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Rent seeking

For a textbook example of rent-seeking, look no further than that pustulent petri dish of corruption, Illinois, for a dandy look at how it is done with affirmative action, casino licensing, and (of course) political connections. It has to do with the troubled Rosemont casino, which would have been located just outside of Chicago. (Sorry, this post has been rattling around in draft long enough for my links to rot. You’ll just have to take my word for it).

The State of Illinois licenses casinos, generally under terms that skim off obscene amounts of the profit to various appendages of the state. I suppose the State earns its money; since Illinois licenses very few casinos (Rosemont would be the 10th), it suppresses competition and thus enables those high profits to a significant degree. Regardless, I defy anyone to distinguish this racket from the more straightforward protection racket run by organized crime. Let the record show that the State of Illinois, through its protection racket for casinos, is perhaps the uber-rent-seeker in the whole sordid arrangement. As part of its licensing requirements, the State of Illinois requires that 20% of the casino ownership be in the hands of certain specified ethnic groups and women. Since it is very difficult to run a casino at a loss in Illinois, these investments are very attractive and thus expensive. Thus, poor folks need not apply, regardless of their genetic backgrounds or personal histories of woe and oppression. Let us dispense, then, with the notion that this set-aside helps the needy or corrects historical wrongs.

No surprise then, that the group of ethnically favored investors consisted of the wives of wealthy and powerful men, the presumably wealthy widow of a deceased professional athlete, and another presumably wealthy professional athlete. This, in the name of social equality. Really, their participation in the deal at all is the second instance of rent-seeking, but we have only just begun.

It turns out that the majority investors were mobbed up. (In a casino deal! In Al Capone’s hometown! Imagine!) When this was discovered, the casino license that had been granted was, effectively, suspended. The license, which is still outstanding, will be sold off to pay the construction and other debts incurred in the Rosemont project.

Ordinarily, when a business venture that requires a license loses that license, the license disappears and is not available for resale and the investments made by the ownership group are rendered worthless. If you run a bar and you get your liquor license pulled, well, too bad. Your investment, your risk, your profits, and so also your loss. Anyone who fails to do their due diligence, and gets into bed with folks who should not hold the license, can expect to pay the penalty of laziness.

If the Rosemont deal existed in the real world, rather than the empyrean realm of clout and favors, one would expect the license to disappear so that the considerable investments made would be lost, including those of the ethnically and politically favored.

C’est la vie? Caveat emptor? Non! Rather, the license will be suspended, not cancelled, so that it can be sold to enable some, but not all, of the investors to get their money back. Which investors, you ask? Why, the ethnically and politically favored ones, of course. Not only do they get their money back, they get it back with interest! And are invited to participate in the next deal!

That, my friends, is how it is done. None of this sweat of the brow, do your research, take your chances nonsense for our betters. No, much easier and more profitable to get an invite into a business with government-guaranteed profits, and have your friends in office give you your money back, with interest, so you can try again when you manage to screw up the first time.

14 comments to Rent seeking

  • toolkien

    The worst part is that gambling doesn’t produce anything it merely shifts wealth. It would still be unconscionable, but it would be a little something to think this racketeering actually added something to the social fabric in some way. At least with the shakedown/favoritism that is the construction industry (in general and much worse in IL) at least roads are built, albeit expensively.

  • Sandy P.

    Actually, it does.

    Check out Joliet, IL. Armpit of greater Chicagoland for decades, now one of the top 10 fastest growing cities in the country.

    Improving infrastructure, brought in NASCAR and a minor league ball team. Downtown getting a facelift. More jobs. Building like crazy because Will Country is still cheaper than DuPage County.

    Now the STUPID Governor Blowdry and the rest of the Combine raised taxes on the casinos and what happened, the casinos instituted $5 per head entrance fees, cut staff and hours. Empress was pulling in 5000 people just on the weekends, now they’re lucky to pull in 5000 during the entire week.

    I live in DuPage.

    Was the original agreement lax? Yes. Could a deal have been reached? Yes. But not now.

  • Theodopoulos Pherecydes

    Gambling does produce something: pleasure. Now I realize that is an unpopular, intangible good, but it still drives a lot of economic decisions to “shift money”.

