Monday, July 22, 2013

Randy Wray — How Wall Street’s Rent-Seeking Vampire Squid Sucks All Life Out Of The Economy

In economics there is the notion of economic rent—payment in excess of what is required to mobilize factors of production. For example, such rents accrue to those who have “cornered the market”—by artificially restricting supply of some resource, they are able to dictate usurious terms to buyers. We call them “rentiers”.
Here’s the point that is critical to understand: the rentier performs no useful function, and the economic rent can be eliminated without reducing the supply of the resources needed for production. This is why J.M. Keynes advocating “euthanizing” the rentier. As you know, “euthanasia” means “mercy killing”—you kill to reduce pain and suffering. Keynes was serious about this—his recommendation came in the final chapter of his great General Theory, as one of his two fundamental policy proposals.
Brilliant lede. Best short explanation of economic rent and rentier I've seen yet. Great to see it being brought into MMT analysis.

Economonitor — Great Leap Forward
How Wall Street’s Rent-Seeking Vampire Squid Sucks All Life Out Of The Economy
L. Randall Wray | Professor of Economics, UMKC


29 comments:

Unknown said...

Interest is the rent we pay for our debt-based money supply. But money can be issued as either Liabilities or Equity. Money issued as Equity requires no borrowing or lending, much less at interest.

So why should the government provide subsidies for debt-based money (e.g. government deposit insurance, a fiat lender of last resort, sovereign borrowing) and punish Equity-based money with the capital gains tax on common stock?

Unknown said...
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Unknown said...

not charging a capital gains tax would be pretty unfair to all those people who aren't fortunate enough to own lots of stocks.

People like Warren Buffett and Mitt Romney would benefit massively, the average person would lose out.

Unknown said...

Good point so let's equally redistribute the common stock of all large corporations too.

Dan Kervick said...

Even if money were equity, people would still borrow and lend it, and still charge interest.

Unknown said...

heck let's just equally divide up ownership of land and everything else too. Why not?

Unknown said...

Sure they would, but why subsidize it?

Unknown said...

There's a case to be made for land reform too since the banks stole many family farms. It's also Biblical; see Leviticus 25.

Unknown said...

I think that government deposit insurance and lender of last resort backing are ultimately only justifiable if the banking sector is made to 'serve public purpose' in the way MMT and other economists recommend. In it's current form the banking system is clearly some sort of monstrosity.

Unknown said...

Beard,

it might be nice to start with a blank slate - redistribute all the important things like land and ownership of the means of production (common stock) equally, and then start again from a 'year zero' situation.

(Right wing "libertarian" ideology actually implicity assumes that this was the sort of starting point of human civilization).

However, if we look at real-world examples of where people have tried to do this, it's usually not very pretty.

So the question is, do you want to believe in a perfect imaginary utopian world - which requires a massive and potentially bloody revolutionary transformation to get there - or do you want to try and make the world better through reform?

Unknown said...

No bloody revolution is required or desired.

Short of common stock redistribution, the capital gains tax could be made highly progressive, no?

As for a utopian world, that's unobtainable but that's no excuse to tolerate clear injustice such as government subsides for debt creation.

Tom Hickey said...

An organized group always beats a disorganized one. Te fundamental problem is social and political disorganization. Roger keeps emphasizing adaptive rate and return on coordination. Failure in this regard is leading to dystopia.

Unknown said...

Tom,

the 'organized group' in this case has a very simple objective that each individual in that group shares, even though they might disagree on everything else. That is, wealth and power maximization for themselves and their descendants.

The disorganized group has no equivalent simple unifying principle.

Unknown said...

"the capital gains tax could be made highly progressive, no?"

yes that's an example of reform, whereas redistributing the ownership of corporations equally is a more revolutionary act.

Tom Hickey said...

the 'organized group' in this case has a very simple objective that each individual in that group shares, even though they might disagree on everything else. That is, wealth and power maximization for themselves and their descendants.

The disorganized group has no equivalent simple unifying principle.


Right, y, and it's worse than that. The organized groups does it best to prevent the disorganized groups from becoming organized through cultural, institutional, political, and legal means. And at times some illegal means, too.

One could actually call it a conspiracy but then you would be marginalized as conspiracy theorist.

The Rombach Report said...

"So why should the government provide subsidies for debt-based money (e.g. government deposit insurance, a fiat lender of last resort, sovereign borrowing) and punish Equity-based money with the capital gains tax on common stock?"

F. Beard - You are making more and more sense to me.

The Rombach Report said...

"Good point so let's equally redistribute the common stock of all large corporations too."

F. Beard - Now you're not making so much sense to me. This sounds like a socialist redistribution of wealth.

Unknown said...

Well, if the corporations were built with the population's stolen purchasing power then redistribution is only justice.

Hey, it weren't me who designed our disgusting money system; I'm just trying to unraveled it peacefully.

