Monday, December 21, 2015

Nick Bunker — What are the factors behind high economic rents?

In research and debates about economic inequality in the United States, there’s been a resurgence this year in explanations for rising inequality that emphasize market power and market imperfections. In a recent piece for the New York Review of Books, Paul Krugman details how increasing market power seems to be a more attractive story of how inequality became so large in the United States. A paper that Krugman cites—by Jason Furman, Chairman of the Council of Economic Advisers, and Peter Orszag of Citigroup—emphasizes the role of “rents” in contributing to inequality and suggests increasing market power could be the reason for this trend. But an interesting new paper from Dean Baker, economist and co-director of the Center for Economic and Policy Research, proposes a very different reason for why those rents came about.…
WCEG — The Equitablog
What are the factors behind high economic rents?
Nick Bunker


Random said...

This like most of MNE is missing the obvious. The main rent is land rent.

The answer is the same as before: there is quite a bit of voter pressure for policies to drive unemployment higher and wages down (for people with an income below the median).

This is in part direct, because for many voters close to retirement or retired the employment and wages of people on a lower income are a cost to them they want to minimize.

A government that helps the middle class find plentiful and cheap hired help is going to gain votes (the cheaper hired help cannot vote or don't vote much).

But pushing up unemployment and pushing down wages by means of demand suppression means that the central bank with a given inflation target is then bound to expand credit and keep interest rates down, helping asset prices to zoom.

Thus "austerity" (for those on low incomes, especially in the North) helps drive property prices up, and that is the single most important factor in winning elections (especially in the South, where they are won).

For many decades nearly every time a government was re-elected property prices had been zooming up, and every time a government lost power house prices had stagnated or gone lower.

Bigger better house prices are the what "aspiration" is about and "aspirational" voters are eager to fire governments that don't push them up.

Every politician but the Bennites and Corbynites (the same group...) seems to understand that house prices are the single most important election winner (or loser).

Random said...

Let us view “Blow you! I am all right Jack” politics common in the UK among teh fickle middle classes:

You might want to read this one in full, it explains a lot:
“”The problem with Gordon,” a senior minister said to me recently, “is that he doesn’t understand why anyone would ever want to build a conservatory.”
There is a growing concern in the Government that the Prime Minister is alienating the aspirational middle classes who put Labour into power in 1997 and have kept it there ever since.
… Although Mr Brown talks a lot about aspiration, he means it in the sense that people at the bottom of the pile should be able to get to the middle, rather than that those in the middle should aspire to get a little bit further towards the top.
His preoccupations with child poverty, Africa and banning plastic bags are all very worthy – but they leave the conservatory-building classes thinking: what about us?
… With the cost of housing, energy, childcare and food going through the roof, people who are relatively well paid can no longer afford to live the way they did even a year ago. As the middle classes book holidays in Torquay rather than Tuscany, drink tap water instead of San Pellegrino and put the conservatory they had been planning to build on hold, they start to question the amount they have to pay to the Government.”
“Flint, the shadow energy secretary, also holds a position as the party’s champion for the south-east. She writes: “We have to win votes from the Tories as well as from the Liberal Democrats. The collapse of the Liberal Democrat vote alone will not be enough to win in 2015. We have to continue to focus on those voters who supported Labour in 1997 but voted Conservative in 2010.”
She adds: “We went into the last general election promising a ‘future fair for all’, but too often, when we thought we were talking about fairness, we were actually talking about need.” She claims that for many swing voters in the south-east “fairness is as much about exchange – taking out once you have put in – as it is about need. They want ‘fairness for my family as well.’”

I’ll repeat here the classic, and sincere (yet read between the lines) relevant part of Blair’s pivotal speech:
“I can vividly recall the exact moment that I knew the last election was lost. I was canvassing in the Midlands on an ordinary suburban estate. I met a man polishing his Ford Sierra, self-employed electrician, Dad always voted Labour. He used to vote Labour, he said, but he bought his own home, he had set up his own business, he was doing quite nicely, so he said I’ve become a Tory. He was not rich but he was doing better than he did, and as far as he was concerned, being better off meant being Tory too.
In that moment the basis of our failure – the reason why a whole generation has grown up under the Tories – became plain to me. You see, people judge us on their instincts about what they believe our instincts to be. And that man polishing his car was clear: his instincts were to get on in life, and he thought our instincts were to stop him.”

Note the euphemism “get on in life” for “milk the benefits of incumbency”,
What Blair understood very well is that the right mainline policy was to give “aspirational” voters an ongoing stream of the benefits of incumbency via higher house prices, because the “aspiration” so-called Middle-England voters (especially middle aged and older property owning female ones) have is for massive tax-free effort-free windfall capital gains (cashed in via low rate remortgages)