    I would keep the casinos and ban movie theatres, stadiums and all Dixie Chicks concerts.

  • toolkien

    Actually, it does.

    Gambling doesn’t create new wealth or turn lesser resources into more valuable ones. Unless the casinos are a big out of State draw the net economic gain is 0 for Illinois. Here in Wisconsin we have our own casinos which has attracted $$$ from Chi-town and other parts of Illinois, enhancing WI’s position but presumably at IL’s expense, and when IL builds its own casinos we’ll end up breaking even with each other – reciprocity at its finest.

    Gambling, and to some extent tourism, are both service oriented activities which produce no economic gain, it merely shifts around wealth from one place to another. To some extent I guess construction of casinos produces building space but it usually so specific in its design that it wouldn’t have much value on the rental markets without a lot of renovation, likely beyond reasonable cost to implement. Razing it the ground would be the likely option.

    From that perspective then, as the money changes hands, and moves from one location to another, the construction will follow it as well, and so construction is likely to a fixed good in any event, just a matter of where. It creates jobs, but again if the money were spent on other services at point A instead of gambled at point B, jobs would be created either way.

    I don’t have any ready figures about how much idle money is recirculated do to casino gambling, but from my observations, it is probably very little. The crowd that frequents casinos; elderly folk on fixed incomes, wheel chair bound, oxygen tanks on high, catching a smoke. They’d spend their money on something either way. I don’t think the high finance crowd with idle cash are the target audience.

  • toolkien

    Gambling does produce something: pleasure. Now I realize that is an unpopular, intangible good, but it still drives a lot of economic decisions to “shift money”.

    I would keep the casinos and ban movie theatres, stadiums and all Dixie Chicks concerts.

    It does create pleasure but the main article points out the ‘racketeering’ type nature of government involvement in the process and I guess my point is that the government should stay out of such business but that if it were deemed necessary that at least some hard infrastructure were to be the result versus publicly controlled circuses to keep the sheep in their pens.

    Perhaps a bigger issue, touched on a few weeks ago here, is the idea of the Feds trying enhance the GDP at the expense of foreign production. We in the US have shifted quite a bit of our production off shore, pay much lower wages plus freight, for products made to our design and tastes, while setting up a service economy based on pleasure, travel, and convience to move the money around. I have no problem with world trade as it enhances the lives of all who engage in it, I just wish that it didn’t seem to be skewing our economy away so drastically from hard production to facile services.

    The government should be out of the markets altogether but it is certainly frustrating the States involve themselves in these ultimately empty endeavors, many times using TIF moneys to sow the initial seeds in the first place, or running Lottery skims which are merely voluntary taxes (again like taxes, gambling adds no new output to the economy, merely shifts who).

  • bil.

    Sure it is wealth producing, though perhaps not material wealth. One must remember that value is subjective.
    Presumably on the whole gamblers value the gambling experience more than they value the money spent on it, else why would they gamble?
    Thus, the value of their time (a limited resource) is increased more than it cost them.
    Likewise the employees and investors presumably value their income and capital gains more than the time and investment costs, thus their resources (time and money) increase in value.
    As with most voluntary exchanges, one would expect that on whole wealth is increased.

  • Julian Morrison

    Removed licenses disappearing is hardly the free-market or desirable outcome. Licenses at all consist of the state agreeing, conditionally, not to get in your way, and possibly charging for the privilege. All licenses are “protection rackets”.

  • triticale

    In Wisconsin, where R.C. Dean and I live, gambling operations, other than the state-run numbers racket, is restricted to a single ethnicity. The dollars involved are sufficient that they have become a major force in electoral politics. Most recently they bankrolled a recall election, run at an off time to minimise turnout, which replaced my state senator, a generally liberal but decent Democrat who dared to question expansion of gambling, with a total hack.

    Interestingly, Indian gaming is justified on the basis that the tribes are sovereign nations outside the normal legal structure, but if so they would thereby be prohibited from making campaign contributions.

  • Errr I hate to break it to you guys, but ALL capitalist activity involves moving money around. If gambling’s only product is enjoyment, well then, the same is true for DisneyWorld.

