Buttonwood’s notebook | Economics, the wealthy and official policy

The real days of rentier rule

Trying to define the terms

By Buttonwood

PAUL Krugman has responded to comments on his rentier post, reiterating the point that the ownership of wealth in the US is focused on the elite whereas the poor and middle-class tend to be indebted. The rentiers - those who derive their income from investments - are thus a small group.

There are two points at issue here. The first is the composition of the rentier class. The second is the nature of the policies that will benefit that class, and whether the current regime is designed for that purpose.

On the first issue, the balance sheets of individuals are not static. The well-established lifecycle theory states that people accumulate debt in their youth and then pay off their debt in their 40s and 50s, becoming net savers before retirement. Clearly that is more of a middle class pattern than one that applies to the poor, but it is not a purely elite phenomenon. Thus elderly savers do suffer when rates fall; those who buy an index-linked annuity on retirement (the prudent course) get a lower income for their lump sum.

On the second issue, we know what policies are designed to benefit rentiers because they were put in place in the 19th century. As one commenter on the last post remarked, William Jennings Bryan ran for the presidency in 1896 on the free silver platform - bimetallism as it was known. The idea was to expand the money supply by adding silver in order to ease the debts of the farmers. In short, he wanted QE. He was defeated by the sound money forces behind William McKinley.

The sound money school believed in the gold standard and the balanced budget. As Barry Eichengreen pointed out in his book Golden Fetters, central bankers in the Victorian era were able to operate the gold standard because they were largely operating in an era of the restricted franchise. They were members of the rentier class themselves and naturally favored such policies; the system kept down inflation but at the expense of forcing the burden of economic adjustment on to the working class, through regular sharp recessions. The wealthy of that era lived off their investment income which was positive in real terms because inflation was kept low.

So if rentier rule was marked by sound money, balanced budgets and positive real rates, what do we have now? Two years of quantitative easing, huge budget deficits and negative real rates. 19th century central bankers would regard this era with anathema. That is what struck me as so strange about Mr Krugman's argument.

One element of confusion in this argument is the rule of QE this time. It has been designed to push up share prices, as Mr Bernanke and its supporters attest. But it has been more successful (in my view) at bolstering equities than it has in boosting the economy (unemployment was 9.5% in August 2010, when the QE2 policy was unveiled and is 9.1% now). The stockmarket seems to be drifting lower in the absence of a QE3 programme (which Mr Krugman desires). But higher share prices do benefit the wealthy, Wall Street bankers and CEOs. If they are to be defined as the sole members of the rentier class, then he is in favour of handing them a huge bonus.

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