a) create laws, rules, regulations , that benefit politically connected people

b) redistribute money to politically connected people

c) threaten to create unwanted laws, regulations, rules, unless they are paid off

“Politicians are interested in people. Not that this is always a virtue. Fleas are interested in dogs.”

—P. J. O’Rourke

 Cooperation or Exploitation?

Consider that contract is not the only basis on which parties interact in society. While contracts are mutually beneficial, things like theft and murder—also involving interaction between individuals—leave one side better off but the other worse off. Behavior, in other words, may be either cooperative or exploitative. Individuals seek voluntary bilateral transfers (contracts); they also guard against the possibility of involuntary unilateral transfers (theft).

Exploitative behavior need not involve stealth, as typifies theft. Take blackmail, where Person A agrees to forbear from some perfectly legal action in exchange for payment from Person B. For example, A may know of B’s extramarital affair and threaten to reveal it to B’s spouse and the rest of the world (as A is perfectly free to do), but agrees not to tattle in exchange for money. Superficially, the transaction resembles a contract, but there is a crucial difference. Commercial contracts between A and B would leave both better off than they were before A came on the scene. But B agrees to a blackmail deal to avoid being made worse off by A’s intrusion. When Bill Cosby contracts with a production company or television network, he gains; had he acceded to the demands of his alleged daughter, he would have been paying protection money to avoid her attempts to make him worse off. Had model Elle Macpherson agreed to the alleged demands for money in exchange for a promise not to post nude photos of her on the Internet, she likewise would have been paying to avoid being made worse off, not to gain.

So, too, with politicians. They may well take payments to make private parties better off, such as providing tariffs or subsidies. Occasionally, these payments cross the legal line and are actionable as bribery. Prosecutions are few and far between. They largely target not the true substance of the transaction—payment for special favors—but some failure to follow the prescribed legal methods of payment for the favors. Campaign-spending laws provide the blueprint for perfectly legal bribery.

But a politician has an alternative for raising money: selling protection. He can agree not to do something that otherwise he says he would do, something that would reduce the wealth of the potential donor. The most obvious burden that can be threatened is a tax, but there are any number of others that a politician can propose and then withdraw for a price. A private citizen will be just as willing to pay for a special favor worth $1 million as he will to avoid a $1 million tax. (This assumes constant marginal utility of wealth; with declining marginal utility of wealth, a citizen will pay more to avoid the $1 million loss than for the $1 million gain.)

This, then, is the essence of the political protection racket. Superficially, selling special favors and selling protection do look the same: payment is made to the politician in both cases. But in the extortion racket, citizens are made to pay, not for special favors from Uncle Sugar, but to protect private wealth that they have earned the old-fashioned way, outside the political process.

Milking, Juicing, and Fetching

One observes this sort of protection being sold routinely, at all levels of government. Legislative extortion is commonly practiced through so-called “milker bills,” to use a term popular in California. A bill is drafted and submitted, not because there is any legitimate need for it, but because it threatens some private person or group that predictably will pay to have the bill withdrawn. “Juice bills” is another term for those legislative proposals intended to squeeze private interests for cash.

In Illinois, the name “fetcher bill” is apparently the more common designation for legislative proposals intended purely as shakedowns of monied interests. Even in Washington, D.C., Illinois politicians play the fetching game adeptly:

Rep. Jim Leach quietly introduced a bill a few days ago aimed at reducing speculation in financial futures. Barely 24 hours later, the Iowa Republican learned that Chicago commodity traders were gunning to kill his proposal. Rep. Leach said one Illinois lawmaker told him the bill was shaping up as a classic “fetcher bill,” a term used in that state’s Legislature to describe a measure likely to “fetch” campaign contributions for its opponents. Sure enough, one of the first to defend the traders was Democratic Rep. Cardiss Collins of Illinois, recipient of $24,500 from futures industry political committees. She called on colleagues in the Illinois delegation to beat back the Leach bill and watch out for similar legislation. (“Chicago Futures Industry to Fend Off Attack, Rallies Lawmakers Who Received PAC Funds,” Wall Street Journal, Nov. 12, 1987, p. 64)

While sale of special favors and sale of protection may look the same to outsiders, those milked or squeezed, of course, know the difference. Political scientist Larry Sabato reports that to political action committee directors, invitations to purchase tickets to congressional receptions “are nothing but blackmail.” Some time ago, the Wall Street Journal reported that “House Republican leaders are sending a vaguely threatening message to business political action committees: Give us more, or we may do something rash.”

