Wednesday, June 13, 2012

Landlords are doing extremely well!

For 35 years following WWII rental income as a percent of GDP was trending down. Then came Reagan and the beginning of the "financialization" of our economy.

From the mid-1980s rental income started to trend higher and in the 1990s, it literally exploded to the upside as a percentage of GDP.

Then we had the financial crisis and it dropped, briefly.

But now it's higher than ever. This means that more and more of our national income comes from people doing nothing more than extracting rents from assets (property). Sadly, incomes from actual production of goods and services is a declining percentage of GDP.

I am tempted to invoke Keynes here and say, "Euthanize the rentiers!!" (I guess I just did.)


Anonymous said...

One day you want to euthanize the rentiers. The next day you say the banks (rentiers) serve public purpose. This view that banks need to be euthanized along with the reality that banks serve private purpose and charge rents to maximize profits for shareholders is not consistent in MMT.

Mike Norman said...

I didn't say the banks serve public purpose, I said they should serve the public purpose. The don't, currently, at least not in my opinion.

DustinM said...

Invoke Keynes? I think we need to go further back and invoke Henry George's single-tax on rent.

Sam said...

I am trying to understand the logic behind your position here. Why is it wrong for someone who owns a property to be able to rent it out to someone who needs a property? A lot of people prefer to rent. And in many cases it's more beneficial than owning (like the last 5 years when owners saw their equity collapse).

Why is this a problem?

Tom Hickey said...

"One day you want to euthanize the rentiers. The next day you say the banks (rentiers) serve public purpose. This view that banks need to be euthanized along with the reality that banks serve private purpose and charge rents to maximize profits for shareholders is not consistent in MMT."

See Warren Mosler's proposalsfor reform.

It's also a big reason that Bill Mitchell would like to see banking nationalized. I also think that this is the best course for retail banking as long as govt is going to guarantee deposits and take on mortgages.

Why not let govt take care of retail banking through agency management, and leave commercial and investment banking to the private sector with no govt guarantees. The basic rule would be that any entity to big to resolve in a weekend is too big to exist.

I would also follow Michael Hudson's lead and tax economic rent — land rent, monopoly rent, and financial rent — and leave gains from production alone in order to discourage rent-seeking and encourage productive contributions from primary investment and productive work.

Mike Norman said...

The problem is that this activity produces nothing. No new capital/assets/wealth is created. Growth stagnates and wealth is concentrated in fewer hands. The only way capital can become abundant is by first eliminating this capital hoarding strategy.

Tom Hickey said...

I am trying to understand the logic behind your position here. Why is it wrong for someone who owns a property to be able to rent it out to someone who needs a property? A lot of people prefer to rent. And in many cases it's more beneficial than owning (like the last 5 years when owners saw their equity collapse). Why is this a problem?

It's not a problem at the individual level, but it is a problem at the aggregate level, when rent-seeking accounts for a greater and greater % of GDP and production less and less. This means that the income from productive contribution is being distributed to unproductive activity, which is economic parasitism that eventually sickens the host.

The other problem with rentierism is that increases saving (hoarding) and that results in demand leakage, which has to be offset by the govt fiscal deficit or exports if it is not result in UE, and a fiscal deficit just flows to the savers in this scenario, reinforcing the cycle. This is the why Keynes said to euthanize the rentier.

miller B said...


because a heavy renteir economy generates no new wealth only transfers it. Once consolidated it's next natural step is feudalism. Feudal lords pass down ownership to family and before you know it (100 years or so) you've got an aristocracy. A renteir economy is a jump back to the middle ages. Probably not time to panic yet though.

Tom Hickey said...

Once consolidated it's next natural step is feudalism

The super-rich are already a neo-feudal phenomenon. They live in a separate world of wealth, opulence and privilege, unprecedented in history, into which no one can step uninvited without buying in. This world is invisible to others, so no one actually knows about it other than its existence.

Btw, that's Mitt's world and he is poised to become "king," with both branches of the legislature and a large swath of the judiciary already in feudal control.

Bob Roddis said...

Interesting. Mike Norman is now proposing the slaughter of people who own real estate. As I've said, it's not a coincidence that Abba Lerner's book was called THE ECONOMICS OF CONTROL, the book was RED and it was expressly devoted to saving socialism. Make that real clear to the American people.

DustinM said...

The optimum allocation of goods involves the equalization of marginal substitutability. This is automatically reached by free exchange.
-Abba Lerner

What a communist! /snark

Bob Roddis said...

