Andrew Samwick Does Not Exactly Tiptoe Around the Rentier Issue

Though he still doesn't quite confront it head on.   Following up on the Delong post I cited here, Samwick says:

The larger context of Brad's post is to question whether the financial sector's increased share of GDP over the past six decades has contributed to economic growth.  Given how much of the financial sector is no more socially useful than a casino, I don't see how that could be the case.  Worse, the "house" and several of the "players" in this casino have used their growing resources to subvert our political institutions into believing that their institutions are "too big to fail."

Recognizing the casino aspect is valuable in its own right. The important next step is to recognize that these rentier activities are not only socially useless but overtly harmful.

I feel like a voice crying out in the wilderness.

Delong Tip-toes Around the Rentier Issue

Via Thoma I see an article by Brad Delong that I would otherwise have missed.

Brad tells us that, "In 1950. finance and insurance in the United States accounted for 2.8% of GDP  . . .  Today, it is 8.4% of GDP, and it is not shrinking."

That is exactly a 3-fold increase, and correlates pretty well (as far as those two numbers take us) with the growth of the finance sector share of total corporate profits.  Brad references Justin Lahart of the WSJ, who opines that this has “not, by and large, been a bad thing....Deploying capital to the places where it can be best used helps the economy grow...”

Which would be true, except that it's not.  The finance sector share of profits has not been in a steady year-over-year increase.  Instead, as can be seen in the chart at my link above, it oscillated around an exponentially increasing trend line, with sequentially higher highs, and higher lows.  Notably, with only one exception (1986) every peak in finance sector grab lines up with a recession, all the way back to the start of the data set in 1947.  Given these facts, the notion that capital is being best deployed looks a lot like a god-damned lie.

Brad is more polite - and more numerical:

But if the US were getting good value from the extra 5.6% of GDP that it is now spending on finance and insurance – the extra $750 billion diverted annually from paying people who make directly useful goods and provide directly useful services – it would be obvious in the statistics. At a typical 5% annual real interest rate for risky cash flows, diverting that large a share of resources away from goods and services directly useful this year is a good bargain only if it boosts overall annual economic growth by 0.3% – or 6% per 25-year generation.

Besides which:

Finally, better finance should mean better corporate governance. Since shareholder democracy does not provide effective control over entrenched, runaway, self-indulgent management, finance has a potentially powerful role to play in ensuring that corporate managers work in the interest of shareholders. 

How well do you think that is working?

Overall, however, it remains disturbing that we do not see the obvious large benefits, at either the micro or macro level, in the US economy’s efficiency that would justify spending an extra 5.6% of GDP every year on finance and insurance. Lahart cites the conclusion of New York University’s Thomas Philippon that today’s US financial sector is outsized by two percentage points of GDP. And it is very possible that Philippon’s estimate of the size of the US financial sector’s hypertrophy is too small.

At this point Brad could have said something about the rentier activities of finance sucking the life blood from American capitalism.    But we get nothing - even a single subordinate clause - on that topic.

Despite this missed opportunity, the article is well worth reading.  Go check it out.

Trend Line Failure and The Housing Bubble

Back in 2005, Very Serious People like Alan Greenspan were assuring us that there was no housing bubble.

" . . .  Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications. 

Well, hindsight is always 20/20, but one can make a very good case that housing prices up until just about the very moment of Greenspan's infamous prediction were bubblicious, indeed.

Here's the evidence*.

This graph shows year over year rate of change in home prices.  First, I'll suggest that a 12% YoY increase in anything, anywhere, any time is unsustainable.   Hence the late 80's - early 90's housing decline, which I have labeled a crash.  But that crash was not much - a brief excursion into negative territory followed by a few years of relative stability.   After the mid-90's things got interesting - for a decade, or so.  I've placed a lower trend line (red) connecting the bottoms, and a parallel (red) line more-or-less cross the tops.  This data doesn't fit this channel neatly, though, so I've also place a purple line that fits better across the tops.

The ultimate peak is then at the expanding channel top or an overshoot, depending on how you chose to think of it.  Then in '06, the RoC line crashed through the lower trend channel boundary.  That looks like a sharp V recovery, but we'll have to see how sustainable it is.  With unemployment remaining stubbornly high, lousy paying jobs replacing better-paying jobs, and increasing wealth and income disparity, it's hard to imagine what could drive a robust recovery.   I suspect the recent drop back below zero will be an important part of the story for several more years.  The backlog of foreclosures has gotten worse, not better, and until that clears, housing prices will remain stagnant, at best.

