How Rent-Seeking Is Driving Inequality
When someone like Bernie Sanders rails against a “rigged” economy that is fueling inequality, some believe that he is espousing a radical view. Nothing could be further from the truth. Even the White House knows the economy is rigged.
One newly released and enlightening document you may enjoy reading today is the Annual Report of the Council of Economic Advisers to the President—the report that sums up where the American economy stands this year, from the Obama administration’s top economic advisors. Much of this year’s report is dedicated to America’s vast economic inequality—of income and of wealth—and what is driving it.
Many factors contribute to it, of course. But one thing that this thoroughly mainstream report zeroes in on are “rents” that are being collected by the most powerful companies and people in America. “Rents,” you may know, are the economic term of art for ripoffs, skims, soaks—money that flows into someone’s pocket not because they earned it, but because they are powerful enough to simply demand it. From the report:
But many economists have recently emphasized another contributor to rising income inequality: “economic rents.” Rents are unproductive income paid to labor or capital above what is necessary to keep that labor at work or that capital invested. Rents arise when markets are not perfectly competitive, such as when uncompetitive markets yield monopoly profits or preferential regulation protects entities from competition. For example, a firm might be willing to sell a piece of software for $20 based on costs and a reasonable return to capital. But if the firm has no competition, it may be able to sell the same product for $50—the $30 difference reflects an economic rent. Rents can serve a productive purpose in encouraging innovation. Some rents are inevitable, but the critical question is how they are divided—for example, between profits and wages. And in many cases the evidence suggests that the pursuit of such rents (“rent-seeking behavior”) exacerbates inequality and can actually impair growth.
These rents accrue to companies, and then to top executives and shareholders, ultimately fueling their wealth at the expense of workers.
The rising importance of unproductive economic rents is likely also contributing to the broad increase in inequality. Workers and managers at firms earning supernormal return—likely reflecting increased aggregate rents—are paid progressively more than their counterparts at other firms. Moreover, as union membership declines, inequality can rise further as workers at the bottom of the income distribution lose market power.
How does declining union membership enable the corporate rent-seeking that drives inequality?
Whenever a firm hires a worker, the difference between the highestwage the firm would pay and the lowest wage the worker would accept is thesurplus created by the job match—an economic rent. The division of thatrent between firm and work depends on their relative bargaining power. Asmarkets grow concentrated and certain forms of labor are commoditized,the balance of bargaining power leans toward the firm. Unionization andcollective bargaining—along with policies like the minimum wage—helplevel the playing field, concentrating labor and encouraging the firm to sharethose rents with labor.
Furthermore, income inequality in the short term turns into wealth inequality in the long term, which then fuels more inequality, because wealth not only creates more wealth but also warps our political system to its favor.
As the distribution of wealth becomes increasingly unequal, the returns to that wealth—like interest, dividends, and capital gains—will generate more inequality. In addition, the fact that those at higher wealth levels seem to receive higher returns to capital, when coupled with reductions in tax rates on capital income in recent decades, has increased the contribution of capital income to overall inequality. Further, if some firms earn monopoly profits, owners of those firms may benefit more than others.
Look at this motherfucking chart.
Does that look fair to you?
One perspective on wealth inequality comes from the Federal Reserve’s Survey of Consumer Finances (SCF) which, as shown in Figure 1-3, shows that the top 3 percent of households have held more than 50 percent of aggregate wealth since 2007 (Bricker et al., 2014). This share has been on a consistent uptrend since the late 1980s. The next 7 percent of households in the wealth distribution hold roughly 25 percent of aggregate wealth, a share that been fairly stable time during this period. Notably, the loss in wealth share experienced by the bottom 90 percent of households, which in 2013 held only 25 percent of all wealth is accounted for by the rise in share captured by the top 3 percent. This is not a uniform spreading of the wealth distribution; it is a rising concentration of wealth at the very top.
The very rich are getting richer, at the expense of the rest of us. This is not a radical viewpoint. It is well understood by everyone. The hard part is not grasping what is happening. The hard part is motivating people to do something about it.
