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How Hawaii is harmed by ‘rent seeking’

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Examples include special-interest support for the Jones Act, job licensing, project labor agreements and tourism subsidies

People who think the United States has a free market apparently are unaware of the economic concept of “rent-seeking,” also known as crony capitalism.

During a presentation in October to a political science class at the University of Hawaii at Manoa, Joe Kent, executive vice president of the Grassroot Institute of Hawaii, explained how rent-seeking is contrary to the free market, and how it harms Hawaii.
 
Kent was invited to speak to the class by UH professor and Grassroot Scholar Kate Zhou. He said examples of rent-seeking include special-interest support for the Jones Act, occupational licensure, certificate-of-need laws, project labor agreements (aka “community workforce agreements”) and subsidies for the tourism industry.
 
For the record, Wikipedia defines rent-seeking as profiteering “by using social institutions, such as the power of the state, to redistribute wealth among different groups without creating new wealth.”
 
It defines crony capitalism as “an economic system in which businesses thrive … by using state power rather than competition in managing permits, government grants, tax breaks, or other forms of state intervention over resources where the state exercises monopolist control over public goods, for example, mining concessions for primary commodities or contracts for public works.”
 
So basically, they’re the same thing. Whichever you call it, we have more of it in Hawaii than we should.

 

 

10-27-20
Transcript of Joe Kent, Grassroot Institute of Hawaii executive vice president, speaking to professor Kate Zhou’s political science class at the University of Hawaii at Manoa, on “rent-seeking.”

Joe Kent: Aloha. I’m Joe Kent. I work at the Grassroot Institute of Hawaii, which is a research organization that educates about individual liberty, economic freedom and accountable government. Today, we’re talking about “rent-seeking,” which means an attempt to increase profits by lobbying the government for a special advantage.

Whenever the government has something to give away, let’s say it’s money or a special privilege, there are a thousand ways to get it, and there are a thousand groups that tried to get it, and that’s all called rent-seeking. Sometimes people refer to it as crony capitalism or cronyism. Let me share my screen here, just to make sure. Now you can probably see my screen.

Kate Zhou: Yes.

Kent: There it is again. It’s an attempt to increase profits by lobbying the government for a special advantage. That’s all we’re talking about today. 

Do you think there’s a lot of that going on in Hawaii? Well, actually there is. Unfortunately, there is a lot of that going on in Hawaii, backroom deals, or just lobbying. Can anyone think, though, of an example — I’m not sure if I’m able to ask everyone questions. I think I am — of an example of rent-seeking; for example, in the shipping industry.

I think a few weeks ago you might have learned about a special federal law that gives shipping companies a special advantage. Does anyone know what that is? Does anyone remember? There’s a special federal law. It was called something.

Student: The Jones Act.

Kent: That’s exactly right, the Jones Act. The Jones Act is definitely a special-privilege type of a law. It allows U.S. shipping companies to get a special privilege. Does anyone remember what the Jones Act does?

Student: It only allows American companies with certain American ownership and American crew members to port.

Kent: That’s great. Basically, any ship carrying goods between one U.S. port and another U.S. port, they have to be built in the U.S., flagged in the U.S., and 75% crewed and owned by U.S. citizens. Here you can see the map of the Pacific Ocean. Here’s Hawaii in the middle, and if you wanted to take goods from Hawaii and ship them to California and drop them off there, that can only be done on an American ship. Actually, it used to be that foreign ships used to be able to do that back 100 years ago. This is a ship called the Shinyo-Maru, which is a Japanese-built ship. It would take goods and passengers from Hawaii to California, and back. There were a lot of shipping companies, foreign shipping companies, that would do this. But then they passed the Jones Act, and that ended everything. Now, there’s basically only two shipping companies that can do that, Matson and Pasha, and they’re the Jones Act ships, the American ships. This raises costs for everyone. 

The way they got this law passed is basically they lobbied Congress to have this special privilege, and now we have it. The law is 100 years old this year. It’ll probably be around for a while longer.

