Rent Seeking, The Bane

The bane

The bane

Today, I am writing about a humble service-provider (a laundry guy in our apartment) who has been running a tiny ironing shop. Soft-spoken and very punctual gentleman whose grey-hair and wrinkly face speak volumes about the life he has seen in all the years being around, almost a decade out of which in his current tiny-little shop. I write, for I had the opportunity to listen to him today as this is the first time that the ironing was delayed.

He has been renting the square-foot area and running (or minding) his business. Today, he was sad. While his single-employee was busy ironing the clothes, he broke the piercing news that the rent for his shop has been doubled. He hands me over the sheet of paper with the figures, additions and taxes, not like a complaint instead like a request on a formal application, as if I may have a way to help him out of the situation. “What maintenance charges should be applicable to us?”, he asks, “We are not even allowed to use the water or any other amenities provided in the apartment!”

This was, however, not the reason for the delay. His other employee had been off work (another poor fellow who took a week off in order to follow the state election/minister, where he expects to get some cash in order to be a part of the cheering crowd. Or, to be the crowd, in other words). I could empathize and it was not a big-deal waiting for some more time to get my clothes ironed. In-fact I had no problem at all, sitting with him and listening to what he had to say (except for the little-space over-stuffed with pending work, a small fan and a tube-light covering the bare necessities of a shop). Even earlier, I would sometimes go with my kid as it would bring a smile on his face and bring his inner child out to play with my 2 year old.

“Doubled!”, I exclaimed. “Well, almost”, he said, “from 6,600 to 11,800”. Like a very innocent and naive soul, he starts sharing all his business numbers, expenses and margins. A “fiver” is what he charges for each item of cloth he gets, “three” out of which he gives to his employee who irons it out. The rest, he says is used for the rent, expenses, water, electricity, and he leaves it up-to me to assume or calculate his net take-home or profit or in other words what’s left after all that.

The “management” committee of the apartment decided in a General Body Meeting (GBM) to have this additional rent and maintenance charges and state + central tax, he claims. He told me he has not increased his costing/prices in past 3 years, but he would probably have to charge at-least a “7” per item given the additional costs. Most of us in this apartment are well-off, working with big companies, raising our families from what we earn, save and plan for a positive future, so my concern was not on what price-increase he was trying to convey, but the overall scheme of things.

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In his 10 years at this place, he tells me, he has seen his share of shallow people who dress and walk like a prince, people who are in good positions of power and money but their actions and character is not even a fraction of what they talk. The management committees (MCs) change every year or so in an MC election and the GBMs are a democratic affair (or so it is projected). I am new to this this place (apartment), by his and many others’ standards, having come here only about a year ago, but the cracks (physical and others) are sometimes glaringly visible already.

He complains, “An earlier MC member won’t even pay me a fiver for his clothes as they are the people in power in their tenure to manage and approve the usage and renting of the facility”. This is the stench of corruption to me. I realize, it is the “people” who are corrupt, whether in a government space or in a private setting. If you see, the MC is elected and given the authority to take care of the society members, manage overall finances, resolving common issues, maintenance and enhancement of the apartment. But, the committee and the committee members start putting themselves first, seeking profit, exploiting power, taking decisions which would ultimately be detrimental to the society that has elected them? Now, the increase from “5” to “7”, a difference of mere “2” is ultimately going to come from somewhere, right? Since the ironing-man is serving only the apartment residents as his customers, so, in fact, it is them who are going to be paying an extra for his service every time. And, this is just one person I had a chance to talk to.

“Please increase your rate to 7 bucks”, I earnestly request him. After all, when “everyone” starts paying 7 bucks per item, there will certainly be a common question in the next GBM as to why the ironing-man suddenly increased his costing. Is he trying to take the benefit of the apartment residents or how dare he earn more profit from us as he should be happy in what business he gets from the apartment without much competition. A simpleton thinking that, finally it will come out that the MC increased (aka doubled) his rent and that amount has to be “earned” and given to MC. While the “management” might be able to show in their annual reports that year-on-year collection has increased because of them getting elected and project it in shiny-positive graphs!

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Who is the loser, who is the winner?

Did the productivity increase? Where is the value-addition? What is the basis of increased rent which not tied to any extra facility being provided to the tenant? And, we still have the financial report showing increased financial benefits to the apartment/society. It was society’s money itself that would be shown under “extra” profit in this financial year.

Now, the implications:

  • With “7 bucks” per clothing item to be ironed, we would either have people (society residents) choose some other ironing-man from outside (who still irons in a “fiver” or maybe less); or, choose to give less clothes or less frequently, as the costs have increased
  • The poor ironing-employee who used to get 3 bucks per item, would continue to get 3 bucks. Remember, the additional cost charged to the residents is merely getting transferred to the society/MC account in form of increased rent.
  • Most likely the workload would reduce. So, overall savings to both the employees (3 bucks * num_of_clothes) as well as to the gentleman owner (7 minus 3 minus Expenses * num_of_clothes) get squeezed further.
  • The cost of doing business increased with the double rent. The productivity is the same. The facility is the same. The work-load and the business is lesser. The profits and savings are squeezed.

As I sit and ponder, while still listening to him, I see the diligent employee continue to iron out one cloth after the other (maybe keeping a track of number of clothes in his mind, or the number of “3 bucks” for today he would be able to take home)

End of Story

Maybe, I am just foolish to think of all this. Rents increase. Its a fact of life. But, its a bane. I am open to criticism from all you great economists who can tell me how this is beneficial. In my mind I also play a devil’s advocate that:

  • Maybe the MC wants to indirectly tell this guy to go away. (As the business becomes less viable with additional costs, he would understand)
  • Maybe the rate of rent is actually increased as per the market-rate and society expects some other businesses (with higher earnings)
  • Maybe …
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When there is NO value addition and there is just additional rent, tax or expense that comes into the account of any society, that money is the resident’s own money that Management Committee disguised as profit in their yearly reports. They could have as well asked everyone to contribute directly, saving the poor man’s job and business, but MC is too holier than thou to beg for money in its coffers.

It is the same with the governments. In India, government of a tenure was punished for letting out the spectrum at too economical a price than it could have fetched. It was a number much bigger than the “fiver” we have been talking all this while. However, just because one cannot count the ZERO’s in that huge figure does not mean one cannot comprehend that it is the same problem. The next government came and auctioned the spectrum at a huge huge cost to the telecom operators. The cost of business (telecom) increased. Where will that cost be recovered or earned? Its the people who use the telecom services, who will be paying the additional burden in terms of monthly rentals or pre-paid cards. The holier-than-thou government would not beg for money from its own citizens for its coffers. But, with this disguised profit it can show how much more money government gained through auctions which it can use for the benefit of the society. Where is the value add? What is the extra facility to increase the cost? Did any productivity increase? No. Only the cost of doing business increased. The smaller players vanished. The consumers paid the price for the increase in the cost of spectrum. And, the new government came to power toppling the previous one (as did the MC — Management Committee) showing its spectacular financial results.

Rent, Lease and yearly increase is the bane. You expect ever-increasing amount of money for a property you have occupied/bought at one time in the past. Due to the nature of its proximity and location, it is a scarce resource you are hogging (as is the spectrum) and “seeking rent” from someone else (who works hard, generates new ideas, innovates and provides for his family) who is providing an actual value to the society through his job or business. Its a wonderful world we live in with weird economics and corrupt people.

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