Mud Farming and Political Extortion

In responding to politicians’ minatory messages, private parties are actually paying “money for nothing,” in the words of the song. The money is “contributed” in exchange for politicians’ doing nothing, when legally they could do something. The practice resembles the “mud farming” described in William Faulkner’s The Reivers. Mud farming was a simple but lucrative rural extortion scam. By night, farmers plowed up and then hosed down stretches of the dirt roads out in the country. By day, after cars sank into the nocturnally produced mud, the victimized drivers had a choice: abandon the cars or hire a mud farmer and his animals to pull the vehicles out.

The mud farming analogy brings out one important feature of political extortion. The money paid to politicians to avoid their taking an even bigger bite is not simply a monetary transfer. There are real costs associated with the protection racket akin to the time lost and the labor expended in extracting cars from the mud. The time and money spent on executives’ visiting politicians, on lobbyists’ work on behalf of clients, and so forth are all time and money not devoted to the production of widgets. Perhaps more important, the possibility of wealth being legislatively expropriated creates a disincentive to invest in the first place (or an incentive to invest in less valuable activities that are easier to shield from political threats). Each extortion episode thus leaves society poorer for the time lost and resources diverted from more productive endeavors.

Selling Protection

That the protection racket is costly is a point made, very apocalyptically, in the Clint Eastwood western High Plains Drifter. Eastwood rides into Lago, a mining town that is about to be attacked by three killers just released from prison. Lago’s corrupt city fathers had hired the men to kill the town’s honest marshal, then trumped up other charges to put the killers in jail. They return for revenge. Eastwood himself has come to wreak vengeance on Lago for the marshal’s death. Unaware of Eastwood’s agenda, the townspeople implore him to protect them from the killers; Eastwood agrees, on condition that they do everything he says and give him everything he demands. Making himself mayor and sheriff, Eastwood gradually reveals his plan: fending off the killers, but only by destroying practically everything in Lago in the process. He rides out in the end, leaving the town “saved” but a smoking ruin.

Eastwood, the high plains drifter, selling protection to Lago is no different from Joe Politician selling protection, except that Eastwood wants to annihilate the town and utterly impoverish its denizens. For the politician, total devastation would not be possible politically nor desirable pecuniarily. If politicians could take everything, individuals would have no incentive to invest in creating assets in the first place, meaning there would be nothing to protect in the future and so no future protection racket.

The politician’s maximizing strategy, then, is to take just enough to benefit himself at the moment while leaving sufficient incentive for private parties to generate new wealth—which then will need political protection. The extortion game is analytically identical to a dictator’s nationalization of assets invested by foreign firms. Citizens of the more developed countries regard the expropriations of foreign despots as exotic, sometimes even laughable, antics indigenous to the “Third World.” But what difference is there really between an American company paying hundreds of thousands of dollars in soft money to the Democratic or Republican National Committee in return for tax exemptions and that same company acceding to having a factory or other assets nationalized abroad in return for being allowed to continue doing business there?

It is true that shakedowns practiced by American politicians may differ in the complexity, camouflage, and rhetoric surrounding their threats and ultimate exactions. Compare the extortion game as played in state legislatures or in Washington with the schemes of Brazil’s President Fernando Collor de Mello, who, as reported in the New York Times Magazine, ran “an extortion and influence-peddling system” so successful that it amounted to “an assault upon the state.”

