Monday, December 21, 2015

Dean Baker on Economic Rents

Dean Baker at CEPR has a new working paper out on economic rents and income inequality.  It is heartening to see Baker continue to confirm the finding that increasing income variance has been mostly a function of wage variance, not a function of labor vs. capital shares.  This has led him to a position that I think can really gather a consensus from many parts of the political spectrum, which is that properly regulated and functioning markets are the solution, not the problem.  The working paper focuses on patents, financial sector rents, executive compensation, and barriers to entry in the skilled professions.  Of course, I would place housing constrictions front and center on that focus (and I would also explain the recent decline in labor share of national income that we do see, with housing constraints), but that doesn't matter nearly as much as the acceptance of the fundamentals here.  The "negotiating power of labor vs. capital" explanation is very satisfying, from a progressive point of view, and I give a lot of credit to Baker for following the evidence here, even as it points away from that explanation.  Credit is especially due, because it would be easy enough to conflate the recent decline in labor income (which is due to housing) with the long-term stability of labor share of national income, to claim, mathematically, that it is a labor vs. capital story.  The fact that Baker has resisted this easy-enough interpretation for the more subtle, and (I think) accurate interpretation is commendable.

Here is his concluding paragraph:
The implication of this argument is that progressives need not think of themselves as using government against the market. Rather they should seek to find ways to use market mechanisms to bring down the incomes of the wealthy in the same way that wealthy have sought to structure markets to lower the income of everyone else. The market should be viewed as a tool. It makes no more sense to rail against the market than to argue against the wheel. Progressives place themselves at an enormous disadvantage if we are not prepared to use this tool as effectively as possible to advance progressive ends.
Low barriers to the application of new, competitive capital is the primary cause of the material improvement of the common person.  If we can re-establish a consensus on this point, along with the realization that prices (including incomes) are information, and if our efforts are directed at changing the inputs (functional and accessible safety nets and credit, health, education, and housing markets) into that information instead of being directed at forcing a change in the outputs (price and wage pegs, redistributive taxation, and subsidies), the remaining disagreements are trivia.


  1. Great post.

    Parts of the Democratic Party are still stuck in the 1930s, when the whole world was labor versus capital. Bernie Sanders comes to mind.

    The GOP wants to occupy Afghanistan, Iraq, Syria, and probably a few other nations. The Iraqistan Follies have cost $6 trillion or about $18,000 per resident in the US. The typical family of four will have to come up with $64,000 for Iraqistan.

    And people say a third party doesn't have a chance....

    And do not build a skyrise condo in my single-family detached neighborhood...

  2. It is still labor versus capital. Companies have record savings. Jobs are shipped overseas. Tell us how capital didn't do that.

    But Benjamin, you are on to something. It isn't occupation, it is more regime change. Read up on Oded Yinon Zionism sometime if you are confused as to American policy. Truth is, American policy is regime change and American hoax policy is the war on terror and on ISIS. That is completely fake. They have to make it look a little real, since Russia came into the game, but truth is, the US/Israel/UK/Saud empire supports ISIS and all things Sunni. I can't understand why. But read Yinon and you will see the motive, to disrupt and tear down the middle east for the security of Israel first and Saudi Arabia second. The Saudis have read Yinon, and know they will be on the list for regime change if they don't support Israel.

  3. > Jobs are shipped overseas.

    You mean, low productivity jobs are shipped overseas, where there is a surplus of labor desperate for anything, leaving us with higher productivity jobs. Everyone wins --- laborers here, abroad, and capital. Competitive markets did that.

    Kevin has it exactly right. A well-run market is a wonderful thing. The key is to remove the barriers to entry that cause excessive rents, just like Kevin says. Anywhere you see persistent excessive rent, there is an opportunity to make things better.

