How To Euthanize Rentiers (Wonkish)

In my last post, I established that the “rentier’s share” of interest — resulting from as Keynes put it the “power of the capitalist to exploit the scarcity-value of capital” — can be calculated as the real-interest rate on lending to the monetary sovereign, typically known as the real risk free interest rate. That is because it is the rate that is left over after deducting for credit risk and inflation risk.

However, I have been convinced that my conclusion — that euthanizing rentiers should be an objective of monetary policy — is either wrong or impractical.

It would at very least require a dramatic shift in monetary policy orthodoxy. My initial thought was thus: the real risk-free interest rate (r) can be expressed as the nominal risk free interest rate minus the rate of inflation (r=n-i). To eliminate the rentier’s share, simply substitute 0 for r so that 0=n-i and n=i. In other words, have the central bank target a rate of inflation that offsets the expected future nominal risk free interest rate, resulting in a future real risk free interest rate as close to zero as possible.

There are some major problems with this. Presently, most major central banks target inflation. But they target a fixed rate of inflation of around 2 percent. The Fed explains its rationale:

Over time, a higher inflation rate would reduce the public’s ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling — a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.

Now, it is possible to argue that inflation targets should vary with macroeconomic conditions. For example, if you’re having a problem with deflation and getting stuck in a liquidity trap, a higher inflation target might be appropriate, as Jared Bernstein and Larry Ball argue. And on the other side of the coin, if you’re having a problem with excessive inflation — as occurred in the 1970s — it is arguable a lower inflation target than 2 percent may be appropriate.

But shifting to a variable rate targeting regime would be a very major policy shift, likely to be heavily resisted simply because the evidence shows that a fixed rate target results in more predictability, and therefore enhances “the public’s ability to make accurate longer-term economic and financial decisions”.

A second sticking point is the argument that such a regime would be trying to target a real-variable (the real risk free interest rate), which central banks have at best a very limited ability to do.

A third sticking point is Goodhart’s Law: “when a measure becomes a target, it ceases to be a good measure.” By making the future spread between the nominal risk free interest rate and inflation a target, the spread would lose any meaning as a measure.

A fourth sticking point is the possibility that such a severe regime change might create a regime susceptible to severe accelerative macroeconomic problems like inflationary and deflationary spirals.

And in this age of soaring inequality, the euthanasia of the rentier is simply too important an issue to hinge on being able to formulate a new workable policy regime and convince the central banking establishment to adopt it. Even if variable-rate inflation targeting or some alternative was actually viable, I don’t have the time, or the energy, or the inclination, or the expertise to try to do what Scott Sumner has spent over half a decade trying to do — change the way central banks work.

Plus, there is a much better option: make the euthanasia of the rentier a matter for fiscal policy and specifically taxation and redistribution. So here’s a different proposal: a new capital gains tax at a variable rate equal to the real risk-free interest rate, with the proceeds going toward business grants for poor people to start new businesses.

In defense of economic thinking

My colleague Damon Linker recently wrote a piece entitled “How economic thinking is ruining America,” arguing that political considerations such as community, loyalty, citizenship, and the common good have been “sacrificed on the altar of economic profit-seeking.”

As an economic thinker myself, I was bound to find some disagreement with Linker’s view. But there is also a fair amount of common ground. As Linker argues, the years since the 2008 recession have been rough: “Inequality is up, while growth, job creation, and middle class wages are running far below historic norms. That’s enough to drive even the cheeriest American to despair.”

One economic measure, of course, that is not down is corporate profits, which are at all-time highs relative to the size of the economy. The same thing is true for the incomes of the top 1 percent. So Linker is absolutely correct to argue that corporate profit-seeking has been allowed to override political and cultural loyalties and restraints. The middle class has been trampled into the dirt.

But is that really a product of economic thinking? Or is it a product of a broken political system that funnels insider access, tax cuts, and bailouts to the well-connected, while largely ignoring the concerns of the middle class?


Is the economy really twice as large as we thought?

Since the mid-20th century, economists, governments, businesses, and just about everyone else has used gross domestic product (GDP) to measure the size of the economy. But is it thebest metric for the job? Some economists are saying no.