Previously, as a local mayor, Collor sold tax relief worth $100 million to sugar-cane firms in exchange for $20 million paid to him personally. As president, however, it is estimated that he raked in several times that amount, much of it again in selling protection. For example, Collor froze all bank deposits over $1,200 for 18 months as a supposedly anti-inflation measure. Again to quote the Times Magazine, “The program was a colossal failure, producing suicides, heart attacks, a 4 percent plunge in economic activity—and barely a dent in inflation.” To Brazilians, the measure might have seemed just an unfortunate but well-intended mistake—until they learned that President Collor was selling companies the right to unfreeze their accounts for a 10 percent commission.

Crass as extortion in Brazil was, readers may not find it all that much different from American politicians broadcasting their message, “Give us more, or we may do something rash.” Take the current spectacle of politicians milking the tobacco companies. Common Cause recently labeled the millions of dollars that tobacco firms have passed to politicians in 1997 (primarily to Republicans) “astounding.” But exactly why is it so surprising? Newspaper accounts ascribe the “donations” to the industry’s desire to improve its image—as if the public viewed giving money to politicians as something praiseworthy. The real reason is much simpler and (one would think) more obvious. As the pols have demonstrated, they now have the power to crush cigarette firms if they choose to exercise it. But for a price, Washington’s high plains drifters have agreed to forbear from total destruction of tobacco. Not surprisingly, state politicians are racing to strap on their six-shooters and threaten tobacco firms, too. When tobacco antes up—as it surely will, because it must—it won’t be to improve its image.

The tobacco wars illustrate a point noted earlier: politicians will threaten and take what they can, but it is not in their interest—whatever they might threaten—to kill the goose laying the gold. That’s the good news. The bad news is that the politicians will certainly be back as new eggs are laid.

Opening the Tax Window

For those who find such a view too cynical, consider the sorry muddle that our tax system has become. Scarcely a year passes without at least discussion in Congress and the White House of tax “reform” or “simplification.” Yet, as politicians open the tax window annually, no true reform and certainly no simplification result—au contraire. The public seems bemused: why does each round of change only increase the number of special breaks and add new forms to the April 15 ordeal? Answer: it’s all part of this year’s round of extortion. The names of those purchasing protection from the taxman change—the 1986 tax “reform” legislation featured a “Gallo amendment” and a “Marriott amendment,” while the 1997 legislation included an “Amway amendment” in return for that firm’s reported so-called contributions of over $1 million. But the rules of tax “reform” remain the same.

Of course, the political threats must be credible. If private individuals think a threat is just a bluff, they have no incentive to pay. Thus, politicians may sometimes be forced actually to legislate; as Gordon Tullock puts it, “politicians may sometimes have to enact legislation extracting private rents from owners who do not pay up, just as the Cosa Nostra occasionally burns down the buildings of those who fail to pay its protection levies.” If payment ultimately is forthcoming, politicians can always repeal the legislation.

Threats can be credible (and politically attractive) only if they are constitutionally protected. Private extortion is illegal. However, there is no law against the political extortion discussed here: legislators themselves get to define what constitutes extortion, and obviously have chosen not to outlaw what they do. (True, when political shakedowns come to light, they occasionally prove embarrassing enough to force a legislator to resign.)

Constitutions exist precisely to establish rules to protect the citizenry against such political depredations. Were there constitutional obstacles to profiting from the sorts of threats that elicit private payments, those threats would be made less often, since victims would always have the counter-option of seeking refunds through constitutional litigation.

But the state and federal constitutions have provided little shield against the political protection racket. The Founding Fathers themselves seem not to have worried as much about politicians extorting from the voters as they did about factions of private citizens using government to take from other factions. The level of constitutional protection against legislative expropriation of basic contract and property rights has steadily diminished since the late nineteenth century. As noted earlier, the very right to “contribute” to politicians has been held constitutionally protected. As government regulation pushes into more and more areas, the scope for selling political protection expands apace. In effect, as courts have retreated from affording constitutional protection against threats of legislative takings, potential private victims have found it necessary to use their own self-help remedies, paying off politicians rather than endure even more dire regulation (including taxation).