Back to the bubble - I'm going to suggest that when the YoY % change in the price of anything is in double digits and increasing, that is indisputable evidence that there is a bubble in that item.  No other confirmation is needed.   Even the decline in the '01-02 recession only brought the RoC down to about 8% - and that was brief.  By 2005, it was exceedingly clear that there was a housing bubble.  Greenspan is either a fool or a tool - quite possibly both.

There is also a lesson here about trends.  When the channel is broken in a convincing way, that trend is done.   Forever.   Whenever it is spoken of in the future, it will be as an item from the past.
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* Steve has a post containing the original version of this graph, and points us to a post by Tyler Durden at Zero Hedge that has several more.  Those posts aren't about the housing bubble, per se, but rather about how Wall St. is sucking money out of ordinary peoples' pockets, and thus the economy in general.

These are examples of more rentier activity, and detrimental to society.

We're screwed.

Quote of the Day

Michael Hudson:  (Somewhat ironically, that link was broken.  Here it is.) 

In more modern times, democracies have urged a strong state to tax rentier income and wealth, and when called for, to write down debts. This is done most readily when the state itself creates money and credit. It is done least easily when banks translate their gains into political power. When banks are permitted to be self-regulating and given veto power over government regulators, the economy is distorted to permit creditors to indulge in the speculative gambles and outright fraud that have marked the past decade. The fall of the Roman Empire demonstrates what happens when creditor demands are unchecked. Under these conditions the alternative to government planning and regulation of the financial sector becomes a road to debt peonage.

This powerfully reinforces what I said here and here (including the comments.)  Here, too.  Also here.  Check also the Mike Kimel and Andrew Dittmer links here.

H/T to Art.

What is the Contribution of the Finance Sector?

From earlier today, Krugman points to an article by Andrew Haldane, coincidentally having the same title as this post.  PK lifts this Notable Quote:

In fact, high pre-crisis returns to banking had a much more mundane explanation. They reflected simply increased risk-taking across the sector. This was not an outward shift in the portfolio possibility set of finance. Instead, it was a traverse up the high-wire of risk and return. This hire-wire act involved, on the asset side, rapid credit expansion, often through the development of poorly understood financial instruments. On the liability side, this ballooning balance sheet was financed using risky leverage, often at short maturities.

In what sense is increased risk-taking by banks a value-added service for the economy at large? In short, it is not.

PK's post was titled: "A Gigantic Scam." He concludes:

And he suggests that much if not all of the rise in the share of finance in GDP reflected this deception; in effect, Wall Street and the City were con artists extracting huge rents from an unwary public (and eventually dumping much of the cost, when things went bad, on taxpayers).

A lot more to say about this — but I’m needed in the kitchen to chop vegetables.

I saw Haldane's article reposted at Naked Capitalism yesterday morning, and left this comment.  It generated some very favorable responses from other readers, some of whom told me that I did, indeed, miss things.  Those blanks are well worth filling in.  Check it out at the link.

So, to summarize:

1) Over the last 30 years banking has devolved from a necessary financial function involved in the allocation of resources and management of risk to essentially non-value-added rent-seeking activities implemented through high risk practices.

2) When the whole house of cards came tumbling down, the losses were socialized, while the criminals who perpetrated the underlying fraud walked off not only scot-free, but with huge bonuses.

Did I miss anything?

This is how we’ve been screwed for decades.
JzB

Have I ever mentioned that I love it when Krugman agrees with me?   But it gets even better.  I chopped veggies this afternoon, too!

Happy Thanksgiving, everyone.

The Brute Economics of Slavery

Late update:  If you happen to read this post, be sure to also read the comments.  They are enlightening.

In thinking about the economics of slavery, I'm considering slavery and serfdom to be economic near-equivalents. Of course, I recognize that there are qualitative differences between chattel-slavery and serfdom:

-  In slavery, the master owns the person of the slave; in serfdom the master owns the labor output of the serf, either as a stated labor quantity, a stated output quantity, or some combination.

-  Serfs enjoy some measure of freedom, and can accumulate personal wealth, after the rents are paid; slaves do not and cannot.  (The point, though is to keep rents so high that accumulation is prohibitively unlikely.)