In 1980, two years before he died, Abba Ptachya Lerner (1903-1982) was dabbling in the following price control system according to this article by David Colander, a co-author of a 1980 book with Lerner:

Lerner found the implications of sellers’ inflation so important that, beginning in the 1960s, he changed his research program to center on finding cures for sellers’ inflation. Initially he toyed with various administrative wage and price control policies, but he found those lacking and soon gave them up. He replaced them, first, with a tax based incomes policy and ultimately, a market based[?] incomes policy in which property rights in prices are set and individuals have to buy the right to change prices from others who change their price in the opposite direction. It was this idea that formed the basis of our market [?] anti inflation (MAP) book. (Lerner and Colander 1980) Under MAP, rights in value added prices would be tradable so that any firm wanting to change its nominal price would have to make a trade with another firm that wanted to change its nominal price in the opposite direction. Thus, by law, the average price level would be constant but relative prices would be free to change [@page 12]

I thought taxes cured inflation.

Anonymous said...


Using fiscal policy to "regulate aggregate demand" (control inflation) is MMT's preferred approach. There are other aspects though, such as limiting banks' ability to create excessive debt, and using alternative forms of monetary policy.

Lerner came up with a different solution.

Your solution is: destroy government, return to the 19th century, remove people's democratic rights, let banks control the entire monetary system, bring back the cult of gold-worship.

But you're right, Lerner's book does have a red cover. That is a very insightful point, well done.

Tom Hickey said...

"I thought taxes cured inflation"

This was mentioned in another thread. It needs elaboration since MMT admits that the govt fiscal balance is not discretionary but responds to the tax rate and automatic stabilization. Those would have to be fine tuned to tightly control inflation and it is not known whether than degree of fine-tuning can be achieve by this means. Nor does it seem that the JG's price anchor is able to fine-tune either.

beowulf brought up Bill Vickrey's market-based plan and the Collander-Lerner MAP. Scott commented that MMT economists are favorable to such means for fine-tuning, too.

MMT sets forth a general theory in terms of sectoral balance analysis and functional finance, but specific policy has to formulated wrt needs of different countries. It might be that a Vickrey or Lerner-Collander approach could have application. I don't know how open MMT economists would be to using interest rate setting as a tool, too.

I don't think that a general theoretical approach can legitimately be criticized for not being specific enough, especially when specifics have been discussed elsewhere in papers.

The basic principle remains. When money creation is leading to excessive effective demand wrt the capacity of the economy to expand to meet it, then reduce the amount of money creation or withdraw money from the economy. Monetarism seeks to do this through interest rate setting, and MMT fiscally through reducing the fiscal balance via some combo of cutting expenditure and increasing taxation to adjust for insufficiency of automatic stabilization.

Anonymous said...

The ownership society is a noble but untenable goal, as witnessed during the past 10 years. Landlords, not slumlords, acquire and renovate distressed properties. They stabilize neighborhoods and communities while providing quality housing to hard working families. So I would disagree with you Mike that they do serve a public purpose.

BTW I am a part time landlord and have witnessed large rental increases during this market cycle.

Tom Hickey said...

Anonymous: "The ownership society is a noble but untenable goal, as witnessed during the past 10 years."

So you are saying that the American Dream is over? :o

The middle class will be shocked, shocked, shocked to hear that. They expect politicians to deliver on it.

However, the numbers seem pretty clear that urbanization is on the rise and the American Dream of home ownership in the suburbs seems to be shifting to a more urban setting where apartment dwelling is more the rule.

In addition, americans are forming traditional households more slowly as families are postponed, and the traditional family is in decline, too.

This is already having an impact on RE as Dr. Housing Bubble has been documenting for some time.

Anonymous said...

Tom I think most of the middle class realize they cannot buy a McMansion without a considerable amount of funds and the financial wherewithal to do so.

I agree that traditional family formation is in decline and their is a shift to urbanization and multigenerational households, but remember that the millenials are the largest generational cohort in history. It is only a matter of time when they decide to to purchase homes in large numbers, signaling the next housing boom.

Tom Hickey said...

Right. It's that "matter of time" that is the big question. What we know now is that household formation is being postponed. Do we have a new norm or is this a blip? No one can tell yet.

Trixie said...

...the book was RED...

Y'all are just way too much fun.

Anonymous said...

Holy cow the reds are everywhere! Where's McCarthy when you need him?
Someone needs to expose these austrian school commies!

