Rent Seeking, Job Creation, and Why Economic Inequality Matters

"As riches increase and accumulate in few hands. . . the tendency of things will be to depart from the republican standard."-Alexander Hamilton   

        One of the things that I learned by reading Atlas Shrugged last year is that, even in the mind of America/Russia’s foremost social Darwinist, all rich people are not equal. For every Dagny Taggart or Francisco d’Anconia creating wealth wealth and adding value to the world, Rand shows us a James Taggart or a Wesley Mouch amassing a large fortune without producing anything of value. Those in the second class of millionaire create neither wealth nor jobs; rather, they harness the power of the state to distribute existing wealth in ways that favor their private interests. Rand refers to these people as “looters.”       

       I did not know until I read Joseph Stigletz’s wonderful new book, The Price of Inequality, that economists have a word for this too. Trying to profit by capturing, rather than creating wealth is called “rent seeking,” using a very old sense of the word “rent” that means something like “seeking concessions” rather than “deriving income from property.” Rent seeking refers to any economic activity that attempts to manipulate political or social conditions to lay claim to a larger share of a society’s wealth. 
        Today, rent-seeking activities include no-bid government contracts, special tax incentives, sanctioned monopolies, competitive barriers, legal immunities, infrastructural improvements, and regulatory relief that shifts resources away from one part of the economy and towards another. Rent seeking also occurs when economic activity imposes costs on others that are not charged against profits--such as, say, a company that creates air pollution but is not charged for treating respiratory diseases that occur as a result. Countless other industries--from pornographers to investment bankers to for-profit colleges--realize profits far in excess of their value by shifting costs (failed marriages, increased economic risk, and student loan defaults) to society and government, who are forced to pick up the tab.
       Rent seekers have been with us always. But Stiglitz sees rent-seeking activities as both a primary cause for, and as the inevitable result of, the most recent “great recession.” Those who profited from the real-estate bubble and from complicated financial derivatives were not, by any stretch of the imagination, creating wealth. They were reaping huge profits by transferring economic risk to the public sector while keeping nearly all of the profits in the private sector. As result, the people who have paid the highest economic costs of the recession (losing their jobs or their houses) are not the same people whose economic activities are the most to blame. 
       But what really interests Stiglitz (and me too) is what has happened since the crash of 2008. According to a certain narrative, the only way out of the recession is to cut taxes dramatically and put as much money as possible into the hands of job creators—business owners and innovators who have the intelligence and the inclination to use that extra money to create jobs and move the lagging economy forward. And, to a large extent, this is what we have tried to do.
       But it hasn’t worked very well. Look at the following chart, which shows how some key economic indicators have fluctuated in the years before and after the great crash:

	Bottom Fifth Income	Top   Fifth Income	Top 1 % Income	GDP (IN TRILLIONS) ON 6/30	UNEMPLOYMENT RATE ON JUNE 30	PERSONAL INCOME TAX AS % OF GDP	TOTAL CORPORATE TAX AS % OF GDP
2006	11,352	168,170	297,405	13.33	4.60	7.90%	2.70%
2007	11,551	167,971	287,191	13.98	4.60	8.40%	2.70%
2008	11,656	171,057	294,709	14.42	5.60	8.00%	2.10%
2009	11,552	170,844	295,388	13.89	9.50	6.60%	1.00%
2010	10,994	169,391	287,201	14.41	9.40	6.30%	1.30%
2011	11,239	178,020	311,444	15.59	9.10	7.30%	1.20%

Notice anything interesting? Here are a few things that popped for me:

•    The bottom 20% of wage earners have not yet caught up to where they were in 2006.
•    The top 20% of wage earners are much better off than they were before the recession began, as are the top 1%.
•    The GDP has recovered from the recession and continues to grow.
•    The federal tax burden remains lower than it was before the recession began.
•     Unemployment in 2011 was nearly twice what it was before the recession began.     

       Let us add to these facts a rather stunning figure that Stiglitz cites, which is that, between 2009 and 2011, the top 1% of wage captured 93% of the income growth (compared to 65% between 2000 and 2007). The (admittedly oversimplified) bottom line goes something like this: we successfully transferred a lot of money rich people, and they kept it. If Stiglitz is correct, this happened because the aforementioned rich people were engaged in economic activity aimed at capturing, rather than creating, wealth.             
        And this kind of social inequality founded on rent-seeking has real consequences, the most important being that, when wealth is simply redistributed upwards, there is nothing that can trickle down or create jobs. Neither Stiglitz nor anybody else suggests that we can or should get rid of inequality. He is not a Marxist or even a particularly committed redistributionist. He believes that markets have tremendous power to create and distribute wealth. But unregulated markets will always flow towards deep inequalities of wealth and income. Like so many other good things (chocolate, oxygen, and close relatives to name a few), capitalism works best when it is diluted.

