The State of Rentierism

Interest in rentierism has begun to percolate in the last few years.  I propose a framework for analysing and discussing the modern state of rentierism in the terms of behaviours, incentives and empirical impact on the economy.

Both the capitalist and the rentier seek to exploit their monopoly on capital to acquire more capital.  Rentier behaviour is typically found in households and corporations, with the public sector tending to run deficits to support the former two.

The distinction between the rentier and capitalist is that the capitalist reinvests her cashflow into creating new capacity – or new real capital.  The rentier more simply exploits his existing monopoly on capital for cashflow.  The capitalist accumulates new real capital, which expands the nation’s capital stock while rentier accumulates economic rent.

All other things equal (including return on capital), it is preferable to be a rentier.  The capitalist creates new things, and is constant competition with other capitalists to provide the highest quality cost goods and services at the lowest cost.  Because capital reinvestment is risky, return on capital is generally lower for collecting economic rents.

The fulcrum upon which the capitalist and the rentier are defined is the marginal decision to re-invest cashflows.

Unchecked, a reduction of re-investment subtracts income from the rest of the economy. When this happens in aggregate, the labour which was used to create the production won’t be able to purchase all of their own output.  Rentiers thus reduce labour demand and demand for the output their assets produce.

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Figure 1: Saving as a % of Investment = Unemployment Rate

To approximate the Aggregate Rentierism in the econonmy, we look at the fraction of savings that investment comprise of.  We observe in Figure 1 that Gross Private Savings as a % of Gross Private Investment explains 70% of the unemployment rate. Rentierism is unemployment.

Figure 2: 85-country study regressing age against saving and investment

Figure 2: 85-country study regressing age against saving and investment

Rentierism itself is not morally objectionable.  The gap between savings and investment is explainable through demographics.  The relationship between age and both income and investment is well understood.  The young have little income and large risk appetite.  As they approach middle-age, their income and investment peak.  At the onset of old age, the high-income dramatically reduce investment to save with less risk towards retirement.  Retirees then dis-save and liquidate investments for sustenance.  Figure 2, drawn from Saving and Demographic Change: The Global Dimension (Bosworth, Chodorow-Reich), demonstrates this effect empirically.

Figure 3: Savings Rate over Age

Figure 3: Savings Rate over Age

The agents which make these decisions, even if impacted by household demographics, aren’t always households themselves, but we’ll start there.

Based on the 2011 Bureau of Labour Statistics’s Consumer Expenditure Survey, we imputed household a savings rates across age-groups using the difference between Income Before Taxes and Average Annual Expenditures.  This is an approximation, and we just use the shape of the curve in our analysis.

The shape of this curve intones a marginal propensity to accumulate rent based on demographics.  Can we really blame our middle-aged for saving with less risk for retirement?

Not all savings are accumulated equally.  The Bureau of Labour Statistic’s Personal Savings Rate accounts for Fixed Investment as consumption, whilst the Federal Reserve’s Z.1 Flow of Funds report reports that as a form of saving.

Figure 4: Consumer Expenditure Survey data on age-groups

Figure 4: Consumer Expenditure Survey data on age-groups

Both are valid in their own context.  The Z.1′s F.10 subsection details the breakdown, including comparison to the Bureau of Labour Statistics version.

The difference between the two provide the basis for rent-seeking savings and capitalist savings.  The capitalist household saves by creating new fixed capital, while the rentier household savings in cash and financial assets.  Thus, we find the household decisions that drive rentier behaviour are probably principally driven, at least over the long-run, but demographics.

Cyclical swings in the marginal propensity to save also invoke the paradox of thrift: when everyone saves, aggregate demand falls, and so too does income, and the value of assets frequently fall more than the cash balances increase.

Households aren’t the only agent which demonstrates rent-seeking behaviour.

Figure 5: The fraction of income which is reinvested into capex

Figure 5: The fraction of income which is reinvested into capex

Using historical data from the F.101 series of the Federal Reserve’s Z.1 Flow of Funds release, we form a ratio between Income before taxes and Capital Expenditures (figure 5).  We find something which looks strikingly like long-term government interest rates.

Business capex to income is proportionate to long-term government interest rates.

This draws us to our central conclusion: rentierism is a dependent derivative of capitalism.  A positive risk-free rate is the ultimate vehicle of the rent-seeker.

We can see that the cost of money is proportionate to the level of re-investment.  This infers that a high cost of money is dependent on a high level of re-investment.

 

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5 Responses to The State of Rentierism

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  4. If you live in Quebec, you have additional rules to worry about. Specifically, for Quebec tax purposes you can deduct interest (and other investment expenses) only to the extent you’ve reported investment income in the year. Investment income for these purposes includes taxable capital gains. Any interest that is not deductible can be carried forward to offset investment income you have in future years.

  5. Debt-leveraged buyouts and commercial real estate purchases turn business cash flow (ebitda: earnings before interest, taxes, depreciation and amortization) into interest payments. Likewise, bank or bondholder financing of public debt (especially in the Eurozone, which lacks a central bank to monetize such debt) has turned a rising share of tax revenue into interest payments. As creditors recycle their receipts of interest and amortization (and capital gains) into new lending to buyers of real estate, stocks and bonds, a rising share of employee income, real estate rent, business revenue and even government tax revenue is diverted to pay debt service. By leaving less to spend on goods and services, the effect is to reduce new investment and employment. Contemporary evidence for major OECD economies since the 1980s shows that rising capital gains may indeed divert finance away from the real sector’s productivity growth ( Stockhammer 2004 ) and more generally that ‘financialization‘ (Epstein 2005) has hurt growth and incomes. Money created for capital gains has a small propensity to be spent by their rentier owners on goods and services, so that an increasing proportion of the economy’s money flows are diverted to circulation in the financial sector. Wages do not increase, even as prices for property and financial securities rise – just the well-known trend that we have seen in the Western world since the 1970s, and which persists into the post-2001 Bubble Economy.

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