    1. Low productivity jobs are shipped overseas. Some. But the ones that remain are necessary. It is necessary that people work at McDonalds. It is necessary that people work for Walmart. In the 1930's, retail sales was an honorable and respected job. It is just propaganda from Wall Street that retail is not respectable. Heck, even teaching in a public school is not respectable, when you have Pete Peterson funding the propaganda against the public school teacher, even though the public school has to take all the children and charter schools, a big money maker for Wall Street, do not.

  4. Great article Kevin.
    Your points are good Bakers not so much.
    He's onto a couple of good ideas - patents and copyright, yes. But his solutions - R&D spending, hhmmm I smell Leftism. And then a tax credit for creative work (I think that's what it was). That seems a bit confused really. I think some simple tax regime - royalties or an auction, shortened terms, etc. With the financial transactions tax though he's all over the place. He describes day-trading and such as being pure rent seeking. No! It's profit-seeking. The implicit subsidy creates all sorts of distortions and rents within finance, and needs to be addressed.
    Economic rents are "bads". And taxing them or regulating them away would represent an enormous economic gain. Partly because they're are bads but the magic really happens when you start taxing economic "goods" less. Teasing out the bads from the goods is tricky no question. A Land Value Tax is a personal favourite of mine - I'm UK based so we have some quite different stuff to the US. But whatever - more proportionate taxation of housing and Land is a must. IP also - but it won't be easy - taxing away innovation, entrepreneurialism, risk-taking, hard work, and overall efficiency would be a huge mistake. Not sure about natural resources. Finance is also awkward - the crucial role of financial intermediation - of banking and insurance - makes it hard to do. But hey that's why economists earn the big bucks right!
    Figuring out ways to tax rents, while simultaneously cutting taxes elsewhere would be the holy grail of economics/politics really - greater efficiency AND greater justice. A real free lunch, and a $10 bill on the sidewalk.

    1. Thank you, Sean. All of your points are well-taken, and they are all solid. All the financial issues seem ill-conceived. And, on the transaction tax, I would even say it's almost a pure positive externality that is being taxed.

      I guess, looking at it in a glass-half-full sort of way, there are a lot of even worse policies that he could have proposed, which his fortunate framing allows him to avoid. Second, I think if progressives followed his lead, a lot of the economic stress that people experience now would be reduced, so that there would be less motivation for the poor proposals that he does have.

      When just a slight paradigm shift causes many people to seemingly always choose precisely the wrong way to address problems, it seems like a huge step forward for there to be a trend toward agreement on some basic fundamental truths that are subtle and hard to maintain when even personal experience frequently leads people astray.

      Bastiat's quest will never be comfortably achieved, but if public conversation can begin with Baker's closing paragraph, we are off to a good start.

    2. Yes, good point. There are some policy type people out there with some progressive/technocratic approaches that seem to be designed to work with markets rather than against. These folks do need positive engagement from all sides, and should not be dismissed. Prosper in Australia for example has some interesting ideas and in general they're on the right track. I don't want to sound condescending or anything - it's just that sometimes they effectively turn the State in to the rent-seeker rather than allow markets to co-ordinate. It's hard though - the beauty of economics is that its a way of thinking about things rather than a set of prescriptions (apart from Macro of course where they know everything with laser precision!)
      Interestingly many such people are kind of hidden away in dark corners of the web. They plough a bit of a lonely furrow. They don't get linked to much or appear on blogrolls and such.
      I remain convinced however that the best policies are strongly non-ideological or at least can appeal to both sides.
      Maybe that's why they're not so well known - people need a partisan fight rather than a dry technical solution.

    3. Great points. On your comment about rents, this is another reason Baker's analysis causes some optimism for me. When we are stuck in the labor-vs-capital framing, progressive policies tend to be about capturing rents for labor (unionization, credentialism, etc.). But, for there to be rents to capture by labor, the firms have to capture them first. So, much of the progressive agenda actually supports the creation of economic rents. Moving away from that capital vs. labor framing might move progressives away from rent-friendly policies.