Consider, for example, environmental regulation, an area of state and federal activity virtually unknown even a generation ago. The search for sites to dump toxic wastes, the wish to exclude certain land (woods, wetlands) from private development, and other environmental issues have created opportunities for politicians who can influence such decisions to harvest big contributions.

This leads to a perhaps unexpected conclusion. In a second-best world where government has already been allowed to grow large, toleration of the political extortion racket is actually desirable. If the politicians cannot be paid off to abstain from imposing costs on private parties, those costs will be imposed. Where government has too much power, then, the political protection racket can actually lighten the burden.

“All right,” one might say, “we should reduce or eliminate government’s ability credibly to threaten private individuals with pecuniary or other loss.” True enough, perhaps, but this position effectively boils down to reducing the size of the state, of reducing its power to do almost everything it currently does. In particular, it would mean an end to most taxation and programs to transfer wealth, the essence of modern politics. However desirable, any such reduction amounts to arresting a trend in government growth that has been gaining momentum for over a century. If that engine cannot be stopped and thrown into reverse, those of us along for the ride must sometimes resign ourselves to protecting our well-being with our own wallets.
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Fred Mc-Chesney, a professor of law and economics at Cornell, has written an excellent book that enhances our understanding of the political economy of government. Money for Nothing neatly summarizes (in 170 pages of text plus 43 pages of notes and references) the research in the past 30 years (in which McChesney has played a key role) about “rent-seeking” and “rent extraction.”

“Rent” is an economist’s term that refers “to returns to the owner of an asset in excess of the level of returns necessary for him to continue using the asset in its current employment.” Rent-seeking is the process of attempting to obtain rents by manipulating the political process to grab the wealth generated or owned by another. For example, environmental groups commonly pressure legislatures or regulatory bodies to reassign property rights in a way that reduces the wealth of property owners while advancing the groups’ own goals (such as additional habitat for spotted owls). This is a nonmarket, but legal, transfer of wealth.

Paul’s desire to have the state rob Peter and give the money to Paul (rent-seeking) is well understood. Less understood is rent extraction, which is the receipt of payments in return for a promise not to take or destroy private wealth, in other words, extortion. Private rent extraction, such as a Mafia protection racket, exists, but is trivial (and illegal) compared to public-sector rent extraction.

Legislators have nearly unlimited constitutional powers to impose taxes and regulations that reduce or destroy the wealth of a business. Politicians can, therefore, extract rent from owners in exchange for not imposing destructive taxes or regulations (political extortion). Peter will be willing to pay something not to be robbed.

Who is the key player in the political protection market? The politician. A politician is a political entrepreneur with the legal authority to bestow favors on Peter or Paul. Exercising such power has, in recent decades, become the primary role of government. Productive functions of government—such as law enforcement and national defense—take a small fraction of government resources; most government now involves wealth redistribution via taxing and entitlement schemes, or regulations that favor certain firms at the expense of consumers and other firms.

McChesney’s book provides a readable and nontechnical explanation of the theory and practice of our political economy. His particular contribution to this literature is his work on politicians as entrepreneurs who manage the process that allows them to be “paid not to legislate—money for nothing.”

There is already a large literature about politicians transferring wealth to win political support. McChesney has expanded our understanding of the extent of the politicians’ damage done by focusing on how they can extract rents for themselves by promising to abstain from that activity.

His book is filled with stories of the kinds that will show ordinary citizens that politics is dominated by special interests. But as Mc-Chesney explains, politicians do not wait passively for rent-seekers to come to them with proposals. Politicians actively exploit the process, such as by giving taxpayer dollars to so-called “consumer groups” that request ever-more regulation at hearings run by the same members of Congress. That provides a rationale for members of Congress to threaten new regulations unless industry mounts makes the appropriate effort (by PACs, etc.) to “convince” Congress of the “wisdom” of not acting.

The politicians cannot lose. The losers are citizens who see their freedoms and wealth consistently chiseled away by those who have developed the finest skills for getting money for nothing. Given the massive and expanding scope of government, McChesney’s book is an important part of a comprehensive economic education.