Corporate rent-seeking behavior goes a long way in accounting for the ever-growing presence of pork-barrel legislation moving through the U.S. Congress. I thought the following excerpts from an editorial in the October 4, 2005 Wall Street Journal (via Truth About Trade and Technology) examining how the actions of a self-interested politician and the corporations who learned how to exploit the system created at the behest of lobbyists provides some really good insight into the modern political process (links added):

Tariffs for the Rich

So you want to be a millionaire? May we suggest a career in ball bearings or steel or candles.

That's our thought as we read a new report from the General Accountability Office on the Byrd Amendment, a trade rule that directs the proceeds of anti-dumping duties into the pockets of companies "injured" by foreign competition. It was named after West Virginia Senator Robert Byrd, passed by Congress in 2000 and has since been ruled illegal by the World Trade Organization.

The U.S. collected $1 billion in Byrd duties from 2001 to 2004, and according to GAO, two-thirds of the payouts went to companies in just three industries: ball bearings, steel and candles. Nice work if you can get it.

But, lest you think that the money collected through the Byrd duties was evenly distributed among the hundreds of companies within these industries, the GAO report reveals a high degree of concentration in where the money went:

The report also found that nearly half of the Byrd duties ended up in the coffers of five companies. Some 38% went to ball-bearing manufacturer Timken Co. of Canton, Ohio, including two subsidiaries -- Torrington Company and MPB Corporation. Timken's take alone was $205 million. Two other companies -- Candle-lite and Zenith Electronics Corp. -- raked in 5% and 3% respectively.

Some quick math (dividing Timken's $205 million by its 38% share) reveals that the amount taken in by the Byrd duties adds up to approximately $539.5 million USD. The 5% received by Candle-lite amounts to roughly $27 million USD and the 3% received by Zenith adds up to just over $16 million USD. Quite a lot of free money if you, or rather, your stable of lobbyists, lawyers and accountants, know how the game is played:

These companies won the Byrd lottery by figuring out that payouts depend more on how many claims are filed than on whether they are valid. U.S. Customs and Border Protection, which is charged with collecting and disbursing the Byrd duties, has more claims than it can handle so it uses a pro-rata formula for disbursements. This, as GAO drily notes, has created "an incentive for producers to claim as many expenses as possible relative to other producers."

I think the GAO quote might well qualify as the understatement of the year. Now, let's see what Byrd's amendment has achieved in terms of changing the behavior of the companies seeking a potential windfall:

Claims skyrocketed from $1.2 trillion in 2001 to just under $2 trillion (no, that's not a typo) last year. A "more than 10-fold increase" is expected this year, says the report. Over four years, by the way, Customs has managed to verify the claims of just one of the 770 companies that received Byrd money.

That increase in claims from $1.2 trillion USD in 2001 to $2.0 trillion USD in just three years time represents an annualized growth rate of 18.56%, as determined by Political Calculations' Investing: Rate of Return tool. Funny how changing things like incentives changes behavior. But how does a self-interested politician, who is looking out for their special interests instead of the interests of those they represent, keep the unwashed masses from being able to cash in their share of the bounty?:

Byrd mischief doesn't end there. It is tilting the playing field of the U.S. economy in favor of a privileged few. The GAO says the "top recipients" of Byrd money "reported positive effects" (no kidding), but "some non-recipients said that disbursements to competitors were having negative effects on them." "Non-recipients" are companies in the "injured" industries that failed to support anti-dumping lawsuits in the first place. They are being punished for opting to compete rather than agitating for protection. Nor is there any evidence that Byrd recipients used the money to create jobs in the U.S. One Byrd recipient used his windfall to pay off his mortgage.

But let's not forget the potential for retaliation against U.S. exports. U.S. consumers could well find the things they buy becoming more expensive as a direct result of the WTO's finding that the Byrd tariff is prohibited by international trade agreements:

Finally, there's the effect on U.S. competitiveness abroad. Since Byrd violates WTO obligations, U.S. exports could be hit with retaliatory tariffs of up to $134 million based on 2004 Byrd disbursements. Canada, the European Union, Mexico, and Japan have already ordered new duties and it is possible that four other WTO members will do the same.

Like so much that goes wrong in public policy, the solution is to stop the government from doing stupid things. The Byrd amendment favors the well-heeled and connected few at the expense of everyone else. Maybe a constitutional amendment that applies to public officials along the lines of one proposed by the Skeptical Optimist could go a long way to providing the self-interested politicians with the proper incentive to focus their efforts on serving the collective best-interest of those they represent, rather than those who make sizable campaign contributions or investments in K Street lobbyists.

- posted by Ironman at 9:30 AM | Permalink | Home |