Let’s talk a little bit about the economic cost of the Jones Act. Basically, the costs are —  I think, Keli‘i Akina, who spoke earlier, talked about the costs — they’re about $1.2 billion dollars to the Hawaii economy every year. That costs Hawaii families about $5 a day, or $1,794 a year. Basically, we have 9,000 fewer jobs, and we miss out on about $400 million dollars in wages because of that law.

Another example of rent-seeking is hospitals. Hawaii has among the fewest hospital beds per person in the nation. I was talking to my dad the other day, and he said, “Joe, if you’re going to research something, research why we don’t have any hospitals, or why it’s so hard to get a doctor,” and all of that. It really is in Hawaii. We have some of the fewest amounts of hospital beds. Part of the reason for that is because of Hawaii’s “certificate of need” laws. A certificate of need law is basically a law that gives hospitals a special privilege to keep out other hospitals.

If anyone wants to create a new hospital, they have to petition the government for a certificate of need. Basically, the government says, do we really need a hospital? Everyone weighs in. Some people from the community say yes, please, we need a hospital, but the existing hospitals often say no, we don’t need a new hospital. Now, that’s really interesting. Why do you think that existing hospitals would say that we don’t need any new hospitals?

Student: Maybe supply and demand, I’m not sure.

Kent: Supply and demand. That there’s just enough hospitals, do you think? Do you think there’s another reason that existing hospitals wouldn’t want another hospital to pop up in their area?

Zhou: Come on, you know that answer. Elijah?

Elijah (student): Protect their market or their profits, and avoid competition or more competition. 

Kent: That’s probably right. When the existing hospital petitions the government and says no, we don’t need any new hospitals, a lot of times they say it’s because people will take their business, and then they’ll have to compete. Then they’ll have to lower their prices, and then they won’t make as much money. 

That’s exactly what happened on Maui in 2006. A group of doctors pooled their resources, they gathered $1 million, and they tried to start a new hospital. But the existing hospital lobbied the government to keep the competitors out, and the doctors were denied the right to build their hospital, and that left Maui with only one hospital to service the entire island.

Actually, I used to live on Maui. I don’t know if anyone here used to, but if you’re sick on the other side of the island, you have to drive an hour to get to the hospital. Sometimes the road is closed, and you’re just out of luck. This is a policy that can be really damaging and dangerous, actually, to a lot of people.

Another example of rent-seeking or special privilege-seeking is Uber and Lyft, and taxis. Uber and Lyft came to the islands, when was that — 2014, 2015 or so? The existing taxi companies lobbied the government to make them illegal. They said that ride-sharing was dangerous, and that they would take advantage of their customers, so the government outlawed ride-sharing companies at the airport, and residents had to walk away from the airport to hail an Uber.

I don’t know if any of you have done this, but I used to fly into Maui, and no Ubers were allowed at the airport, and so I would have to walk a mile with my bags and everything in order to get an Uber. For me, I preferred to get the Uber or Lyft. It seems so silly. I’m walking, I’m out in the middle of a canefield trying to hail an Uber. 

Now they finally changed the law to allow ride-sharing companies to pick up passengers at the airport, and taxis have to compete with that. For a few years, the taxis had this special privilege where only they could pick up folks at the airport.

There’s rent-seeking happening right now at the Honolulu Council over a bill called Bill 80. Bill 80 was basically put forth by the hotel workers, and the workers say, “We want the hotels to hire us back.” Now, normally the hotels are a private company, and the workers are a private union. What normally happens is the private company negotiates with the private union for pay and benefits and all that. But what’s happening now is the workers don’t want to sit at the negotiating table. They want to skip the negotiating table and go to the Honolulu Council government to force the hotels to hire them back.