Anonymous said...

This graph uses nominal rental income divided by real GDP. If you use nominal GDP, it looks a lot different before 1970. Look here:

Trixie said...

And it's spreading. To eBooks!

Tom Hickey said...

Trixie posted a link to David Gordon's The Philosophical Origins of Austrian Economics. If you want to understand the debate, read this short article. It is probably a bit challenging for those without prior knowledge of the field and the controversy.

However, Gordon does a reasonably good job of summarizing the issues involved, although of course any summary of such a limited scope necessarily is greatly simplified, and authors taking a particular view have difficultly adequately representing opponents' views. That said, I think that the essential point is clear, regardless of these qualifications.

Gordon confirms my previous statements about Austrian economics following Aristotle's method of deductive reasoning based on self-evident first principles (Greek αιτιαi), similar to mathematical axioms.

As Gordon observes, the evolution of the Austrian school was a reaction to the previously dominant philosophical school in German-speaking countries, namely Hegelianism. This implies that the original Austrian thinkers were part of the dialectical progression of thought and played a historical role that was at the cutting edge in their day, at least in their cultural environment.

During the post-WWI period in that environment, Logical Positivism of the Vienna Circle was also philosophically prominent, and it criticized the philosophical foundations of the Austrian school of economics as being apriori, hence, no "scientific" in the Positivist sense of being empirical grounded. Karl Popper, also from Vienna, continued criticism in that vein, emphasizing the lack of falsifiability.

As Gordon notes, the Austrian school of economics rejected that criticism and they do to this day. Their problem now, however, is that science has progressed greatly and a scientific epistemology has emerged that seriously calls into question previous views of philosophical epistemology. Mises simply rejected this, relying on the same sort of intuitionism as the intuitionist school in the foundations of mathematics. So the argument ended in disagreement over worldviews, where it seems to be stuck.

As far as I can see, the Austrian school of economics has not successfully refuted the Popperian criticism, let along taken into consideration more contemporary scientific research to general systems theory, cognitive science, and behavioral psychology. For that reason, I have said that AE is dated and needs to do some catching up with developments subsequent to its inception. I don't see that it has done so, and as a result fundamental features of it appear to be dogmatic and ideological rather than reality-based.

The other dimension that needs updating is the pitting of methodological individualism against Hegelian holism. That debate has also moved forward by great leaps with the contemporary investigation into systems in general system theory, biology, cognitive science, systems analysis and computer science. Based on newly discovered knowledge, methodological individualism is deficient, at least in any strict form such as AE uses. So they need to revisit this in light of what's happened since the end of the 19th and beginning of the 20th centuries. Just because collective consciousness has not caught up is no reason to ignore the cutting edge, a lot of which is many decades old by now.

I understand where AE is coming from, since I was very much into Aristotle and like his approach. I think that his orientation will get a rehearing in time, but for the present, it has been superseded by the scientific approach, which itself has surpassed positivism.

Knowledge is a growing endeavor, and my impression is that AE has not kept up with this development sufficiently to be taken seriously as a major player now. Proponents of AE need to get up to date and advance their discipline, or it will go the way of phlogiston theory.

Trixie said...

Oh, no you don't Tom. You are not going to pin this on me by linking electronically to "The Philosophical Origins of Austrian Economics" when we all know the cover of that book is RED.

Next think you know I will be emitting red beams from my fingertips:

And see that RED dot at the lower left hand corner of the image? If you stare at it for longer than 30 seconds, look away and blink, you will see an image of Stalin. I'm not sure what that means yet. But MY EYES HAVE BEEN OPENED. After I blink.

Is this the real life?
Is this just fantasy?
Caught in a landslide
No escape from reality
Open your eyes
Look up to the skies and see
I'm just a poor boy, I need no sympathy
Because I'm easy come, easy go
A little high, little low
Anyway the wind blows, doesn't really matter to me, to me

Magrathea said...

"...while providing quality housing to hard working familiesSo I would disagree with you Mike that they do serve a public purpose."

People, collecting and renting housing do some good, while at the same time inflicting costs on those around them. Presently they they do more harm than they do net good because the tax system is very slanted in favor of real estate ownership and against production, which means the incentives encourage them to make money by inflicting costs rather than by providing a service. To put it in other words, landlords are presently net parasites; they take a lot more value from others than they contribute - to put it in yet other words; the way things stand, the community would be better of they simply failed to show up for 'work' and we didn't pat them


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