenit: On Usury and Other Dishonest Profit—where charging interest rates on loans were condemned as a sin.

Guess who profited from the prohibition throughout those years?

From Mark Koyama* (hat tip: Café Hayek) [bold emphasis mine]

The usury prohibition created monopoly rents which made it possible for the Church, the state and international merchant–bankers to benefit from the suppression of usury. It was this shared interest that made the usury prohibition a self enforcing institution. It cemented a partnership between the leading merchant–bankers, secular rulers, and the Church, and because it shaped the beliefs and expectations of medieval society as a whole, it generated behavior that reinforced and perpetuated its own existence.

So the church integrated the role of the ‘baptist and the bootlegger’ which essentially converted her moral positions into laws that generated economic windfall for them. Of course, this was not restricted to the church , who acted as a political patron, but had to be backed by a vested economic client seen in “international merchant bankers”-manifestations of patron client relations.

In short, the usury prohibition laws engendered crony capitalism-the medieval ‘church’ edition.

Then and today, the nature of economic rent hardly makes any difference. Only the participants has changed.

*Evading the ‘Taint of Usury’: The usury prohibition as a barrier to entry

President Aquino’s Cabinet Appointments: The More Things Change, The More They Remain The Same

As the Aquino Administration matures, current developments seem to be confirming my predictions that there will hardly be any change in the administration’s political direction.

This from the Philippine Inquirer, (bold emphasis mine)

“President Benigno Aquino lll’s decision to pick executives from big business for key Cabinet posts has placed his administration in potential conflict-of-interest situations, particularly in state-regulated enterprises, such as power, water, telecommunications and toll roads, lawmakers noted Tuesday.

They said the big business appointments were a growing public concern because they were identified with four of the most influential business conglomerates in the country – the Ayala, Lopez, Aboitiz and Metro Pacific groups – to positions with powers to make or unmake business empires.”

Some thoughts

1. It’s payback time. Election campaign bills come due.

2. Conflicts of interests depend on the definition. Every person sitting on a regulatory agency or bureaucracy has an interest which will always come in conflict of the interest of the regulated. (Yes, I mean personal interest. Political leaders and bureaucrats are not gods nor are they supposed to embody our perception of interest)

In the above, what is clearly being defined as conflict of interests is regulatory capture or as defined by Wikipedia.org as “when a state regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating. Regulatory capture is a form of government failure, as it can act as an encouragement for large firms to produce negative externalities. The agencies are called Captured Agencies.”

In other words, regulatory agencies function to advance the interest of select or favoured groups at the expense of the rest of society.

By the use of the regulatory body as legal barrier, competition is therefore restrained, and thus, economic opportunities are allotted based on political concessions via the arbitrary application of regulations or what is known as economic rent.

3. Insider versus outsider game. Insiders are those who comprise the economic-political elite class. Outsiders are those in the periphery who are made to believe that genuine change is in the offing. And outsiders are the majority and wielded by the insiders for election purposes.

The Aquino appointments clearly demonstrate this deeply rooted Insider based relationship in the context of the Philippine political economy.

Hence, the only thing that has changed are the personalities involved in manning the bureaucracy, and not the anti market political patronage system. The net effect is a status quo.

And as we previously predicted, ``The rule of the entrenched political class means 'the more things change the more they remain the same'.”

We also anticipated the kingmaker role of the personalities involved in the Meralco takeover in the recently concluded elections, which apparently has emerged in the appointments.

Elections are, therefore, a vehicle which grants a mantle of legitimacy to the immoral alliances of vested interest group and the political class.

As H.L. Mencken rightly labeled, “[Democracy] has become simply a battle of charlatans for the votes of idiots."

Forbes’ Philippines 40 Wealthiest

Here is the updated list of the Philippines’ who’s who or the wealthiest 40 from Forbes.

Click here for a crispier image

While attaining wealth by providing consumers their invaluable goods and services is the most admirable trait of successful entrepreneurs, in the Philippine setting, some may have achieved their lofty status from political entrepreneurship or obtaining economic privileges from political concessions.

They are what author Joe Studwell calls as the Asian Godfathers who are “highly effective traders in rent-offering environment.”