Friday, June 26, 2009

Windfall Profits vs. Rent Seeking

The expenditure of resources in order to bring about an uncompensated transfer of goods or services from another person or persons to one's self as the result of a “favorable” decision on some public policy. The term seems to have been coined (or at least popularized in contemporary political economy) by the economist Gordon Tullock. Examples of rent-seeking behavior would include all of the various ways by which individuals or groups lobby government for taxing, spending and regulatory policies that confer financial benefits or other special advantages upon them at the expense of the taxpayers or of consumers or of other groups or individuals with which the beneficiaries may be in economic competition.
--(Glossary of Political Economic Terms)

Personal matters are keeping me from writing much these days, but I want to refer you to an article on a critical bill which will soon be coming up for vote in Congress--possibly even today. This bill, the American Clean Energy and Security Act, would implement a program which will intentionally increase the cost of energy to every individual and business in this country. The stated goal is to reduce CO2 emissions, but this method has been tried in Europe and has not achieved its purported goal. Please let your representative know what you think of this bill.

Near the end of the article, the author states that through cap-and-trade, some special interests will benefit from a "windfall profit." This is an unfortunate and incorrect use of the term "profit." It helps perpetuate a grave misunderstanding of the role of profits in an economy while at the same time maligns an honorable activity: that of seeking and creating profits. Profit is simply the excess value created (via honest and free trade) above the costs of production. With cap-and-trade, nothing is being produced except an artificial increase in the cost of energy. No value is being created; thus, there can be no additional value, and no additional or "windfall" profit.

The more appropriate economic term to use, which is unfortunately not widely known, is "rent-seeking." (See the definition above.) Cap-and-trade creates no real value but merely adds a costs "out of thin air" and then shifts (redistributes) the additional money collected from one place to another. Those chasing this extra money are "rent seekers." The extra money individuals and businesses will pay for energy will go in part to the Federal government (through its sale of emission permits) and to those poised to make money on the artificially created "market" for permit trading. Those companies who obtain emission permits without purchasing them are in fact receiving a government subsidy--which then puts them at a competitive advantage over those unable to lobby successfully enough to receive these handouts. Some of the money the government obtains will be used to prop up companies which are unprofitable in a free market (such as alternative energy providers.)

The entire cap-and-trade process is a disvalue. Some like to call it cap-and-tax, a term which only captures a part of the problem, but not its deeper essence. Cap-and-trade is promoted as a "market solution" but it is in fact an "anti-market" process that creates problems and does not provide a single real solution--not even to the "problem" proponents are attempting to solve, that of reducing CO2 emissions in the name of anthropogenic global warming.

A market is where individuals meet to trade value for value. Efficient users of scarce resources create excess value and thus gain profits. With cap-and-trade, instead of profit (i.e. efficient use) determining who obtains access to resources, those decisions are made through politics. Resources are wasted obtaining permits and political privileges rather being used to efficiently create energy. The price system is disrupted--and true costs are incalculable. No one can make intelligent economic decisions because prices no longer reflect supply and demand. Instead, prices are determined the political agenda of special interests. The most efficient users and providers of scarce resources are penalized at the expense of those who are less efficient or even wasteful. Those who wish for our scarce resources to be wisely used should be screaming loudest against these political distortions of resource allocation, but a lack of understanding of the laws of economics blinds them to the destructive effects of cap-and-trade.

Cap-and-trade is a non-solution to a non-problem. Real progress is made by making more goods and services available at a lower cost--through the discovery of the most efficient use of scarce resources. Cap-and-trade will make less available and cost us more. This is anti-progress and will only benefit the politically connected, and even then, only in the short term.

Up Date 6-28-09
I thought I had published this Friday morning, but it appears I had saved it as a draft. Too late now to effect the results in the House. The bill passed by a mere 7 votes, 219 to 212. The bill is expected to go before the Senate mid-September. Even Jim Hansen, one of the loudest climate science alarmists, calls cap-and-trade a Temple of Doom, and the American Clean Energy and Security Act (a.k.a. Waxman-Markey) a "monstrous absurdity." Yet another 1000+ page, unread bill is rammed throughthe House. Congress is drunk on power and out of control.


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