What the workers say is, when businesses come back, the same workers come back. They want to hire the same worker in the same job for the same salary, and the same benefits and everything. That’s what Bill 80 does. The hotels, though, argue that it doesn’t give them the flexibility they need to try to save costs. Hawaii’s economy has totally been decimated, you may have noticed. The hotels are struggling, the workers are struggling, but there are no tourists. Well, I guess they’re starting to trickle back.

What Bill 80 would do is say, “OK, if your hotel has 50% capacity” — let’s say tourists start coming back — “about 50% capacity, the hotel would have to hire back 50% of the workers from before by seniority, and give them the same salary and benefits and put them in the same position.” For example, if a hotel wanted to shift people around, and let’s say they say, “Let’s take someone from the front desk, and we need them in the parking lot today,” or something. This bill wouldn’t allow them to do that. It’s basically a form of rent-seeking.

The workers are seeking the special privilege from the Council. What do you think, though? There’s pluses and minuses to both sides. Do you think the workers are in the right, or do you think they have a point, though, that the hotels should be forced to hire all of them back, or do you think the hotels have the point? In other words, do you think Bill 80 should pass, or do you think it should fail, or what are your opinions about that?

Student: For me, I think I support the workers for this instance, like hotels, because they’re like preparation type things. But if it were like — my family owns a rental house, and if they needed to do budget cuts like a family-owned local business, then I feel like they should have the freedom.

Kent: Yes. I think that’s a great perspective, and I want to defend that perspective. In fact, my family has some folks that work at the hotels, and they would really like to have their job back in the same position and all that, so they want that protection. There’s definitely an argument there. Anyone else? 

Well, there’s a lot of opinions. If you go down to the Honolulu Council and listen to this, this is a ping pong match that’s going on for a while. Some say that it’s political too, that it might be different after the election season, so we’ll have to keep following that. 

Is that all the rent-seeking there is in Hawaii?

No, there’s a lot more. There’s licensing laws. Occupational licensing. Hawaii has some of the most burdensome occupational licensing laws in the nation. You need a license to cut hair, to do nails, to be a travel agent, to be a masseuse, to be a contractor or a teacher’s aide, and a lot of other things. A lot of these licensing laws require fees and hours, and a lot of requirements for someone who just wants to do something simple like do a massage. For example, there was someone who reached out to us, Tisha. She lives on Maui, and she said she wanted to work as a hairstylist.

Now in order for Tisha to get a cosmetology license, she would need to pay $200 in fees and have 450 days of training and experience, and all of that could total to more than $17,000 in order for her to get her license. She said, “I can’t afford that.” She said, “There’s no opportunities here.” 

There’s a lot of occupations in Hawaii that require a license. Here’s all the occupations licensed in the state. This is just a few of them. You can see all the tuition and fees that you need, the experience. 

Here’s some more: You’ve got barbers, skincare specialists, child care workers, bus drivers, truck drivers and so on. Milk samplers. For example, let’s look at handyman. In Hawaii, to be a licensed carpenter, you need 1,460 hours of experience. That’s a few years of experience, and you have to pass two exams and pay a $615 fee — unless you work on jobs less than $1,500. Then you don’t need a license.

My wife and I wanted to install a new ceiling fan, and we wanted to fix a door, and we had a broken window and we wanted to fix it, so we hired a handyman. We had to make sure to stay under the $1,500, otherwise we would have had to hire a licensed handyman, which would have been way, way more expensive and which is hard to find, actually. Most contracted or licensed contractors want to work on jobs that are like $10,000 or $20,000. They don’t want to work on a little $2,000 project. So that is a form of rent-seeking. 

Another form of rent-seeking in the contracting industry is called “project labor agreements.” It’s basically a requirement that government projects have to use union work. The rail, for example, is a large construction project. The law says that if the project is large enough, they have to use union work, so the rail is all union construction companies. But there are a lot of nonunion construction companies who might have tried to offer a lower price or tried to offer better service, and all that. That might have actually brought the cost of the rail down. It might have brought the cost of many other things in the government down.

