Monday, 17 August 2009

An alternative interpretation of rent-seeking

This article at VoxEU implies that companies in Italy which are 'connected' with politicians make 5% more profit.

Could be true.

But an equally plausible story is that companies become less profitable around election time because they are spending 5% of their profits on subsidising politicians.

On this interpretation, contributing to political campaigns is seen as a cost of doing business, and depresses profits immediately before an election. Note that in the graphs shown in the article, the firms' profits take a dip in the year before the politician's term ends.

Far be it from me to impugn the Italians' proud record of rent-seeking and corruption - my Italian friends would claim they have a unique comparative advantage in this field, and lead the world in their craftsmanship (though there are some volume producers in Africa and Asia who compete for sheer scale of bribery). But I want to allow them the elegance of a convincing escape clause - which is, after all, an essential component of every perfectly balanced protection racket.

1 comment:

Don said...

There's a possible benefit to open bribery. In the US, Banks purchased TBTF Insurance through Lobbying and Contributions. This was the basic layout of the system, from some people's point of view. This was my view.

Consequently, when Rogoff says this:

"It was not just Lehman Brothers. The entire financial system was totally unprepared to deal with the inevitable collapse of the housing and credit bubbles. The system had reached a point where it had to be bailed out and restructured. And there is no realistic political or legal scenario where such a bailout could have been executed without some blood on the streets. Hence, the fall of a large bank or investment bank was inevitable as a catalyst to action."

I agree. There was No Plan B. Well, there was; namely, a Debt-Deflationary Spiral. The reason I advocated bailing out Lehman and everybody else was precisely because there was No Plan B.

Now, Rogoff claims that we needed Lehman to fail, to wake up everybody to the fact that there was No Plan B. That's a hell of a price to pay. We almost had a Debt-Deflationary Spiral. But, if I knew that there was No Plan B, and there hadn't been one since at least the S & L Crisis, then how come others didn't know that, and we needed Lehman's failing to alert everyone to that fact?

The only answer that I can come up with is that this Obscured Bribery works. People really believe the BS about politicians voting their conscience! Hence, give me Open Bribery any day. At least it won't lead to the World Financial System almost blowing up.

Don the libertarian Democrat