This is the first of what I hope will be a regular weekly feature here on The Glittering Eye: Rent Seeker of the Week. What’s rent-seeking? See here. And here’s a succinct definition:
In their quest for value, people choose between two paths. They can obtain value through exchange by providing a good or service that others consider valuable. Alternatively, they can seek to have value transferred to them without providing anything in return. The first path is one of profit seeking, and it has the desirable side effect of forcing people to serve the public by providing products the public wants at prices they will pay. The second path has become known as rent seeking, a term descriptive only to those who know something of the history of economic analysis. Unlike profit seeking, rent seeking has no desirable side effect, but rather can cause a serious waste of society’s scarce resources. In different terms, profit seeking is a positive-sum game, whereas rent seeking is a negative-sum game.
There’s no question where this week’s award should go: credit card issuers. I linked to this post on the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 earlier in the week. As I see it this bill is an attempt to secure for the credit card issuers, some of the biggest of all contributors to political campaigns, what was formerly unsecured credit and reduce their risks.
I don’t have any problem with credit card companies making money. And I do think that people should be responsible for their debts. But there’s a simple solution to reducing the exposure of the credit card issuing companies: stop giving unsecured credit. I do have a problem with the credit industry improving their bottom lines by having the government do the heavy lifting for them. They knew what the rules were when they issued cards to people who couldn’t pay.
So congratulation, MNBA and other credit card issuers. You’re the Rent Seekers of the Week.
I’m accepting nominations for the next “Rent Seeker of the Week”. Or ideas for a suitable graphic.
This “rent seeking” idea will be helpful to me in thinking about the bankruptcy legislation. It’s really an interesting problem–purely political, with definite positions being taken, but no obvious ‘right’ and ‘wrong.’ Or, they are obvious, just dependent on the pre-existing assumptions that one carries to the debate.
You hit the nail right on the head. This legislation is a classic example of the moral hazard problem. Lenders lent under one set of rules and when those rules produced adverse outcomes, instead of rethinking their risk parameters, they sought a change in the rules.
JK, that’s an extremely succinct statement of my position. But it’s even worse: the outcomes weren’t even that bad. They’re just sweetening the pot.
But, couldn’t it be argued that contract enforcement is the one place where the gov’t SHOULD do the heavy lifting?
Where do we draw the line between contracts that are frivolous and unwise and contracts that are legitimate?
If it were an instance of contract enforcement, Jeremy, I might agree with you. It isn’t. It’s a now successful attempt by lenders to go after more of the assets of defaulting customers than were allowed under the previous rules. The lenders knew what the rules were when they issued credit; they were not required to issue credit; they could have reduced their risk by tightening the requirements for lending. Instead of doing that they’ve gotten the rules changed to brighten their bottom lines. Classic rent-seeking.