These things, again, they’re called project labor agreements, they end up raising the costs of a lot of government projects. They benefit the rent-seekers at the cost of the taxpayer. We all pay a little bit more so they can have that special privilege.

I have a question now. Who is the bad guy when it comes to rent-seeking, if there’s a bad guy at all? Is it the fault of business, or do you think it’s more the fault of the government in these rent-seeking situations?

Elijah (student): Government.

Kent: Okay. Elijah thinks it’s government. Anyone else? Was it Elijah that said that?

Zhou: Yes.

Kent: Why do you think it’s more the government than the business’s fault? The businesses are — they’re the ones that are begging the government for the permission, right?

Elijah (student): Because it’s hard to blame a worker for wanting more money, or an organization for wanting more influence, but the government shouldn’t be offering that influence. It shouldn’t be making deals, because that compromises their fairness and their ethics. The company is working in its best interest. The government official should be working in the public’s best interest, not in their personal best interest by taking money or whatever the lobbying entails.

Kent: I think that’s a great perspective. Some people say, “If the government didn’t have that privilege to give away, then there would be no rent-seeking.” If there was no government at all, there would be no lobbyists. [laughs] Lobbyists actually exist because of this rent-seeking.

Actually, there was an economist, Milton Friedman, who said, “In socialist dictatorships, there’s no such thing as lobbyists.” If the government is so big that all there is is government, then there is no lobbyists, either. Here in Hawaii, in the United States, where we have a democracy and where we can talk to our legislators and get a little bit of that power, then that creates this lobbying environment.

Are there any other examples of rent-seeking that you can think of? If anyone has any examples. If you can’t think of anything, that’s OK too. But any other examples that you might think of of rent-seeking, either at the Hawaii level or the federal level.

Zhou: How about the solar industry? People who are in the solar industry lobby, for example, on Obama. There was a company in California, San Francisco. They donate $25 million to Obama. As a result, they get more than $300 million grant, and that company, within two years, folded.

Kent: Yes, there’s a lot of solar company lobbying. Absolutely. Even in Hawaii, there’s a lot of that. I haven’t looked deeply into it, but I’ve heard of it. Also, it’s interesting that you said, Professor Zhou, that the company gets millions of dollars, but they only pay thousands of dollars to lobby. Some people ask, “How much does it cost to buy a legislator, or how much does it cost to buy a politician?” The answer is, it doesn’t cost as much as you think. [laughs] If you look at the rail project, for example, the Honolulu rail project.

That’s started out as about $2.3 billion. They said it was going to cost $2.3 billion, and now today, it costs more than $10 billion. How much money did they actually spend lobbying to pass the project in 2008? There was a big vote in 2008. I don’t know if you knew. They wanted to see if the people in Honolulu wanted the project, yes or no.

The rail could have been killed right there, but the vote passed by 51%. Fifty-one percent of Hawaii residents, voters, said, “Yes, I want the rail.” 

How did that happen? It’s because the pro-rail lobby basically spent thousands and thousands of dollars to do advertisement campaigns. They spent five times more than the anti-rail folks to advertise why we need rail and everything. That’s how the rail passed, just by a hair.

Notice they only spent hundreds of thousands of dollars, which sounds like a lot of money, but actually in the end they got billions of dollars. The amount that you have to spend to do rent-seeking is much lower than the amount that you get as a benefit, usually. That is the main gist of my talk here. 

I wanted to ask a few questions here. How does rent-seeking affect taxpayers, do you think?

Student: It drives up government project costs, and so they need more tax revenue to pay for these projects.

Kent: Right. Usually taxes go up because of rent-seeking, often. A lot of people are saying that our taxes are going to go up next year, and it’d be interesting to see how much of that is due to rent-seeking. 

How can we limit rent-seeking? I think we touched on that before, about how to limit it. Basically, it’s to limit the government’s power and try to — if you have a weaker government or a limited government, then you have less ability to actually give out favors and everything. Here’s what I was talking about before.

