Limitations of Rent-Seeking in the US - Research Proposal Example

American Society Rent seeking is abehavior through which firms seek only to maximize profit without benefiting any other stakeholder such as the customers, the employees or even the society in general. Banks in America have applied this in the past. The paper discusses rent seeking behavior with regard to the way it creates economic inequality. The 2008-2012 economic recession in U.S.A that affected other parts of the world is discussed in the context of rent seeking by the American banks. It became clear that the rent seeking behavior has a very negative impact on the American economy. Research Proposal Although the United States of America is one of the most developed countries in the world and often referred as the land of opportunities, these opportunities are not distributed equally among the American citizens. The U.S.A banking/financial system has resulted in made-up inequality. Rent seeking in the USA has resulted in wastage of resources and inequality because of unequal creating and assigning of transfers between economic players. According to Stiglitz (2012, p. 35) although market forces aid in shaping the level of inequality, régimes policies influence these market forces. Stiglitz (2012, p.35) further articulates that the level of the disproportion that occurs today is because of the various régime policies; both what a regime does and does not accomplish. The research evaluates the influence of rent seeking in the American financial and banking institutions on the American economy. In addition, it tries to determine how the actions or inactions of the government led to the rent-seeking practice in the American financial and banking institutions. Methodology The method used for collecting information for the paper is a literature review. Scholarly works from different backgrounds will be consulted through their past work to identify how the rent-seeking behavior has affected the American economy. Research Questions 1. How has rent seeking by American Banks affected the American economy? 2. How have the actions or inactions of the government led to an environment where rent seeking by American Banks is possible and profitable to then? 3. How do rent-seeking activities, especially by the American Banks affect the economy? Literature Review Several scholarly studies cover social inequality. From past literature, it becomes apparent that social inequality has always been there since the civilization of man. Social inequality manifests itself as a stratification of the society where various strata of the society have varying degree of access to resources (Western, 2006, pp. 5-7). Those at the top of the social strata can access the best and the highest number of resources, at the expense of those who are at the bottom of the social strata. The resources allocated are material like wealth or income, and are prestige and social status. Stratification systems divide individuals vertically in a social structure that has a top and bottom. Social stratification, commonly measured in terms of inequality, evaluates the difference in the dispersion of individuals in social categories. The distribution of earnings significantly reduced during the Great Depression and the Second World War (Massey 2007, p. 4). In addition, poverty rates declined steadily. However, the new post-industrial economy developed and increased the professional differentiation enlarging the distance between the bottom and the top of the social hierarchy. Markets are not working as they are should work. Stability should be an element of markets. However, the global financial crisis has indicated that markets could be considerably unstable leading to detrimental effects. Markets are also supposed to be efficient where demand equals supply. The markets have led to significant levels of inequality in the society. Massey describes markets as competitors between individuals placed at certain levels of the strata (Massey 2007, p. 23). The society brings markets into existence to enable consumption, production, and distribution of services and goods. The most basic evidence or result of stratification is the allocation of individuals to social categories and the socialization of the practices and actions as well as environment that allocate these scarce resources unequally across the social classes (Massey, 2007, p. 210). In this regard, considering that most of the people that gained subprime mortgages from the banks ended up homeless, it is arguable that rent seeking was only in the interests of the banks (Rosenberg, 2012, p. 319). Rent-Seeking Behavior of the American Financial Institutions and the 2007 Recession Rent seeking is the practice in which an organization, company, or individual applies resources to get an economic gain from other parties without reciprocating benefits to the community through the creation of wealth. For-profit or non-profit organizations are involved such a practice. The American economy has benefitted from high productivity levels compared to other economies in the world. Rent seeking requires spending of resources to own another person’s surplus eventually. This practice adds no value to the national economy (Khwaja & Mian, 2011, p. 579-60). Rent seeking only benefits one party. Rent seeking is a waste of resources and weakens an economy (Stiglitz, 2012, p. 119). The practice distorts the allocation of resources. Corporations and individuals who benefit from rent seeking collect huge returns at the expense of others (Khwaja & Mian, 2011 p. 580). A country that embraces rent-seeking behavior encourages bad misalignment of social returns. Rent seeking behavior among banks has had adverse effects on the American economy. The financial sector should serve the entire economy and not vice versa. Financial institutions are not the only rent-seeking source in the