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Earlier this summer, someone left a message on Cecil Bohanon’s cellphone urging him to call a vendor who could help him file for up to $26,000 for every employee he had kept on at his company during the COVID pandemic.
Since Bohanon didn’t have a company then or now, he thought it was a scam and blocked the number. It sounded similar to the fraudulent emails where a mythical African prince promises to deposit millions of dollars in our bank account if we send him our financial information.
Recently, we learned the call was a byproduct of an actual government program: the Employee Retention Credit, designed to reward business and not-for-profit entities that maintained payrolls during the COVID crisis. An Internal Revenue Service website discusses eligibility requirements and warns about firms promoting scams and aggressive marketing. Qualifying employers have until 2025 to make claims.
Of course, discerning eligibility and benefits for a firm or not-for-profit can be tricky, which is one reason consultants offer their services. Reputable consultants evaluate the employer’s claim and shepherd it through the process. The consultants garner a portion of the proceeds when the government pays the claim. The Wall Street Journal reports that up to $340 billion could eventually be paid out, more than three times higher than the government thought it would cost.
While the intentions of the original legislation might seem noble, the current frenzy is a classic example of what economists call rent-seeking: “the act or process of using one’s assets and resources to increase one’s share of existing wealth without creating new wealth.”
While employers welcome money from the federal Treasury, there is an opportunity cost. If the government didn’t issue the check, someone else would have access to funds. However, the rent-seeking cost is not that some employers gain at taxpayers’ expense nor that the consultants are scammers, though many might be.
Instead, the rent-seeking cost is the consultants’ time and effort in organizing, soliciting and shepherding the transfers. Those resources could have been used for more productive ends than facilitating a transfer.
Instead of capable consultants delving into the details of the federal refund provisions, those same capable people could be delving into real-world problems of firms and enhancing economic productivity. But talented and honorable people are responding to the incentives of a well-meaning government giveaway that unintentionally but predictably misallocates scarce resources to lower-valued uses.
Rent-seeking is not healthy for the economy.•
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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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