In the last year or so there has been a spate of articles by liberal economists exploring the causes of and possible solutions to declining productivity and increasing inequality in the United States. Not only has economic growth been anemic, but what growth we've gotten has not been inclusive, which means the top earners continue to receive an outsized share of the income gains as they have for the past 35 years.
I'll provide some links at the end of this post for those who want explore these issues further.
The basis of Bernie's campaign was that the U.S. economy is rigged to favor top earners. Broadly speaking, that is correct, but what does "rigged" mean?
Economists (and Elizabeth Warren) discuss this lack of inclusiveness in terms of "monopoly rents" or "rent-seeking" or simply "rents". What do these terms mean? (Dean Baker).
“Rent” is used to refer to an income that is generated that exceeds what would be needed to meet the same economic purpose given an alternative set of institutional arrangements.
In this sense, “rents” are accruing due to patent and copyright protection if it would be possible to generate the same amount of innovation or creative work at less expense with an alternative institutional structure. In the case of CEO pay, the question is whether it would be possible to induce the same amount of effort from comparably skilled individuals at lower pay in a different institutional structure.
The unfortunate phrase "institutional arrangements" refers in the real world to political or regulatory decisions (or neglect) which have altered the structure of markets in such a way as to increase the monopoly power of a few key players across all our major industries (e.g., finance, airlines, pharmaceuticals, telecommunications, etc.).
These changes in market structure to favor the few were accomplished by various means: lack of oversight leading to concentration of market power through mergers and acquisitions, outright government subsidies to industry in various forms, including explicit subsidies to the equities and housing markets (among others) by the Federal Reserve to create a trickle down "wealth effect" in those markets, changes in the tax structure which increase the concentration of wealth, etc.
For example, saying a bank is "too big to fail" is the ultimate subsidy. That bank has effectively been removed from the market. TBTF means the bank is immune to market forces which might, in theory, put it out of business.
That is what it means to say we have a "rigged economy." Here are a few resources not linked in above.
In today's New York Times — With Competition in Tatters, the Rip of Inequality Widens
From Obama's chief economic advisor Jason Furman — Productivity, Inequality, and Economic Rents. Furman gives us a "good news"/"bad news" scenario. Here's the bad news.
The bad news, however, is that rents have beneficiaries and these beneficiaries fight hard to keep and expand their rents. As a result, political reforms and other steps aimed at curbing the influence of regulatory lobbying are important for reducing the ability of people and corporations to seek rents successfully. Such actions would help ensure that economic growth in the decades ahead is robust, sustainable, and widely shared.
From the legendary economist Robert Solow — The Future of Work: Why Wages Aren’t Keeping Up. And see this excellent commentary on Solow called Free lunch: economic rent and the social contract.
From Joseph Stiglitz — Rewriting the rules of the American Economy
And finally, for a little perspective, my essay Moral Failure In Liberalized Market States.
"For example, saying a bank is "too big to fail" is the ultimate subsidy. That bank has effectively been removed from the market. TBTF means the bank is immune to market forces."
Not just immunity to market forces, but outright criminal prosecution, as evidenced by HSBC's money laundering operations:
http://www.bbc.co.uk/news/business-36768140
You would have thought this would be a major story causing a worldwide revolt. We are held hostages by these institutions to the extent that they engage in criminal activity which is essentially sanctioned by the highest levels of law enforcement. I'm sure there are plenty of people that assume large corporations and banks participate in these activities. However, to admit they avoided the consequences as a means to avoiding disrupting the markets is just disgusting. And still, you will have people who deny obvious inequities in the legal system and will rationalize people being killed by police for not being not being nice enough to the officers.
The economy really is everything to humans.
Posted by: Jeremy MG | 07/13/2016 at 11:34 AM