economy. Several major sectors in the economy have also resulted to rent seeking like the telecommunication and healthcare sectors. When some banks take high risks to obtain excessive returns, they risk that the returns will be worth the dangers involved. When the government bails out such risky banks, they provide a huge advantage over those banks that are cautious. The high-risk taking banks can privatize any revenue gained from the risky adventures. Nevertheless, such banks manage to coerce the public to meet the financial obligations of their failure through rent seeking. Rent seeking affects the economy negatively. This practice pulls out income used for financing innovations. Rent seeking accompanies government spending. Rent seeking wastes billions of dollars from the public sector. The process of bailing out banks stands based on the notion that the institutions are too important to the economy and would have negative effects if they failed. During the mortgage scandal, banks misinformed customers on the value of mortgage loan sale before the housing crash (Autonomous Nonprofit Organization, 2014). The institutions gave out excessive loans to customers knowing they could not repay the loans. This aspect later led to the downfall of the housing bubble and the commencement of the recession in 2007. Financial institutions deceived customers on the status of the loans resulting in billions of dollars in losses and millions of individuals lost their investments to foreclosure. The groups of banks involved in the mortgage scandal sold billions of dollars in terms bad loans. Before the financial disaster, one of the banks purchased a huge number of mortgage loans and sold them as securities with the knowledge that a significant number of the loans were faulty. The banks engaged in such activities to obtain the highest returns. The banks proceeded to seek a bailout from the government without compensations to the millions who had lost their homes in the scandal. Politics significantly affects banks in their rent-seeking practices. The financial institutions are susceptible to corruption because of their administrative organization. The top managers of the banks are government appointees (Khwaja & Mian, 2011 p. 579-81). The government describes the personnel policies and bank’s credits; hence, such banks alter their lending rules to favor candidates with political connections. Proposed reform measures of reducing the vulnerability of banks include opening exchanges to reform, confronting the brokers directly, and privatization of the banking sector. Rent-seeking activities are harmful to the American economy. Such practices negatively affect productivity and innovation leading to social inequality. The government plays a center role in rent-seeking practices. The government should enact effective policies to cease the practice of rent seeking. Regulation of the financial institutions is critical in ensuring the economy remains uninfluenced by scandalous activities that only seek to benefit one party. The government offers bailout money without accountability. The government should put measures in place to regulate and dictate situations under which a bank can receive a bailout. According to Stiglitz (2012, p. 119), rent-seeking undertakings were responsible for creating inequality in the U.S.A, especially during the recession because those who benefitted from the home market bubble and complex financial products were not generating wealth. The banks and private capital firms were getting extraordinary returns by shifting the financial risk to the public sector while accumulating all of the revenues (Stiglitz, 2012, p. 120). These activities led to inequality because the ordinary Americans lost huge sums of money to private equities and the US government used people taxes to bail out the private equities when the market crashed. The U.S government policies on banking were inadequate and failed to safeguard the American people from financial exploitation by the banks and mortgage companies. Further, the execution of bailout plans failed to safeguard the interests of the public. For instance, the government used the taxpayers’ money and gave it to the same companies that caused the recession of 2007, the so-called “job creators.” However, this has not worked because the 1 percent earnings have improved while the “99 percent” continue to suffer, such that their wages have not managed to reach the levels they were before 2007 (Piketty & Saez, 2003). For instance, according to Stiglitz, “The top 1 percent of Americans gained 93 percent of the additional income created in the country in 2010, as compared with 2009….the ratio of CEO annual compensation to that of the typical worker by 2010 was back to what it had been before the crisis, to 243 to 1” (2012, p. 3). The current trends continue to show that rent seeking is continuing post the 2008 economic recession. As Stiglitz says, most of the inequalities issues that exist today in U.S.A are a result of state rule, with regard to the government actions or inactions (Stiglitz, 2012, pp. 119-121). The conditions that have facilitated the American banks and financial institutions to rent seek relates to government policies. For instance, lack of regulation or in fact deregulation of the financial services industry led to the rent-seeking activities of the American banks and financial institutions. For example, the US government offered bail out money with no accountability. This meant that money transfers from the taxpayers who are actually productive in the economy, to parties who are not productive in the economy. The effect of this on the economy is that less production takes place because the US government denied those who are productive in the economy the resources to be productive while the same resources go to those who are not productive to the economy. Discussion It is very clear