-  It might be easier to gradually and incrementally impose serfdom on an existing population. First generation slaves need to be captured, conquered, or in some other way removed from - and deprived of - their native state. Thus, serfdom is imposed on the indigenous population, slaves are more typically imported.

-  The individual slave is a depreciating asset.  But, as a population, slaves are self-renewing, since, unlike Shakers, they reproduce.   Serfs are factor inputs rather than assets.  (On the other hand, the master also owes the serf protection, and sustenance in times of famine.  In that sense, the serf resembles an asset that requires maintenance.)

These are significant differences, to be sure, but mostly from a sociological or political perspective.  In terms of the brute economics, they are somewhere between second order and trivial.

The necessary conditions for reducing a population to serfdom are as follows.

- A large wealth and power disparity between the haves and the have-nots.

- Perhaps more significantly, the ownership of virtually all assets by an elite class, with severely limited opportunities for the general population to own or accumulate assets.

- A poorly educated population with limited skill sets.

- Severely impaired individual mobility, due to an impossible debt and/or tax burden and legal restrictions.

- Government of the masters, by the masters, for the masters, with little or no sense of worth or justice for the serfs.  This enforces and reinforces the previous point.

- A social and/or religious system that recognizes the inherent meritocracy of the master class.

- A population that is scared or coerced into ceding their freedom to the masters in exchange for security.

- The political will to deprive people of their fundamental human dignity.

Via Krugman, we find Delong's repost of a short treatise on slavery and serfdom by Evrey Domar.

Domar points out additional requirements, and a mechanism for serfdom to develop.

- Low population density: Labor scarcity favors slavery/serfdom, since the cost of freeman labor will be high.  I'll admit I didn't get this until is was stated the other way around.  Population growth favors freeman labor since the competition for jobs drives wages down.  (Note the implicit denial of the "Lump of labor fallacy" canard.)

- A large class of what Domar calls "servitors" who owe allegiance, taxes, and military support to a higher authority.  They are the equivalent of medieval vassals of a liege lord, who extract from the local peasant population not only their own means of existence, but that of their liege, as well.   This is the beginning of, and most literal sense of "rent-seeking."  The process is that, starting with a free population, by taxation or other forms of indebtedness, the freedom of the common people is eroded.  Those whom Domar calls "servitors" I call leaches.

- Explicit Government complicity in restricting mobility, via legal structures. Besides limiting the population's mobility in a gross sense, it also eliminates the possibility of competition among different servitors.

In this way, serfdom developed in depopulated* Western Europe during or after the late Roman Empire, and in Eastern Europe many centuries later - in fact, long after serfdom has disappeared in the West.  In each case, the critical enabling factor was low population density, resulting in a critical shortage of labor.

Basically, it comes down to an economic evaluation of costs and returns.   But these are not easy to determine with any precision in the abstract, and probably not in the actual event, either, unless the increment is quite large.  The slave, and even the serf, needs maintenance in a way that the free laborer does not.  The serf can be compelled to work past his willingness in way that the free man cannot.  On the other hand, the free man might have higher willingness and unit productivity.  The wild card here is what the free man can demand as wages, and that depends on the competition for available jobs.  The bottom line is that serfdom will dominate whenever the profit (revenues less costs) of keeping a serf is greater than that of hiring a free laborer.

Of course, all of this was long ago - pre-industrial revolution in fact, and centered on a low-technology agrarian system.  What message does it have for us today?   Here, Krugman wonders** why, after the the plagues of the mid-14th century, serfdom wasn't reestablished in Western Europe, since the population was greatly depleted.  Domar has no clear answer, and Delong won't hazard a guess. I will -- but it's only a guess.  Perhaps society had moved on, and the culture was no longer accepting of serfdom as a social institution.  Serfdom had faded away from lack of interest and due to population growth many decades before the plague epidemics occurred around 1350.  There were sufficient numbers of artisans, craftsmen, guilds, merchants, and bankers, such that tying people back to the soil might not have been easy, or even desirable.   The growth of towns might have played a part.  Another social factor is that in late Eastern European serfdom, the servitor's status was determined by the number of serfs he controlled.  I don't think that was ever the case in the West.  Sometimes social factors trump economics.

Also, as Barbara Tuchman points out in A Distant Mirror (Ch 11, frex.), though the population decreased due to the plague, total wealth in coins and material possessions did not, and they were largely in the hands of the elite.  It could be that with this wealth maintained, the brute economic drive for serfdom was absent, or severely attenuated, despite the labor shortage.

