Jason Furman — Productivity, Inequality, and Economic Rents

Productivity growth—a necessary (though not sufficient) condition for rising incomes in the long run—has slowed since 1973, growing at a 1.8 percent annual rate, as compared to a 2.8 percent annual rate in the 25 years prior to 1973. At the same time, inequality in the United States is higher and, in recent decades, has risen faster than in other major advanced economies. In 2014, the top 1 percent captured 18 percent of income, up from 8 percent in 1973. These two major trends have been the major causes of the slowdown in income growth for the median household.

These dual trends—that is, the slowdown in productivity growth and the increase in inequality in recent decades—have many distinct sources, but insofar as they have some causes in common, there is the potential to address these causes in ways that simultaneously improve efficiency and equity. To this end, the evidence that a rise in rents is contributing to both phenomena is important.… 

Trumpet fanfare.

This is a no brainer. Productivity is broadly a function of investment, and rent extraction is broadly a function of asymmetric market power. Economic rent extracts surplus from the circular flow that would otherwise be directed to consumption or investment, but instead gets saved (hoarded) by those with the power to do so. This results in amplifying social, political and economic asymmetries that distort the functioning of the economy and the society.

The good news is that to the degree that the “rents” interpretation is correct, it suggests that it is possible to reduce inequality and promote productivity growth without hurting efficiency by changing how rents are divided—or even that it is possible to do both while increasingefficiency by acting to reduce rents in the economy. Policies that raise the minimum wage and provide greater support for collective bargaining can help level the playing field for workers in negotiations with employers, in turn changing the way that rents are divided. Measures that would rationalize licensing requirements for employment, reduce zoning and other land-use restrictions, appropriately balance intellectual property regimes, and change the incentives that have led to the expansion of the financial sector as a share of the economy would all help curb excessive rents.

Additional measures that would reduce the scope and unequal distribution of economic rents include the promotion of competition through rulemaking and regulations, as well as the elimination of regulatory barriers to competition. A recent Executive Order signed by the President aims to do just that, by instructing departments and agencies of the federal government to identify specific actions that they can take to foster greater competition in the marketplace, with the actions grounded not in traditional antitrust enforcement (which is a law enforcement issue) but in a broader space that includes policies like freeing up set-top cable boxes from being tied to cable providers and freeing up more airline slots at airports.

The bad news, however, is that rents have beneficiaries and these beneficiaries fight hard to keep and expand their rents. As a result, political reforms and other steps aimed at curbing the influence of regulatory lobbying are important for reducing the ability of people and corporations to seek rents successfully. Such actions would help ensure that economic growth in the decades ahead is robust, sustainable, and widely shared.

Good that the chief economists knows this but the response is not overwhelming, not that this is his fault. As he notes, its complicated, and many of the issues are political hot potatoes. But at least he has laid the issues squarely on the table.

Pro Market
Productivity, Inequality, and Economic Rents

Jason Furman | 28th Chairman of the Council of Economic Advisers, a role in which he serves as President Obama’s Chief Economist and as a Member of the President’s Cabinet. This post originally appeared in RegBlog, an online source of regulatory news, analysis, and opinion affiliated with the Penn Program on Regulation.

ht Mark Thoma at Economist's View