        Inequality in America is worse now than it has been since the late 19^th century, when factory workers were paid in company script and the most important industry in the Southern states was sharecropping. The distribution of wealth in the United States (as measured by the Gini coefficient) is about as unequal as it is in Iran and far less equal than it is in nearly every other country in the Industrialized West. In the long term, this will have serious consequences for America. High levels of income inequality are incompatible with political stability, public investment, and long-term expansion. And in the process, we risk creating precisely the kind of self-perpetuating, multi-generational aristocracy that America was founded not to be. 

I Was a Teenage Ayn Rand (and I Didn't Even Know It)

       When I was in my late teens—high school and early college—I remember having the persistent suspicion that I was different than everybody else. Better, really. I saw things more clearly then they did, I had a richer inner life. I was the only person I knew who saw everything there was to see. Everybody else had stuffing for brains.
         I know now that I was just being a schmuck. Pretty much every teenager thinks these things, and most of them grow out of it and become functioning adults who can see their own flaws and recognize the good qualities (along with the flaws) in other people. Meaningful human society is built on the understanding of adults, not on the delusions of teenagers.
       I made almost every mistake that an arrogant, mediocre teenage boy can make except for one: I did not read Atlas Shrugged. I bought it and displayed it proudly on my shelf. I even told people that I had read it. But it was 1200 pages, and I was far too important at the time to go in for reading long books.
       I did not, in fact, read Atlas Shrugged until last month. As a 46 year-old well entrenched in my own left-of-center political beliefs, I did not fall under the spell that has entranced so many of Ayn Rand’s readers. But I understood it. More to the point, I recognized it. And I knew without a doubt that, had I read the novel as an 18-year old boy (when one is supposed to read Atlas Shrugged) it would have confirmed and given voice to all of my adolescent delusions of grandeur. And it would have taught me that thinking like an 18 year old boy was the only way to create utopia.
       This aggressive utopian thinking was the only thing that really surprised me when I actually read Atlas Shrugged. I expected it to be a harsh-but-plausible critique of liberal utopian thinking. And the first two-thirds of the book are exactly that. In these first two sections, the novel’s heroine, railroad tycoon Dagny Taggart, struggles mightily to keep her trains running as the government slips further and further into motivation-destroying socialism. At the beginning of the novel, she is surrounded by other captains of industry fighting the same fight. But her equals disappear one by one, leaving Dagny and her lover, Hank Reardon, to fight an entire nation bent on getting something for nothing. 
       I found much of this critique to be admirable. I agree with Mario Vargas Llosa that “we must mistrust Utopias; they usually end up in holocausts.” Utopian thinking does not map well onto human nature, as human beings are not well suited to all thinking alike, which is what all utopias ultimately require. As Stalin and Mao discovered, the only way to get everybody thinking the same is to kill the people who think differently. This is one of the great lessons of the 20^th century. Bravo, Ms. Rand (I thought), for turning it into a reasonably compelling story.
       But then Part III happened.
       Utopia exists after all, we discover—what Rand describes as the “Utopia of Greed.” Dagny finds this utopia when her plane crashes deep in the Colorado mountains, where she meets all of the people who have been disappearing for the last 12 years. She also meets John Galt, the übermencsh über alles who has been convincing all of the superior, productive people of the world to go on strike.
       The thing is, though, that these immensely talented artists, inventors, scientists, and industrialists have created a pastoral utopia right out of Oliver Goldsmith’s The Vicar of Wakefield. Brilliant scientists are happily raising pigs and planting small corn crops. World-moving industrialists have set up blacksmith shops. And great composers sweep floors by day and write their best symphonies by night. Everybody is happy because people are working for only for themselves and consuming the full value of their labor. It turns out that this is all that the ultra-rich really want. Money was never an end in itself--it way a way for one productive human being to produce the best he can and exchange the value he creates for the best of someone else.
       Yeah, that’s just how it would work out. I’m sure that, if we could somehow convince Bill Gates, Steve Jobs, Donald Trump, the Koch brothers, Stephen Hawking, Anthony Hopkins, and Bob Dylan into a hidden valley they would produce a pastoral utopia in a matter of weeks. What does Trump need casinos for when he can milk goats and exchange the milk for indestructible suspenders? Or we could (and this is Rand’s real point) just do away with all taxes and government regulations, and these avatars of excellence would enrich themselves beyond anybody’s wildest dreams and somehow, in the process, save us from our sorry, mediocre selves.
       And I (the younger version) would be right there with them. For that is what utopia looks like to a cocky, self-righteous teenage boy.