Follow the Money

“Follow the money” is a phrase used in many detective shows and political thrillers. Look for how the villain spent money on or received money from, and there is your culprit. The same is true when examining economic and political decision-making. In today’s world, it is common to talk about rent seeking behavior on the part of businesses. That is, it is economically rational for firms to spend their next dollar to gain profit (rents) from political privilege rather than a risky R&D project with an uncertain return. The interest group theory is pervasive in the study of modern economics and politics. We are quick to accuse “Big Business” of all the world’s troubles by cozying up to the government. However, for all of its understanding of behavioral symmetry, public choice theory often fails to overlook an obvious interest group, the government itself. Economists Robert Tollison and Robert McCormick wrote a volume in 1981 to examine this issue in detail. We understand politicians are willing to accept votes and contributions to their campaigns in exchange for some political privilege. At the same time, what if we start by considering the government as an interest group itself? Extracting rents from businesses, constituents, and other policymakers to provide political benefits happens more often than we think. 

Fred McChesney wrote about what he referred to as “milker bills.” When proposed legislation would be to the disadvantage of the constituents in a political district, the political official explains to the constituent or interest group that will bear the greatest costs that their opponents want to pass this bill. Still, maybe they can prevent it from being passed. Contributions then flow to the political official; the bill does not see the light of day. The issue is not that the interest group contributions made the legislation go away, although that is an essential part of the story. We can also ask how the legislation creates the need for these contributions. The legislators can “milk” the special interests with the threat of legislation passing. 

Why focus on this? I have been thinking about my research agenda recently and realize I have a very broad one. I have claimed that I am a public choice economist, and that is true, but that is just an area of study. I also claim that much of my research attempts to bring the public choice or political economy lens to various economic issues. Again, this is true, but it is not a robust research agenda. As I look closer at my work, I realize the influence of Robert Tollison on my work and remind myself to ask how the politician or government benefits. I often examine fiscal policy issues and think about the political benefit of expanding the deficit at the federal or state level. Yes, special interest groups lobby for political privilege, but politicians create the institutions and incentives that elicit rent seeking. They are exploring ways to extract rents from interest groups in a mutually beneficial way that imposes significant external costs on the public. 

One example that is a common thread in my research is the impact of state economic development incentives. The subsidies and tax abatements that state and local governments usually provide large firms to locate in their area to “create jobs.” Most citizens, at least in the relevant region, see this as a massive benefit to them and their state. However, the economics literature has shown over and over that the economic gains do not materialize. What is realized is that the politicians have created a war of all against all in which each locale competes to get the business. If there is no economic benefit, what’s in it for them? Sure, they could be economically naïve and believe they are doing some good, and there is no doubt that some people will benefit. The chosen businesses clearly benefit from the incentive package and are willing to invest real resources to acquire it. But I have always thought about the political benefits of these incentives. Politicians have created this game, hanging out a sign to businesses that reads “privilege for sale.” And yet the politicians become the story’s hero, cutting ribbons and claiming they “created jobs.” Incumbent politicians receive contributions and votes from businesses. With what goal in mind? These policies only move pieces around the chess board without necessarily creating real wealth. 

We should follow the money, but when we ask what special interest group will benefit from the proposed legislation, we should consider government officials in the mix. Government officials can find ways to promote the need for rent seeking behavior. We should ask if government officials are the special interest group driving the process, not just providing rents but finding ways to extract rents.

Peter Calcagno is a Professor of Economics at the College of Charleston and director of the Center for Public Choice & Market Process, Public Choice and Public Policy Project Fellow with AIER. He is the Treasurer of the Public Choice Society, a Voting Member of AIER, a Board Member of the Classical Liberals in the Carolinas, and has served on the board of APEE. His areas of research are applied microeconomics, public choice, and political economy. He is the author of dozens of journal articles and book chapters, and the editor of Unleashing Capitalism: A Prescription for Economic Prosperity in South Carolina.