Wednesday, June 26, 2013

Rent Seeking and Transportation Service Innovations

Steve Blank at the Berkeley blog has a nice piece about rent seeking strangling innovation. He doesn't set out to highlight how rent seeking has diminished innovation in the transport sector, but he ends up doing so with examples including auto dealers blocking Tesla, protectionist policies that distort auto imports and manufacturing, and taxi services. Rather than me writing new explanations of rent seeking, here is what he wrote:
Rent seekers
Rent seekers are individuals or organizations that have succeeded with existing business models and look to the government and regulators as their first line of defense against innovative competition. They use government regulation and lawsuits to keep out new entrants with more innovative business models. They use every argument from public safety to lack of quality or loss of jobs to lobby against the new entrants. Rent seekers spend money to increase their share of an existing market instead of creating new products or markets. The key idea is that rent seeking behavior creates nothing of value.
These barriers to new innovative entrants are called economic rent. Examples of economic rent include state automobile franchise laws, taxi medallion laws, limits on charter schools, auto, steel or sugar tariffs, patent trolls, bribery of government officials, corruption and regulatory capture. They’re all part of the same pattern – they add no value to the economy and prevent innovation from reaching the consumer.
 How do rent seekers win?
Instead of offering better products or better service at lower prices, rent seekers hire lawyers and lobbyists to influence politicians and regulators to pass laws, write regulations and collect taxes that block competition. The process of getting the government to give out these favors is rent-seeking.
Rent seeking lobbyists go directly to legislative bodies (Congress, State Legislatures, City Councils) to persuade government officials to enact laws and regulations in exchange for campaign contributions, appeasing influential voting blocks or future jobs in the regulated industry. They also use the courts to tie up and exhaust a startupslimited financial resources.

Lobbyists also work through regulatory bodies like FCC, SEC, FTC, Public Utility, Taxi, or Insurance Commissions, School Boards, etc. Although most regulatory bodies are initially set up to protect the public’s health and safety, or to provide an equal playing field, over time the very people they’re supposed to regulate capture the regulatory agencies. Rent Seekers take advantage of regulatory capture to protect their interests against the new innovators.
There have been shockingly few service and technological innovations in all aspects of regulated transport over the past few decades. Automobility is long in the tooth for a technology, which may be why we are seeing a decline in auto travel. Transit has performed poorly relative to investment, with few productivity gains and only minor service improvements since the mid-1970s*. Taxi services remain largely unchanged to the point that few cities have bothered to even consider changing how many taxicabs are allowed.

A major reason that there have been so few innovations is because of rent seeking, and understanding economic rents is critical for all planners and transport officials. Here are a couple of recent rentier examples  that make cities worse off: LA blocks taxi apps, and Veolia engages in regulatory capture. Many of the rent seekers are private companies, so don't think that privatization is the key to innovation. Rentiers can be private or public, and in all cases make the public and consumer worse off.

Here is a link to a podcast about rent seeking by a couple of libertarian (at least libertarian leaning) economists, Mike Munger and Russ Roberts (I updated the names based on a commenter rightly saying I should name these two. The podcast and links are excellent sources for information). There are lots of additional links there, too. One thing about rent seeking is that everyone is against it regardless of political persuasion. People differ in what to do about it.

*I am referring to transit in the US generally, not specific lines or station areas. While the past few years transit ridership has grown faster than the population overall, transit ridership is below 1970 levels by nearly all metrics. This helps illustrate the problem.
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