    The nicest thing about gambling is that it’s a voluntary financial activity (as opposed to, say, paying taxes).

    And gambling is one of the world’s oldest activities — without government, it would exist regardless — so I don’t care a fig for the shenanigans associated with gambling.

    If government wants to dip its filthy beak into the pie, let ‘em. They won’t get any of MY money, because I don’t gamble that way.

    All that said, however, if ever there was a state which needed flushing down God’s toilet, it’s Illinois — especially northern Illinois.

    Best day of my life was when I left Chicago.

  • Guy Herbert

    [...] Indian gaming is justified on the basis that the tribes are sovereign nations outside the normal legal structure [...]

    Not sovereign in the same sense that, say, Colombia is, then; nor outside the normal legal structure as the Guantanamo internees appear to be. I wonder whether the IRS would look favourably on an American Indian resident abroad who claimed to be of a sovereign nation and not subject to the US’s extraterritorial tax regime.

  • R C Dean

    Julian, I agree that licensing is suspect in a free market economy. My point was that licenses issued to the politically favored are treated more favorably than licenses issued to mere plebes.

    There are lots of businesses that require licenses (rightly or wrongly); I have never heard of a business that violated the terms of its license being allowed to auction off the license and pocket some of the proceeds.

  • Taxi licenses in NYC are of a finite number, and are fungible (they cost a LOT to buy). Many states have liquor licenses that act similarly, but in general the regimes I’ve seen that have a fixed pool of them have the State getting the proceeds when it’s revoked do to a violation.

    Which is probably why they just ‘suspended’ it in this case. The connected getting better treatment than the proles indeed.

  • Cobden Bright

    “Gambling, and to some extent tourism, are both service oriented activities which produce no economic gain, it merely shifts around wealth from one place to another.”

    A bizarre statement – I take it you don’t agree with subjective value theory? ;)

    If something makes a profit, then it’s output is valued by consumers in the market at more than the cost of production. The difference between the revenues and the cost is the value created – profit. So, if the casino is profitable, then by definition it is producing economic gain. It is taking labour and building materials valued by the market at X, and turning it into services which the market values at more than X.

    In addition, if consumers spend Y per year on gambling, then they value the pleasure they get from gambling at >Y. Therefore wealth is created for them too – they get more pleasure per dollar spent on gambling than the alternatives (otherwise they would spend it on those alternatives).

    In other words, it is classic free trade – both parties transact only because they both think they will benefit. The casino gets more out than they put in, and so does the consumer.

    Quite how you arrive at the conclusion that no value is created is beyond me. If that were true, then no value would be created by *any* market transaction. Why is a profitable road more valuable than a profitable casino earning the same amount? The market doesn’t view it as more valuable – what makes *your* assessment correct?

  • toolkien

    but ALL capitalist activity involves moving money around.

    The basic idea is that some activities create tangible output, buildings, houses, roads, washing machines, etc etc. Durable goods, housing, and (tangible) inventory are a few of the markers of the health of the economy, while gambling and other entertainment are not. There is a basic reason for this in that it is this layer which people will ultimately care about if it is gone as it is the real quotient in their lives and if it is not there or is lost gambling and Disney World don’t matter a whole lot. I guess it is more or less needs versus wants but that is hardly perfect as durables might be enhanced with extras that are more wants versus needs. Also, capitalism merely is the function that resources to make and build goods are in private hands versus collective hands. It is only on the secondary markets that money moves around without creating goods (directly) that is a ‘spinoff’ of capitalism but doesn’t necessarily define it. Speculation (itself a form of gambling?) is a logical extension of capitalism but isn’t its sum total.

    I have conceded all along that there is an intangible gain by those who gamble or they wouldn’t do it (the thrill of chance replaces the potential the money had in their hands). But as such it doesn’t create more (tangible) wealth as it simply moves money from one pocket to another based on a chance event. And my main point is that if the government were to feel the need to get itself involved in the private affairs of citizens it might as well produce something of real value to all versus a diversion. I guess in way I think it is more harmful for the State to involve itself in this area (intangibles) as it has more to do with individual value judgements and strikes much closer to those ideas that tend to vary more from person to person than the building of a road or something like that. I don’t want them invovled in either too often overall.