GDP is a measure of the level of spending on finished goods in the economy. It is a measure of final production. If a pencil sells for 50 cents, it increases GDP by 50 cents. But a good deal more spending tends to occur in the process of making a pencil. At the very least, the manufacturer has to acquire resources to make the pencil — someone must harvest the wood, someone must harvest the rubber, someone must mine the graphite. Under GDP, that spending is not directly included. It is only counted implicitly when the finished pencil is produced and purchased by a consumer or business.

Some economists, such as Chapman University’s Mark Skousen, argue that the intermediate stages of production lower down the production chain should also be included in measurements of output. While they recognize that including them again explicitly can mean double counting or triple counting, they argue that there are “several reasons why double counting should not be ignored and is actually a necessary feature to understanding the overall economy.” After all, lots of businesses deal solely in intermediate goods. Intermediate producers buy partial products, add a “bell and a whistle,” and pass them on. At Forbes, Skousen argues that “no company can operate or expand on the basis of value added or profits only. They must raise the capital necessary to cover the gross expenses of the company — wages and salaries, rents, interest, capital tools and equipment, supplies, and goods-in-process.” To Skousen that means that a measurement of output should take all this spending into account.

Perhaps taking heed of some of these arguments, the Bureau of Economic Analysis starting on April 25 will release each quarter a measure called gross output that includes total sales from the production of raw materials through intermediate producers to final wholesale and retail trade. 


Is cash the most ‘efficient’ Christmas gift?

Some economists think that Christmas gift-giving is a big waste of resources, and that cash is a much more efficient present.

When giving specific gifts, people often get things they don’t want, which is a waste of resources.An estimate by Wharton Professor Joel Waldfogel suggests that 20 percent of gift giving money is wasted this way.

Woldfogel argues that a person who spends $100 on himself or herself will presumably spend that money on something that actually nets them $100 worth of satisfaction. But when another person spends that amount on a gift they may end up getting a painting of a cat for a dog-lover, a sweater in the wrong size, or a coffee maker for a tea drinker, etc.

Woldfogel argues it would be much more efficient to just give cash, so that the recipient can spend something that nets $100 worth of satisfaction.


Less racism and sexism means more economic growth

Increased gender and racial diversity in the labor market since the 1960s has been a key factor in America’s booming growth in productivity, suggests a new study by the National Bureau of Economic Research.

In 1960, 94 percent of doctors and lawyers were white men. By 2008, this was just 62 percent. Similar changes have occurred across professions throughout the U.S. economy during the last 50 years.

A half century ago, being a white man was clearly considered an advantage (if not a requirement) for employment in certain professions. Things have obviously changed since, though subconscious attitudes in this vein surely still persist.


There is a better alternative to raising the minimum wage

The U.S. Secretary of Labor Thomas E. Perez wants to raise the minimum wage.

In fact, the vast majority of Americans — 91 percent of Democrats, but also 76 percent of Independents and even 58 percent of Republicans — are in favor of raising the minimum wage.

This is an understandable position. After all, the gap between richest and poorest has grown very wide in recent years. But in my view, minimum wage laws are not good laws at all. That’s not out of lack of compassion for low-wage earners, or because I like inequality. That is because I think that there is a better way to achieve a decent standard of living for the poorest in society.

The minimum wage is a factor in creating unemployment. Despite what’s often said to the contrary, it’s true: Countries with no minimum wage tend to have much lower unemployment. Right now, America is suffering a serious deficit of jobs, with over three jobseekers for every available job. We need all the jobs we can get.


Bitcoin: The opportunity costs of mining for money

Everything we do and every choice we make has an opportunity cost. In a world of scarce time and resources each choice necessarily means rejecting many other possible opportunities. One of the best illustrations of this concept was made by President Eisenhower in a 1953 speech. Eisenhower criticized the use of scarce resources for military purposes because of the opportunity cost:

The cost of one modern heavy bomber is this: A modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement. We pay for a single fighter with a half-million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people. [The Chance For Peace]

These kinds of choices are just as difficult as they were for Eisenhower in 1953. How much time, resources, and effort should be dedicated to military activities? It’s still a contentious argument, and opinions greatly differ.