That is basically rent-seeking in a nutshell in Hawaii. 

Oh, one more: the Hawaii Tourism Authority is another form of rent-seeking. The tourist industry basically spends taxpayer money to advertise Hawaii across the nation. The tourist industry could spend its own money if they wanted to, but they choose to spend taxpayer money to do this, and they got a special privilege to do that.

They spend about $79 million every year on advertising Hawaii as a tourist destination, and that makes our taxes more expensive. 

A few final questions here. Why is rent-seeking so difficult to overcome? Someone besides the folks who have talked before. Why do you think rent-seeking is so difficult to stop? 

Anyone? I actually don’t know the answer to that question, so you have to help me with that, if anyone thinks of it. I don’t know why it’s so difficult to stop. It just keeps happening though doesn’t it? 

Another: Does rent-seeking exist at the federal level or county level, do you think? Actually at the federal level, can you think of any other examples of rent-seeking?

Zhou: I don’t know if the scandal is true or not. I’m sorry, because nobody is talking. For example, the foreign company who hired Joe Biden’s son to represent — I think that is rent-seeking, right?

Kent: [laughs] Yes, that would be.

Zhou: They’re using the son to lobby for them, so they gave him maybe how much money? Only $50,000 a month? The government would not prosecute them. Joe Biden openly said that I have fired that son of a bitch. You don’t think, that’s not rent-seeking? I think that’s rent-seeking.

Kent: I don’t know the details of that one, but if you’re talking about someone trying to basically give a special privilege to a different government or something, yes, that would qualify. 

Some of the other examples are sugar subsidies. The sugar industry gets tons of subsidies from a federal privilege, and there are just many others. 

That’s the end of my talk here on rent-seeking, otherwise known as cronyism. Does anyone have any questions?

Student: Would the water rates count as rent-seeking? Like when Alexander & Baldwin was trying to keep the rights to the water claim and stuff? I’m just curious, I don’t know if it is or not.

Kent: That’s a great question. I don’t know. In Hawaii, I believe there’s a public doctrine that says that the water belongs to the people. There’s a thought that water is to be held in a public trust for everyone. But at the same time, you’re right, there is the debate, I guess, about whether A&B should have the exclusive rights to that water. I don’t know, that’s a great question. I wish I knew the answer to whether or not that’s rent-seeking, but it sure seems like it, though, doesn’t it?

Student: Yes.

Kent: We’ve talked about rent-seeking in terms of government employees — or excuse me — in terms of private-sector workers and businesses trying to get a special privilege, but there are also government employees that can try to get special privileges, too. Government employees often do try to get special advantages as well. For example, there is a law in Hawaii that makes it illegal to hire private-sector workers for jobs that government workers typically do. That makes it difficult to hire a private worker for things like, let’s say you want to hire a janitor or something in your school, and you want to try to lower the costs. You have to hire a government worker. You can’t outsource it to a private company, unless [there are] certain conditions, there are certain loopholes that you can do. Anyway, that is a government special privilege as well. And also, there’s the many benefits that government workers get, and they lobby to keep those benefits in place, and in fact to raise the benefits and salaries at the expense of the taxpayers. Some might say that that is a form of privilege-seeking or lobbying as well. 

Zhou: I hope my student can have a chance to go to your website, or you can provide some internship opportunities for my students, help them to send letters to the editor about this. I was wondering where on your website you can find the campaign contributions to local government leaders in Hawaii from corporations. It’s very big corporations, their contributions. Is there a way the student can find out this information on your website?

Kent: Yes. We actually went and looked at, for example, all of the Jones Act contributions that were given to the congressmen and Congress folks. It was millions and millions of dollars that they were giving to both Republicans and Democrats. The most money they would give was obviously to the presidential candidates. In 2016, Trump and Hillary, they got about the same amount, about $500,000 from the shipping companies.