that the rent-seeking activities of the American banks are detrimental to the production in the American economy. It is very evident that the ways in which the American banks conduct themselves declines the productivity of the American economy and influences millions of Americans who are in the lowest tier of the American economy. This practice creates social inequality and creates opportunities for future inequalities. The government has a part to play in this practice. Politics significantly affects banks in their rent-seeking practices. The banks are vulnerable to corruption because of their organizational structure. At the top hierarchy of the banks are government appointees (Khwaja & Mian, 2011, p. 579). The government describes the personnel policies and bank’s credits; hence, such banks alter their lending rules to favor candidates with political connections. The lack of reform on policy toward rent has deteriorated the problem in the American economy. The U.S government needs to curb the financial sector to avoid scandals and wastage of huge amounts of taxpayers’ money on bailouts (Stiglitz, 2012). To control the rent menace the government needs to curb the financial sector. Reforms to curb this industry will involve controlling excessive risk-taking. The US government should regulate the interconnection of financial institutions as they form groups that lead to numerous bailouts. Implementation of limitations on liquidity and advantage is important (Stiglitz, 2012). The US government should emphasize transparency from banks particularly in over the counter products. Credit card and banks need more competitiveness to avoid instances of consumer exploitation. A competitive banking system does not exploit consumers or engage effectively in rent seeking. The U.S government should also make it difficult for the financial institutions to engage in predacious loaning and exploitative credit card practices. For instance, offshore banking centers and their onshore partners should close down. This exercise will eliminate circumventing practices, tax evasion, and avoidance. Competition laws should be enforced strongly and effectively to enhance efficiency and equity (Stiglitz, 2012, pp. 48-50). The policies related to corporate governance, competition, and bankruptcy are critical to an economy. The U.S government must regulate monopolies and imperfectly competitive markets as they form the biggest source of rents. Dominant firms suppress competition and discourage innovation. Corporations should also improve corporate governance by limiting the power of executives in diverting corporate resources for personal benefits. The U.S government should comprehensively reform bankruptcy laws to eliminate situations of consumer exploitation. The lender understands the market better than the borrower does. As such, the lender should bear the effects of a mistake as opposed to the borrower. The mortgage scandal is an effective example in which bankruptcy reform is important. The 2008 recession left most borrowers bankrupt (Stiglitz, 2012, p. 243). The lender felt no effects of the mistakes made from the selfish interests of the lender; therefore, making bankruptcy laws more borrower-friendly will ensure banks are careful when lending. Corporations should also end corporate welfare, which includes hidden subsidies. The government uses huge amounts of money bailing out corporations instead of helping individuals in need of assistance. The U.S government should close corporates that cannot sustain themselves. Government giveaways in corporations are immense and are untainted transfer from the populations to corporations and the wealthy in the society. Such practices limit the spending on investments that have high-return outcomes to the public. The tax code hides giveaways, concealed in subsidies says Stiglitz (2012, p. 270). The exceptions, loopholes, and preferences restrict the progressivity of the tax system and alter incentives. The legal system makes huge rents at the expense of the society. Individuals in the highest position of the economic strata get favor at the expense of those at the bottom. Rent-seeking activities are harmful to the American economy. Such practices negatively affect productivity and innovation leading to social inequality. The government plays a center role in rent-seeking practices. The U.S government should enact effective policies to cease the practice of rent seeking. Regulation of the financial institutions is critical in ensuring that scandalous activities that only seek to benefit one party do not influence the economy. During the 2008, the U.S administration offered bailout money without accountability; thus, it should put in place measures to regulate and dictate situations under which a bank can receive a bailout. The government has a responsibility of using private or public means to ensure that the social and physical infrastructure required for markets is established and maintained. References Autonomous Nonprofit Organization. (2014). Bank of America agrees to record $17bn settlement over mortgage fraud. Retrieved from: http://rt.com/business/181724-bank-of-america-17-billion/ Khwaja, A. I., & Mian, A. (2011). Rent seeking and corruption in financial markets. The Annual Review of Economics, 3, 579-600. Massey, Douglas. (2007). Categorically unequal the American stratification system. New York, NY: Russell Sage Foundation. Rosenberg, Jerry. (2012). The concise encyclopedia of the great recession 2007-2012. New York, NY: Scarecrow Press. Piketty, T., & Saez, E. (2003). Income Inequality In The United States, 1913–1998. The Quarterly Journal Of Economics, CXVIII (1), 1-39. Stiglitz, J. E. (2012). The price of inequality. How todays divided society engages our future. New York: W. W. Norton & Company. Western, Bruce. (2006). Punishment and inequality in America. New York, NY: Russell Sage. Read More