Rent-Seeking and Public Employment - Time To Change

A relatively obscure economic concept has recently
come to the fore in the national economic dialogue.

That concept is Rent-Seeking.

As defined in Wikipedia and The Dictionary of Economics,
rent-seeking is defined as the extraction of unearned value
from economic transactions by manipulation of
the economic environment, rather than by earning profits
through economic transactions and the creation of added
wealth.

And there are different types of rent-seeking behavior - direct
rent-seeking, which is an attempt to gain monopoly or oligopoly
control of a scarce resource, or collusion by market players to
control a market by rigging prices, allocating market shares,
and restricting output.

And then there's indirect rent-seeking - the pursuit of above
market returns through control of a legislative or regulatory
process, where the "rent" extracted is in the form of either
regulatory barriers to market entry or tariffs, tax breaks or
subsidies not generally available to those outside the favored
group or class.

Of the two, the latter is by far the more dangerous, as it implies
control of legislative or regulatory processes to extract "rents"
from the public at large and funnel them to the favored recipients.

And, according to classical economic theory, when rent-seeking
exists in a market, more and more players abandon profit-seeking
for the greater returns of rent-seeking. Ultimately, this causes a
fall in output and productivity, as not all players can become
rent-seekers and those who remain choose to withdraw from
from the market rather than see their profits reduced by
rent extraction.

And where do we see an example of all of these economic
pathologies simultaneously?

In Unionized Public Sector Employment.

To begin with, access to public employment is tightly
controlled, both formally and informally. Not only does
the prospective public employee have to jump through
many bureaucratic and regulatory hoops, but often the
only path to public employment is through an "informal"
connection to either an elected official or family members
already on the "inside". Further, public employment is a
monopoly, for which no corresponding demand exists in
the "private" marketplace.

And do Public Employees extract "rents" from the public
at large? In spades. Through unionized collective bargaining
and campaign contributions to the politicians who set the
wage and benefit scales, the wage and benefit "rent premium"
extracted by public employees have risen in some cases to over
30% compared to similar private sector employment.

And, as would be predicted by economic theory, more and
more people are seeking employment in the Public Sector
than in the private marketplace. According to the Heritage
Foundation, while the US private sector produced NO net new
jobs over the last ten years, total government employment has
risen by over 17%. And the Obama "economic stimulus" plan,
has, as predicted, resulted in both more government employment
(more rent seekers), and less employment in the private
sector (fewer profit seekers).

But now, a tipping point may have been reached. As more and
more private profit-seekers leave the market, either through
outsourcing to other countries (avoiding the rent-seekers), or
withdrawing from the market altogether ( refusal to pay "rents"),
economic output (upon which the rent-seekers depend), is falling.

And, in response, the politicians, who enabled the problem in the
first place, are now having to make some awful choices - namely,
which rent-seekers will be thrown off the gravy train?

If you follow the news, the talk in statehouses and city halls
all across the nation is about wage and benefit cuts, givebacks,
renegotiations, and even permanent layoffs, furloughs, and
terminations. And sooner rather than later, the federal
government will have to follow suit.

And this was all perfectly predictable.

In economic terms, once the aggregate amount of extracted
rents exceeds the amount of profit that could be produced
by the non-rent-seeking sector at any given level of output,
the whole scheme collapses.

And, in many parts of the country, we are now literally at that
point.

The following video sums it up quite nicely (h/t Mish's Global
Economic Analysis)