Krugman also wonders: "And an even bigger question: why hasn't indentured servitude made a comeback in the modern era? Yes, I know, human rights and all that - but if it was profitable to have indentured servants in the modern world, I'm sure that Richard Scaife's think tanks would have no trouble finding justifications, and assorted Christian groups would explain why it's God's will."  

Well, that was in 2003, when Scaife was well known and the Koch brothers weren't. This statement also gets a lot of ridicule in comments at Delong's Domar post. But, there were certainly many Christian apologists for slavery, and you can see today that tea-baggers and the Christian Right do not exactly align themselves on the side of human rights vs the brute force of the elite.

So Krugman's question remains, hanging over us like the sword of Damocles.  Here is the way I see it. First off, you need to be skeptical about translating a socio-economic phenomenon from a different place and time to the here-and-now.  Our population is not sparse nor badly educated (yet), and we do not have a pre-industrial agrarian economy.  But these differences effect the possibilities and modes of implementation.  They don't effect the ongoing defects of human nature that Krugman obliquely alludes to.  These are greed, ego, and the lust for power, and you can see them manifesting themselves right here in the U.S. today in the struggle between labor and the minions of the wealthy elite. When I think about serfdom, I also think about more modern analogs - sharecroppers, coal miners who owed their soul to the company sto'e, child laborers in early industrialized England, indentured servants, the exploitation of illegal immigrants, and the union busting practices that have been highly successful here since 1980.

In evaluating the conditions that favor and disfavor serfdom as such, something is missing from the analysis.  That is that somewhere along whatever spectrum of conditions makes serfdom more or less economically favorable to the elite, there is a point (or region) of indifference.  If working people are reduced to the point where the economics are no less favorable to the elite than serfdom, then actually going through the formality of making them serfs simply isn't worth the effort, and doesn't make any economic difference.

What do we have today?

- The largest wealth disparity since before the great depression - at every stratum of society, growing larger every day.

- An all out assault by the moneyed elite on the wealth and status of working people.   Union busting is one of the tools.

- Deliberate undermining of public education.

- Segments of the population tied to the land by under-water mortgages or the inability to unload a property.

- Popular social movements with religious backing that favor the interests of the elite over the interests of the people.

- Constant fear-mongering as a pretext for inducing people to give up their basic rights.

- A moneyed elite that effectively owns government.

Krugman's apparent underlying assumption, which I share, is that - for the servitors at least, and possibly for the serfs as well - serfdom is a strategy of least resistance, and therefore the default social order, whenever the conditions for it are right.

One of the things that can make conditions not right for serfdom is regulated entrepreneurial capitalism - inventiveness, innovation, industry, and real competition.  Capitalism generates wealth, increases wages, opportunities and the standard of living, and reinforces concepts of freedom, liberty, and fair practices.  Effective regulation assures that fair practices are maintained, keeps the playing field even, and increases the likelihood that reward is in some way proportional to a combination of skill and effort.  Capitalism is expansionist by nature, serfdom is static.

Unfortunately, over time, capitalism transmogrified into Corporatism.

Corporatism, for all its acquisitiveness, is a very different phenomenon.  Ownership is remote.  Assets are used in large part for executive bonuses, dividends, and mergers and acquisitions.  Though the track record of M&A in meeting stated goals is dismal, the real net effect is monopolization - corporatists hate competition.  Corporatism seeks always and everywhere to decrease wages, and is utterly indifferent to the living standards, freedom, and opportunities of anyone outside the elite.  Ethics and fairness are non-existent.  Rewards are in proportion to rapacity.  In other words, Corporatism is the new feudalism.

This is why I say that the goal of the Rethug party, as servitors to Scaife, the Koch's and their ilk, is to take us back to the 12th century.  I've stated that trans-national corporations with no loyalty to anyone or anything constitute the real road to serfdom, in contradistinction to what Hayek said.   That is a bit inaccurate, though. Once wage scales are reduced to the par value of slave maintenance, it doesn't matter what the correct technical description of our condition is, and the elite won't care.

So - are we screwed, or what?!?

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* Antonine Plague of 165-180, Cyprian Plague of 250-270, Justinian Plague of 541-2
** The link to the Surowiecki article that Krugman mentions is broken.  It can be found here.
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