Rent-seeking and the growth of inequality in the US

Joe Stiglitz in Mitt Romney's tax avoidance weakens bonds of American society Guardian 09/03/2012 discusses the concept economists call "rent-seeking", which is an important concept in understanding the dynamics of inequality in the US today:

[Romney] evidently does not recognise that a system that taxes speculation at a lower rate than hard work distorts the economy. Indeed, much of the money that accrues to those at the top is what economists call rents, which arise not from increasing the size of the economic pie, but from grabbing a larger slice of the existing pie.

Those at the top include a disproportionate number of monopolists who increase their income by restricting production and engaging in anti-competitive practices; CEOs who exploit deficiencies in corporate-governance laws to grab a larger share of corporate revenues for themselves (leaving less for workers); and bankers who have engaged in predatory lending and abusive credit-card practices (often targeting poor and middle-class households). It is perhaps no accident that rent-seeking and inequality have increased as top tax rates have fallen, regulations have been eviscerated, and enforcement of existing rules has been weakened: the opportunity and returns from rent-seeking have increased.

Today, a deficiency of aggregate demand afflicts almost all advanced countries, leading to high unemployment, lower wages, greater inequality, and – coming full, vicious circle – constrained consumption. There is now a growing recognition of the link between inequality and economic instability and weakness. [my emphasis]

Robert Kuttner talks about an aspect of the problem of rent-seeking in the US economy today in Debtors' Prison The American Prospect Online 06/06/2011. Paul Krugman picks up the discussion in The Rentier Regime 06/06/2011:

What explains this opposition to any and all attempts to mitigate the economic disaster? I can think of a number of causes, but Kuttner makes a very good point: everything we’re seeing makes sense if you think of the right as representing the interests of rentiers, of creditors who have claims from the past — bonds, loans, cash — as opposed to people actually trying to make a living through producing stuff. Deflation is hell for workers and business owners, but it’s heaven for creditors.

I don't mean to suggest that it’s all cynical; my experience is that there are relatively few people who consciously keep a secret set of intellectual books, who preach Neanderthal goldbuggism because it’s in their interests while rereading Keynes by dead of night to figure out what’s really happening. Instead, people generally manage to believe whatever is in their interests. And maybe not even that: I suspect that there are a fair number of small business owners who faithfully believed in Glenn Becks’s warnings of hyperinflation by 2010, quite unaware that the intimidation of the Fed has savaged their own bottom lines.

Still, thinking of what's happening as the rule of rentiers, who are getting their interests served at the expense of the real economy, helps make sense of the situation. [my emphasis]

Andrew Button at eHow provides a very simple definition of rent-seeking as "any economic activity dedicated to expanding your share of existing value rather than creating value." The term itself as an economic concept has a pejorative edge and is not identical with credit. Credit is necessary for the economy to function. Even the Mitt Romney/Bain Capital leveraged-buyout ("private equity") brand of rent-seeking can be constructive, though the business model for a firm like Bain Capital is focused around extracting fees whatever it may do to the profitability of the acquired company. And not infrequently, that turns into "rent-seeking" in the sense of an "economic activity dedicated to expanding your share of existing value rather than creating value." The Economist calls rent-seeking: "Cutting yourself a bigger slice of the cake rather than making the cake bigger. Trying to make more money without producing more for customers." Since they include unions negotiating for better wages and working conditions, but don't specifically include companies paying workes less than they are worth, as part of "rent-seeking", it makes me wonder if the concept isn't largely a term to stigmatize unions.

But attempting "to make more money without producing more for customers" sounds an awful lot like Bain Capital's main business to me.

It's worth noting that lobbying for government benefits is also considered rent-seeking. And lobbying for permissive laws and favorable tax treatment is also part of what creates the particular conditions for a Bain Capital to thrive. Yes, public policy helped build that, too.

Tags: joseph stiglitz, paul krugman, robert kuttner, rent-seeking

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