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Saturday, May 30, 2015

Weekend reads some more: Stiglitz on rent-seeking

Vox EU - left-of-Hillarynomics. Wait... so it's supposed to be "left of Hillary" to be against rent-seeking? Then what, the Virginia School is a hive of left-wing communism, is it? Cos the Virginia School seem to me to be market libertarians, and the problem of rent-seeking for them is the problem of plutocrats using political influence to produce market failures that they can earn a profit from:

The report, titled "Rewriting the Rules of the American Economy: An Agenda for Shared Prosperity" and released on May 12, is a far-reaching indictment of economic policy as it's been conducted in recent decades, which have resulted in sluggish growth and booming inequality, with wealth growing considerably faster than incomes. One central question, according to the report, is why is this even possible. Conventional thinking holds that wealth should be invested and, through investment, put to productive use, with those investments creating job opportunities and higher wages.

Alternatively, if few productive investment opportunities are available, the return on invested wealth should start falling. It ought to be a self-correcting cycle in which wealth cannot outpace incomes for long. But the return from capital remains high, and wages are stagnating. Something's gone wrong.

The problem, Stiglitz and his co-authors write, is that the rise in wealth isn't coming from productive investments.

It's coming from what economists call rents — a metaphorical extension of the 18th-century practice of small farmers paying rent to landlords for the right to use the total inert asset of land.

Stiglitz and his co-authors extend the idea to include a wider and more modern array of rents.


"Rent-seeking," as economists call it, is generally viewed as economically counterproductive. It's especially counterproductive when it becomes so lucrative as to provide a more attractive outlet for people's money than real investments.

The report's authors argue that's exactly what's happening with Wall Street. Its growth has fueled a big rise in credit — credit that tends to go to those who already have wealth, often in the form of rents, exacerbating existing rent-based problems. Financiers have also identified novel ways to rent-seek.

"Too big to fail" status, for example, can count as a rent. It increases the value of firms like Goldman Sachs or JPMorgan Chase not by making them more productive, but by providing an implicit government subsidy. Trading mortgage-backed securities for profit, similarly, does little to actually increase wealth but a lot to redirect it. That makes it attractive as a business activity for banks and hedge funds, redirecting their energies from profitable activities that create wealth.

Many of these rents are explicitly created by government policies. "Too big to fail" is an obvious example, but financial deregulation more broadly has made speculation vastly more profitable in recent decades, encouraging rent-seeking on the part of financial firms.

Stiglitz and his co-authors also finger tax cuts for the wealthy as a culprit. They cite research by Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva finding that countries that slashed their top marginal tax rates the most in recent decades also saw the biggest increases in inequality before taxes. That might make sense if the tax cuts boosted growth, but that wasn't really what happened. What happened instead, Piketty, Saez, and Stantcheva argued, was that the tax cuts gave top earners bigger incentive to extract rents for themselves, to bargain hard to increase their share of the company's wages. In the 1950s, when the top marginal tax rate in the US was 91 percent, getting an extra $1 in income through rents only yielded $0.09 after taxes. Today, it means getting $0.60. That's a sixfold increase — a huge increase in the incentive to find rents for oneself.

And Dylan Matthews at VoxEU calls this "left of center". I've just got to shake my fucking head.

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