You've Met Hillarynomics. Now Meet Left-Of-Hillarynomics. (Demo)

Joe Stiglitz unveils “Rewriting the Rules” in DC on May 12, 2015.Win McNamee/Getty Images

On May 27, 2015, Dylan Matthews writes on VOX:

Hillary Clinton has yet to lay out a detailed economic platform, but knowing the people she listens to on the matter, and judging from her 2008 campaign, it’s not too hard to guess what it’ll be. She’ll call for a bigger safety net for working parents: more child care subsidies, paid leave for new mothers and fathers. She might call for a slight increase in taxes for the rich. But she’s always been a fan of markets. Her agenda — like President Obama’s, like former President Clinton’s — has been defined by a faith that markets are creating wealth reasonably effectively, and that their major flaw is they don’t distribute income as evenly as they should. Let businesses do their thing, redistribute a bit, and you’re basically set.

But a recent report — authored by Nobel laureate economist Joseph Stiglitz along with Roosevelt Institute fellows Nell Abernathy, Adam Hersh, Susan Holmberg, and Mike Konczal — suggests this basic assumption is badly mistaken. The problem isn’t just one of distribution, the report argues. The problem is that the economy is fundamentally broken, shot through with opportunities for the rich to get richer not by building wealth but through exploitation and taking. We’ll need redistribution, yes. But first the whole system needs to be rethought.

The mystery of rising wealth and stagnant income

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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.

Investing in rents rather than production

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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. A patent or a copyright, for example, can be a valuable financial commodity to own, even without being productive in the way a factory or tractor is. To see the distinction, imagine you have $300 million and can either invest it in a startup or use it to buy the rights to the Beatles’ songs. In the former case, you’re providing money that a company can then use to hire people, produce goods, and generally create wealth in the world.

In the latter, you’re producing nothing; you’re just grabbing something that someone else produced and claiming the proceeds from it.

“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.

How the government helps

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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.

Protections for intellectual property also make rent-seeking more attractive, often at the expense of the public interest.

There’s little empirical evidence, Stiglitz et al. argue, that intellectual property is a significant incentive for innovators. Plenty of major technological advances with enormous economic implications — from Alan Turing’s outlining of the “Turing machine” model of computation to the discovery of the structure of DNA to Tim Berners-Lee’s creation of the World Wide Web — were never patented or otherwise protected by the intellectual property regime. But IP rules do serve to increase the cost of goods like prescription drugs and create a barrier to entry for firms trying to compete against companies with large IP holdings.

How to stop rent-seeking

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The agenda that Stiglitz, Abernathy, Hersh, Holmberg, and Konczal arrive at for reducing financial rent-seeking should look pretty familiar. It’s a straightforward left-of-the-Democrats economic platform. They want to raise taxes on the wealthy by hiking rates and converting deductions (which are most valuable for the rich) into credits (which are worth the same to everybody). They want tougher enforcement on Wall Street. They want to end “too big to fail” by imposing a capital surcharge on large, risky firms, and to create a financial transactions tax to discourage short-term trading. They want subsidized child care, smaller prison populations, immigration reform, and Medicare for all.

Not all of this can be explained through the prism of reducing rent-seeking. Subsidized child care, for example, doesn’t really do a whole lot to curb bank speculation.

But all the same, limiting banks’ opportunities to profit without actually creating wealth is a major throughline. It motivates the report’s most striking proposal, a plan to replace the current housing finance system, in which government and quasi-governmental agencies like Fannie Mae/Freddie Mac and the Federal Housing Administration back up private loans from banks to ensure mortgages remain affordable, with a “public option” for mortgages, in which the federal government just loans money for houses directly. That would largely eliminate banks’ involvement in consumer housing finance, depriving them of an arena rich in rent-seeking opportunities.

There are subtler ways in which the agenda would grow the economy by undermining rent-seeking, as well. The report calls for expanding subsidies for higher education, such as by making community college free (as Obama has proposed) and making income-based repayment of student loans universal, as it is in Australia, to minimize the burden of paying them back while in one’s 20s and at the nadir of one’s earning potential. That doesn’t directly relate to the financial sector; most student loans in the US are already issued directly by the federal government.

But it’d make it easier for students from elite universities with loan burdens to avoid going to work on Wall Street, and, as economists Benjamin Lockwood, Charles Nathanson, and Glen Weyl have argued, directing young people into productive careers instead of finance could grow the economy.

In other words, Stiglitz, Abernathy, Hersh, Holmberg, and Konczal have found a way to rearticulate left-of-center economic policies as more than just attempts to even out the income distribution or expand the safety net for its own sake. Those are worthy goals, but so is boosting economic growth. The report challenge the idea that growth requires getting out of the way of the market, and embraces the notion that it requires constant, active government intervention. It’s a necessary and bracing challenge to years of conventional wisdom, in which being “pro-growth” and “pro-market” were seen as basically equivalent. Markets fail, Stiglitz and his co-authors remind us, and when they do the government is needed to set them right.

http://www.vox.com/2015/5/27/8670749/stiglitz-report-rent-seeking