Suppose there are four major airlines in the United States, each of whom are near bankruptcy. The CEO of one of the airlines realizes that they can get out of bankruptcy by lobbying the government for support. He can convince the 3 other airlines to go along with the plan, as they realize that they'll be more successful if they band together and if one of the airlines does not participate the amount of lobbying resources will be greatly diminshed along with the credibility of their argument.
The airlines pool their resources and hire a high priced lobbying firm along with a handful of unprincipled economists. The airlines explain to the government that without a $400 million dollar package they will not be able to survive. If they do not survive, there will be terrible consequences to the economy, so it's in the best interest of the government to give them the money.
The congresswoman listening to the argument finds it compelling, but she also recognizes a self-serving argument when she hears one. So she'd like to hear from groups opposing the move. However it's obvious that such a group will not form, for the following reason:
The $400 million dollars represents around $1.50 for each person living in America. Now obviously many of those individuals do not pay taxes, so we'll assume that it represents $4 for each tax-paying American (this assumes everyone pays the same amount in taxes which again is an over-simplication). It's obvious to see that it's not worth the time and effort for any American to educate themselves about the issue, solicit donations for their cause and lobby to congress if they'd only gain a few dollars.
So other than a few academic economists and think-tanks, nobody opposes the measure and it is enacted by congress. By this we see that a small group is inherently at an advantage against a larger group. Although in total the amount at stake is the same for each group, the individual members of the small group have much more at stake than the individual members of the large group so they have an incentive to spend more time and energy trying to change government policy.
If these transfers just caused one group to gain at the other's expense it wouldn't hurt the economy at all. It wouldn't be any different than me just handing you $10; you've gained $10 and I've lost $10 and the economy as a whole has the same value it had before. However it does cause a decline in the economy for two reasons:
- The cost of lobbying. Lobbying is inherently a non-productive activity for the economy. The resources spent on lobbying are resources that are not being spent on creating wealth, so the economy is poorer as a whole. The money spent on lobbying could have been spent buying a new 747, so the economy as a whole is one 747 poorer.
- The deadweight loss caused by taxation. In my article The Effect of Taxes on the Economy we saw that higher taxes causes productivity to decline and the economy to be worse off. Here the government was taking $4 from each taxpayer, which is not a significant amount. However the government enacts hundreds of these policies so in total the sum becomes quite significant. These handouts to small groups cause a decline in economic growth because they change the actions of taxpayers.
