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.