A Little Bit More on Rentiers

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.

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7 Responses to A Little Bit More on Rentiers

  1. foosion says:

    Those with substantial financial assets do better when growth is strong. Stocks certainly do better. Bonds take a hit in the short-term if real rates increase (price and yield move in opposite directions), but interest income doesn’t go down. In the longer run, the increased interest payments more than make up for the initial hit to principal (the time period is the duration of the bond, for finance fans).

    Inflation is not helpful, but neither is low real rates.

    Lower unemployment raises labor costs for businesses, but increased demand might make up for it. One might argue that lower labor costs are cash today, while growth is uncertain, but that seems short sighted.

    In any event, it’s far from clear that current monetary and fiscal policy are in the best interests of those who derive income from financial assets.

  2. Seth says:

    “Rentier” is a term which pulls us into a debate about the nebulous concept of ‘class’. That is a very good thing, because awkward and (so far) as subjective as that discussion has been, it is at the very heart of what has been missing from (political) economy. The economics profession has been evading it’s responsibility for political questions by hiding in a thicket of mathematics. The result has been Panglossian tautological optimism: “everything works out for the best in this, the best of all possible worlds”. Voltaire understood the mindset very well.

    I’d like to recommend a focus on the hybrid concept of “money-credit” and the social ‘balance sheet’. We are all stake holders in society and are impacted in various ways by inflation or deflation. Maybe inflation helps my property values, but it also erodes my wages and savings, pushing me to attempt riskier investments in a ‘reach for yield’. We all hold a mixture of items on the liability side of the balance sheet. Some have more bonds, some more equity, some are only represented in the ‘current liabilities’ as entries on the payroll.

    It is often argued against ‘class’ interests, that social security makes us all into bondholding ‘rentiers’. But contemporary political debate about ‘entitlements’ is a blatant refutation of this argument. We have two ‘classes’ of creditors arguing about their priority in the event of default: a) “real” bond holders who have conventional U.S. Treasury bonds (like Stanley Druckenmiller who took to public speculation about trading a couple weeks’ delay in getting an interest payment in exchange for major Federal spending cuts), and b) the Social Security trust fund, which George W Bush told us was just a bunch of worthless IOUs (technically a distinct class of Treasury bonds).

    For me “rentiers” are epitomized by the financial interests who made such a pile from the world of subprime mortgages, securitization and related derivatives trades. With the exception of a relative handful of short sellers (eg John Paulson), these folks reached for yield by issuing ‘credit’ that was fundamentally unsound. And since the crisis began, they have been playing ‘extend and pretend’ games and shifting the bad paper onto the Fed so that they can avoid larger write-offs. At the same time, pass-book savings account holders are another ‘class’ of (very petty) creditors who are being required to subsidize the balance sheet repair operation at the big banks.

    “Rentiers” are the people pushing to the front of the line of creditors, while talking up the idea of government default. Other people who hold (a little) money, bonds, or pension claims but don’t have major political pull are lumped in with the ‘current liabilities’ (workers) who apparently need to be laid off and lose their pensions and health insurance.

    A President Mitt Romney would be the apotheosis of this new “rentier” class: a Private Equity takeover of the U.S. government.

  3. Susanna K. says:

    I’m glad this subject is getting a lot of public debate right now, but it’s hardly new news. I first became aware of companies and wealthy donors buying laws back in 2000 or so, when the DCMA was passed. There’s a law that really does nothing for the average person, flies in the face of technology, but makes perfect sense to the old guard, the moneyed, those who get their income from a technicality rather than actual work.

    If you have the money, you can buy access. If you have access, you can get policy skewed in your favor. It’s that simple. And who has the money to buy access? These days, it’s the high-stakes gamblers, people who are good at playing the financial game.

  4. hhoran says:

    I have a problem with looking at the “rentier” question with a near-exclusive focus on finance and financial industry lobbying. Look at energy. Look at military suppliers. Look at housing/developer interests. Look at telecom. Look at health care. In each case you see a large sector of the industry where revenue and profit growth are heavily determined by Washington. In each case you’ve seen major consolidation that can’t be justified by scale economies or other legitimate “market forces” but is clearly driven by “economies of political influence.” The leverage from “Too Big To Fail” size is just one part of this. In every case you see massive corporate shifts away from innovation and competition towards rent extraction and oligopoly power. These forces always existed, but starting in the 1980s and accelerating greatly after 2000, you see major efforts to strip away marketplace and regulatory constraints, and the steadily growing link between the rent extraction of these very major companies and the financing of (increasingly expensive) incumbent re-election campaigns.
    Non-financial rent-extraction doesn’t raise issues of systematic risk or inflation, but the “rentier” question is key to larger “stagnation”-type arguments about future economic recovery and growth, and of course to basic income distribution issues. You can’t talk about “Finance” (or “Energy” or the others) as homogeneous industries with homogeneous political agendas. There are lots of pieces of those sectors that remain innovative and don’t rely on rent-extraction or federally supported oligopoly behavior. But those pieces are small relative to the Goldmans and ExxonMobils and Boeings, and those bigger players are at the heart of both the “economic” and “political” issues here.
    America has two political parties. One is totally, fanatically devoted to helping certain large corporate interests protect and expand rent-extractive and oligopoly power, and would gut remaining social insurance programs because they feel that steamrolling their supporters would accelerate the larger redistribution agenda. The other party is also totally devoted to helping those same corporate interests protect and expand rent-extractive and oligopoly power, but would like to retain vestiges of social insurance programs because they fear the resulting backlash might slow down the larger redistribution agenda. Focusing on Wall Street is only touching one part of the “rentier” elephant.

  5. engineer27 says:

    Interesting take on the alliance between the “generic captain of industry” and the rentier-class financier. In this regard, some focus on social forces would be appropriate and illuminating. Specifically, industry leaders are likely to see themselves as much more alike to the financiers than labor leaders or beneficiaries of social insurance. Add to that the desire or perceived need to align with the interests of the financiers in order to obtain preferential financing for pet industrial projects, and it seems hardly surprising that so many business leaders will go along with the agenda of Big Finance, even when it seems to run counter to Industry’s long-term success.

    But of course there are counter-examples. One that comes immediately to mind is the ongoing fight over debit card fees — Big Retail vs Big Finance. Of course, Little Consumer doesn’t seem to have a dog in that fight (despite both sides’ claims to the contrary).

  6. JW Mason says:

    Little Consumer doesn’t seem to have a dog in that fight (despite both sides’ claims to the contrary).

    You do know that this blog has made that claim as well, many times, don’t you? Is there a reason you think Mike K. is wrong?

    If you haven’t read Mike’s posts on this, you could start here or here or here or here. (I think that last one is the post that first got me reading Rortybomb.) If you have read them, maybe you could explain why you don’t agree?

  7. Pingback: Rentiers vs. Debtors

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