However, a highly progressive capital gains tax might do instead though I have my doubts.

The Rombach Report said...

"Short of common stock redistribution, the capital gains tax could be made highly progressive, no?"

Absolutely not! The common thread between capitalism and socialism is the accumulation of capital. This is something that Adam Smith and Karl Marx would agree on. The theoretically correct tax on capital should be ZERO PERCENT (0.00%), but this is probably not politically feasible. That said, the capital gains tax in the world we live in should be as low as possible because human progress as evidenced in rising standards of living is based on applying technological advances to labor. As a matter of necessity that means that capital in relation to the economy as a whole must grow relative to the cost of replenishing the existing means of production plus the cost of compensation to labor.

Unknown said...

Fine because the redistribution of common stock would destroy no capital nor disperse it as dividends do.

Fine with dividends are you, RR? You should not be since the purpose of a common stock company is to consolidate capital for economies of scale, not disperse it.

But yeah, I should have had the courage of my convictions and not abandoned my first suggestion.

Unknown said...

Rombach,

are you saying that people who derive most of their wealth from increases in the value of the capital they own should pay next to zero tax? Whereas people who derive most of their wealth from the income generated by their labour should pay a higher rate of tax?

The Rombach Report said...

y - Theoretically yes, but politically speaking no. Adam Smith and Karl Marx were basically in agreement on the concept that human progress is predicated on the accumulation of capital.

By necessity this means that from one production cycle to another over time, the ratio of capital applied to labor must increase. This is the basis for increasing labor productivity and raising living standards for the broader population from one generation to another.

The Marxists would refer to this accumulation of capital as social surplus, whereas capitalists would think of it more in terms of profit and earnings but either way a growing ratio of capital relative to consumption as the economic pie grows larger results in rising absolute living standards. It means that there is progressively more and more investment available not merely to maintain existing plant, machinery, infrastructure and labor skills and corresponding wages but to qualitatively and quantitatively upgrade it. Moreover, those upgrades to all these categories must expand exponentially to avoid economic stagnation.

In connection with this, Alan Greenspan often said that the tax on capital gains theoretically should be zero percent. I agree with this conceptually which reflects my Supply Side roots, but politically this probably would not work because it would be too easy to demagogue by the left.

I favor taxing all sources of income at a flat 10%, including earned income, interest income, dividend income, capital gains, corporate income and social security with 5% paid by employees and 5% paid by employers, while eliminating the income ceiling applicable to the SS tax. Death tax should be 10% also.

Most current deductions would be eliminated and replaced by a generous standard deduction such that a U.S. family of four earning $50K would only have to pay the 10% tax on the first dollar earned income over and above the $50K threshold. This means that even though this tax structure appears as a flat 10% rate, it is nevertheless quite progressive especially when taking into account the elimination of the income ceiling on the social security tax for high income earners. Under current law the SS tax is the most regressive tax borne disproportionately by the middle class and working poor. This feature should appeal to liberal progressives.

Under this plan, if you do the math you will see that regardless of the source of one’s income the total effective tax rate never exceeds 18.75%. I can provide anyone who is interested with a simple EXCEL spreadsheet that shows how it works. Moreover, 10% is a simple number to remember and reminiscent of the 10% Biblical Tithe which should appeal to the religious right.

This approach overcomes the objection often raised by the left about the Armey/Forbes flat tax which did not tax capital gains, interest income or dividends. Makes sense too, because it doesn’t seem fair that some rich guy who derives all his income from coupon payments on Treasury securities wouldn’t have to pay any tax.

At the same time, the 1% would probably be salivating over a combined effective tax rate of 18.75%, which is more than Romney pays, without having to pay an army of tax accountants and lawyers to exploit every available loophole the way Romney does.

In other words, I believe the 10% solution for tax reduction and reform would garner support from liberal progressives on the left as well as Supply Siders and Austrians on the right who want to cut taxes. I believe in building political coalitions from the Left, the Right and the Middle to the extent that that there are common ground mutual self interests at stake. I believe that a tax reform of this nature would unleash a shock wave of economic growth that would put people back to work and break the current cycle of economic malaise and stagnation.

Unknown said...

I believe that a tax reform of this nature would unleash a shock wave of economic growth that would put people back to work ... RR

Some people maybe, but other jobs have been automated away with the workers' own stolen purchasing power.

And jobs should not be the goal anyway; justice should be the goal. And with justice, people will have the resources necessary to do the work they deem important, rather than, for example, work at a rubber bullet factory.

Peter Pan said...

Capital investment can be rewarded after the fact, with a tax credit or deduction.

Tom Hickey said...

The purpose of taxation is price stability, that is, to reduce effective demand when its approaches the limits of expansion of supply to meet it. The subsidiary purpose in the tendency of taxation to reduce behavior that is taxed by increasing its cost.

