Krugman has a fantastic op-ed about creditors and our current economic malaise, Rule by Rentiers:
What lies behind this trans-Atlantic policy paralysis? I’m increasingly convinced that it’s a response to interest-group pressure. Consciously or not, policy makers are catering almost exclusively to the interests of rentiers — those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense…
While the ostensible reasons for inflicting pain keep changing, however, the policy prescriptions of the Pain Caucus all have one thing in common: They protect the interests of creditors, no matter the cost. Deficit spending could put the unemployed to work — but it might hurt the interests of existing bondholders. More aggressive action by the Fed could help boost us out of this slump — in fact, even Republican economists have argued that a bit of inflation might be exactly what the doctor ordered — but deflation, not inflation, serves the interests of creditors. And, of course, there’s fierce opposition to anything smacking of debt relief…
No, the only real beneficiaries of Pain Caucus policies (aside from the Chinese government) are the rentiers: bankers and wealthy individuals with lots of bonds in their portfolios.
And that explains why creditor interests bulk so large in policy; not only is this the class that makes big campaign contributions, it’s the class that has personal access to policy makers…creditor-friendly policies are crippling the economy. This is a negative-sum game, in which the attempt to protect the rentiers from any losses is inflicting much larger losses on everyone else. And the only way to get a real recovery is to stop playing that game.
There’s been a lot of great reactions to the rentier debate that Kuttner’s article kicked off. Krugman at his blog digs out Who Are the Rentiers? Over at Interfluidity, Steve Waldman discusses Too Big To Fail and rentiers. And Asymptosis has a must-read post, Demand Inflation Now, on the winners and losers of inflation, and how if we re-characterize “savers” and “hoarders” the moral language shifts in an important way. I recommend checking these out, and will return to them in the future.
Rentiers are those that make their profits by engaging primarily in financial activities and collecting interest, and should be contrasted with those who make their profits from labor or industrial capitalists who own and manage non-financial firms. Kalecki warned of rentiers being pulled into alliances with industrial leaders in his 1943 essay, Political Aspects of Full Employment:
Even those who advocate stimulating private investment to counteract the slump frequently do not rely on it exclusively, but envisage that it should be associated with public investment. It looks at present as if business leaders…seem, however, still to be consistently opposed to creating employment by subsidizing consumption and to maintaining full employment….
In this situation a powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound. The pressure of all these forces, and in particular of big business — as a rule influential in government departments — would most probably induce the government to return to the orthodox policy of cutting down the budget deficit. A slump would follow in which government spending policy would again come into its own.
This pattern of a political business cycle is not entirely conjectural; something very similar happened in the USA in 1937-8.
Big business and rentier interests would ally in order to oppose full employment. Historically, it is interesting to see big business as the influential group in government departments in this essay, because now we see finance as much more influential than a generic captain of industry.
Inflation and monetary policy balance the relationship between borrowers and lenders – and right now, between crushing debt loads, high unemployment, the difficulty of those underwater in being able to refinance into lower rates, low wage growth and the mass hoarding going on with savers, the chips are already stacked against borrowers. In the near future we’ll be talking more about how the law and our society has further tilted the playing field away from borrowers.
And next week I’ll be at Netroots Nation, where I’m on a panel about monetary policy and the Federal Reserve – Fed Up: Decoding Monetary Policy Matters. We’ll be talking about all these topics, plus activism around banking regulation, housing, austerity and stimulus, the debt overhang, and what a liberal Federal Reserve would look like. I hope you can check it out, either in person or online.