Euthansia of the Rentier

It is bad enough when business models make people rich for destroying the planet. Do we have to enrich those who do nothing at all?

John Maynard Keynes had a famous quip in his central work, The General Theory.... which goes, slightly re-arranged:

"Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land con obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are not intrinsic reasons for the scarcity of capital. ... It would be possible for communal saving through the agency of the state to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce. Now, while this state of affairs would be quite compatible with some measure of individualism, it would mean the euthanasia of the rentier, and consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity value of capital."

Keynes assumed that this day would naturally come as capitalism developed and piled up endless riches in the form of money. But recently Thomas Piketty came along and stated that this day will never come, because for some curious/mysterious reason, returns on capital are persistently higher than they have a right to be, and higher than the economic growth rate. That means that the rich keep getting richer, on a magic escalator, forever, and the only way to change this, historically, has been the horsemen of the apocalypse- war, pestilence and famine. Economic depressions can be pretty effective as well. Sadly, we have rendered all these mechanisms less effective than they have been in the past, so need to come up with something else for this modern age.

It is quite clear that advanced economies have plenty of capital. Companies routinely give money back to shareholders or buy back stock, for lack of anything better to do with their mountains of money. Interest rates tend to be low. The Federal Reserve has campaigned mightily over the last three decades to raise interest rates, to what they deem "normal" rates, which are roughly 5%. The Fed is heavily influenced by the private banking industry, which benefits (perhaps) from higher rates, as do rentiers. Each time, however, some catastrophe has intervened and sent rates back to zero. Whether the latest push turns out be the charm is not clear, but Paul Krugman expects rates to eventually return to very low levels. Japan has had near-zero rates for a couple of decades, with little harm to its domestic economy. So it seems as though the natural interest rate in this era, among stable, peaceful economies, seems actually to be very low, approximately equal to the inflation rate, and thus approximately zero.

History of US interest rates and Japanese interest rates. We keep flirting with zero rates.

This abundance of capital has sent investors to the stock market as a better bet for growth. This has sent stock valuations higher, with price/earning ratios coasting at much higher than historical levels. There is a metric called the "Buffet index", which relates stock valuations to total GDP, and this is also unusually high, twice what it has been historically. Whether all this reflects overall wealth, or the greater profitability of current corporations (due to monopolies, lack of regulation, repeated stock buy-backs, shortchanging workers, etc.), or the push of too many investors into this market, it is a worrisome situation over the long term, as returns may fail to justify expectations.

At any rate, the question is.. how to address inequality and particularly the basically unjust income of rentiers, and bring Keynes' prophecy to fruition? The recent tax changes by the Democratic congress, to impose a cost on stock buy-backs, is a tiny step in the right direction. The the fact that federal taxes on income from work (except when that work is done for hedge funds!) is twice that on investment is a clear bias, inherited from the Reagan era, that needs to be eliminated. Outright wealth taxes are also needed, as are programs against off-shore wealth hiding and abuse of trusts. There is a very long list of ways to reduce the ratchet of wealth, and especially inherited wealth, that fundamentally corrodes the basic equality on which our social and political system is (or should be) based.

The modern monetary theory community has long advocated for another policy that would address this problem, which is to end the issue of federal government bonds. They see these bonds as a relic of past times when we were on the gold standard, and really had to borrow money from the public to make ends meet. With a fiat currency, closely managed by the Federal Reserve, the federal government has no need to borrow at all. It can and does print as much money as needed ("print" being a metaphor for creating mostly electronic forms of money). State and local governments, on the other hand, are financially constrained, and need to put out bonds if they want money for large projects, beyond what taxes bring in. In 2022, the federal government spent 476 billion dollars on interest payments on the debt, which may increase drastically if inflation rises on a durable basis. 

Who holds US federal bond debt?

Whom do these interest payments go to? Well, the Fed itself and the Social Security Administration hold huge amounts- no real loss there. Foreign countries hold huge amounts- China, for example, has a trillion dollar's worth; so does Japan. But then come banks, pension funds, and mutual funds- rich investors who like these low but extremely reliable returns. The mainstream argument for bond issuance, in the absence of a gold standard, is that bonds drain demand from an economy, preventing inflation that would result were the government to not "balance" its spending with borrowing that brings that money back into its coffers. What MMT proponents point out is that those who invest in government bonds are already rich and don't need the money they are parting with. Bonds are not displacing effective demand in the economy, just productive (or unproductive) investment. Secondly, federal bonds are a fully liquid market- the money is not actually tied up in a way that prevents it from turning into economic demand.

These are the classic rentiers, whom we are collectively paying roughly half a trillion dollars a year that could be much, much better spent on other things. The last time that the federal bond market came into doubt, as the Clinton administration, under pressure from the deficit scolds, went into surplus and started paying back the "debt", who raised a hue and cry? The banks, of course, who could not imagine a world without this manna falling from heaven. Well, the fact of the matter is that the foreign countries, and the banks, and all the other rentiers, could just as well hold the fundamental debt instrument of the US government- the dollar, instead of bonds. We don't have to pay all these entities a premium to take dollars off our hands, if that is what they want.

What keeps us from ending these bond payments? It isn't economics, it is purely legislative fiction, the same kind of fiction that makes congress go through the absurdities of raising the "debt" ceiling. The US federal debt is the obverse of economic growth, for which more currency needs to be issued. The Fed and treasury issue new dollars into the economy, channeled through federal spending, and a notional debt is created. The current law just means that one debt (dollar bills) must be traded for rentier-paying debts (bonds) ... because ... we used to do so. But it is no different than the debt implied by every dollar bill: that the government, and the economy in total, stand behind each dollar bill as a manifestation of faith and credit (and good federal management). The debt does not need to be "paid off", it will not drag down future generations, and most of all, it shouldn't be compounded with interest payments to the least deserving recipients imaginable.

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