The way to decrease effective demand most quickly and effectively in a general way is to increase taxation on consumption and in a targeted what on either consumption or production of particular goods. Taking incomes is less targeted and less effective. Taxing capital is rather ineffective.

When comes to taxing negative behavior, the low handing fruit is externality as socialization of expense and liability and economic rent as non-productive extraction.

After that the question becomes whether and to what degree economic inequality is a drag economically, politically destabilizing by concentrating power iaw wealth, and socially dysfunctional.

But I think that the principle of neither taxing nor subsidizing firms is a strong principle in capitalism, and instead taxing households, both incomes and assets, iaw the above considerations. Firms are ultimately owned by households and that is were the taxes should fall rather than on the firms. This implies an asset (wealth) tax in addition to a personal revenue tax, personal revenue being different from income from work in that it includes all gain.

David said...

Adam Smith and Karl Marx were basically in agreement on the concept that human progress is predicated on the accumulation of capital.

I don't know about that. I think you are correct in the sense that Smith and Marx were in agreement about the general physiocratic principle of "free circulation." The analogy was to blood circulation of course. The problem I see is that your definition of "capital" doesn't make distinctions between "land," or "productive capital" as opposed to "financial capital." Both Smith and Marx would have made such distinctions, however crudely. Both would have been in agreement that the factory owner and workers should be lightly taxed it at all. Don't block the circulation! Today, however, many "capital gains" are just real estate sales. This activity adds nothing to total social capital and tends to create blockages of circulation (using the physiocratic analogy) leading to strokes or heart attacks. A suitable tax could free up circulation in this instance.

Why shouldn't there be an inheritance tax approaching 100%? It seems that intergenerational wealth hoarding/accumulation leads to all sorts of socio-political blockages, land/resource hoarding and all the rest of it..

I would take it further. Silvio Gesell invented a money that depreciates and expires. Use it or lose it. Why should it be a given that money must increase in value or that hoarding should be a socially encouraged value? How does that not violate the "free circulation" principle? Gesell and Henry George, like Marx and Smith, wrote in the classical tradition and considered themselves to be capitalists. They both believed that one should keep what one earns and earn what one keeps. Modern "capitalists" seem to have a very different idea of what constitutes earning and rightful keeping, though.

The Rombach Report said...

The problem I see is that your definition of "capital" doesn't make distinctions between "land," or "productive capital" as opposed to "financial capital."

David - Apologies if I was unclear, but as far as capital goes, I was referring to physical capital as in the means of production, i.e. "existing plant, machinery, infrastructure and labor skills".

"Today, however, many "capital gains" are just real estate sales."

OK, so just to clarify my thinking.... if I buy a house that needs some work done on it and I spend $100K or $200K to renovate it, I am not adding anything to social capital and only creating blockages of circulation? Since I haven't read anything by the physiocrats, can you explain what you mean by blockages of circulation?

"Why shouldn't there be an inheritance tax approaching 100%?"

I don't know if you are an American citizen or not, but good luck trying to sell that concept to millions of American workers and business owners who struggle to put away something to pass on to their children when they check out of this world. A 100% death tax sounds like a pretty stiff undertaking to me.

"Silvio Gesell invented a money that depreciates and expires. Use it or lose it. Why should it be a given that money must increase in value or that hoarding should be a socially encouraged value?"

Looks like that invention didn't get much traction. I reckon most people voted with their feet and expressed a preference for money that had some lasting value.



David said...

death tax

The very words you use are loaded with ideological polemic. That particular one is right out of the Frank Luntz handbook. You said you were interested across the spectrum types of coalitions. I gave you a few examples of possible positions and approaches to issues that I knew would be at variance with the way you are used to thinking. None of them were at odds with a possible modality of "capitalism." I just wanted to open up the thought space a little before making judgements on what would "fly politically."

Conservative operatives are paid big bucks to come up with words like "death tax" because their customers know damn well that according to their professed values of "hard work" and "personal responsibility" such a tax is more than justified. Most people who want to pass on a little something to their kids aren't even affected by it and you know it.

The Rombach Report said...

David - Get a grip on yourself and lighten up. I used the words "death tax" along with the words "stiff undertaking" to make a joke... you know... as in a pun?

That aside, since taxes don't actually fund any revenue for the government, but rather serve only to regulate aggregate demand, what purpose would it serve to tax estates at 100% other than to punish people for being successful?

In the Supply Side paradigm, which may not have much currency with you... no pun intended, there is a saying to the effect that the more you tax something, the less you get of it. At 100% death tax ( sorry... I meant estate tax ) rate, I could envision a brain drain developing in the U.S. from mass emigration. On the other hand it might inspire someone to come up with a cure for death!

Putting all that aside though, if you happen to hear of any opportunities where conservative operatives can get paid big bucks to come up with catchy phrases, please give me a heads up as I have been out of work for over a year a half.