Brian Schatz and Mazie Hirono and Tulsi Gabbard, they all get hundreds of thousands of dollars as well from the shipping companies. You may wonder why, “Oh, so if the Jones Act hurts Hawaii so much, why do the Hawaii congressmen and women, why are they for it?” Some speculate it’s because of those contributions.

One person that gets zero contributions is Ed Case. He’s a Hawaii Democrat congressman. We’ve looked into the records, we’ve looked into all of the finances, and it looks like he’s gotten zero dollars from the Jones Act lobby. And lo and behold, he opposes the Jones Act. [Chuckles] It kind of makes sense. But actually, if you want to, all campaign contributions and everything are public record. You could put that all together, and the people who donate, they have to say where they work and everything, so you can actually follow the money.

If any intern [chuckles] wanted to help us with that, you can reach out to me at the website grassrootinstitute.org. We do have internship opportunities. There’s always research to do, there’s just a never-ending fount of research projects to look into, to find more examples of rent-seeking or government cronyism, I guess.

Zhou: That’s good, so they know where to go. Especially, right, the economy is so bad, so maybe there’s a good opportunity. I have two students who used to work for you.

Kent: Oh, yes?

Zhou: Yes.

Kent: Oh, Sean Mitsui?

Zhou: Yes.

Kent: [Chuckles] I can’t remember the other one, but I know he did.

Zhou: Where is he going now, he left?

Kent: Sean still works for us. He’s in the next room [laughs]. He’s very helpful.

Zhou: He was my student. Actually, I introduced him to the Grassroot. 

That’s good. Can you say a little bit about the rail? Just a little bit about the rail thing —  the lobby player role, and then the cost of …

Kent: Oh, sure. The rail project — like I said before — now, as of last week, it’s over $10 billion dollars. A lot of the new cost has to do with the COVID — basically, the revenues fell because of COVID and because of the lockdown. So Gov. Ige locked down the state, the revenues fell, there were no tourists coming in, we weren’t getting any general excise tax revenues. That’s money that the rail was hoping for, and so the delays of the project now are going to increase the cost.

Also, there was something called a P3, which is a public-private partnership, and basically what that would do, is the rail was going to partner with a private company to build the rest of the project, and government leaders would say, “Oh, look, this is a way we can save costs. Okay, it’s $10 billion, but we can save $2 billion if we just let a private company build it.”

Well, what they didn’t say is that the $2 billion would eventually come from taxpayers.

The taxpayers still have to pay for the whole bill, and the taxpayers would just pay the private company for the rest of it. Even with all of that, all of that P3 business, the private companies and the government still couldn’t make a deal, and so now that won’t happen, probably, and that’s going to cost more money as well. Finally, the director of rail — his name is Andrew Robbins; I think he’s the CEO of the project or the main director — and they’re talking about firing him actually today.

There’s a rail meeting today. I’ll have to go check on it afterwards. And they’re debating whether they should fire him or not. So this whole rail project might actually stop. In fact, it probably will stop. Those in the know, even the government is saying, that the rail itself is probably going to stop somewhere. It might stop at Middle Street, it might stop somewhere beyond that, but there’s probably a 90% chance that it will stop.

The big question, then, is: Will it continue in the future? Are they going to pause it, or are they going to stop it? If they pause it, then what does it cost to start it again? Is that another billion dollars or so, and how far are they going to build it? This project, it’s actually already the most expensive rail project in the world per person, and it’s getting even more expensive. Eventually, the question is going to come: Should we continue this?

As we talked about, there’s going to be the typical rent-seekers that we see [chuckles]. They’re going to be out in droves, and they’re going to be spending. They used to spend hundreds of thousands of dollars, but now they’re probably spend millions of dollars to keep it going. It’s just something you can predict. 

That’s why you folks here probably know more, actually, than most people in Hawaii about this topic, and we really need to get more people to learn about how politics works, I guess, in order to change things, I guess. You can all go out and tell them.

Zhou: Tell them what?

Kent: You can tell them everything; you can share this video. There you go.

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