Changing the rules of game for US economy..

What should be Hillary Clinton’s economic agenda? Should she be on right of the centre (like her husband) or lean towards the left (as developed world is increasingly moving to)?

This report by Prof Stiglitz et al suggests rules for American economy have to be rewritten. Over the last few decades, post policymakers have followed market ideology but that has only led to wealth piling at the top. All that talk of market being the best mechanism to distribute resources has not worked. Markets may be more efficient than govt but poor at equity allocation.

This article by Dylan Matthews sums up the report:

The problem, Stiglitz and his co-authors write, is that the rise in wealth isn’t coming from productive investments.

It’s coming from what economists call rents — a metaphorical extension of the 18th-century practice of small farmers paying rent to landlords for the right to use the total inert asset of land.

Stiglitz and his co-authors extend the idea to include a wider and more modern array of rents. A patent or a copyright, for example, can be a valuable financial commodity to own, even without being productive in the way a factory or tractor is. To see the distinction, imagine you have $300 million and can either invest it in a startup or use it to buy the rights to the Beatles’ songs. In the former case, you’re providing money that a company can then use to hire people, produce goods, and generally create wealth in the world.

In the latter, you’re producing nothing; you’re just grabbing something that someone else produced and claiming the proceeds from it.

“Rent-seeking,” as economists call it, is generally viewed as economically counterproductive. It’s especially counterproductive when it becomes so lucrative as to provide a more attractive outlet for people’s money than real investments.

The report’s authors argue that’s exactly what’s happening with Wall Street. Its growth has fueled a big rise in credit — credit that tends to go to those who already have wealth, often in the form of rents, exacerbating existing rent-based problems. Financiers have also identified novel ways to rent-seek.

“Too big to fail” status, for example, can count as a rent. It increases the value of firms like Goldman Sachs or JPMorgan Chase not by making them more productive, but by providing an implicit government subsidy. Trading mortgage-backed securities for profit, similarly, does little to actually increase wealth but a lot to redirect it. That makes it attractive as a business activity for banks and hedge funds, redirecting their energies from profitable activities that create wealth.

Solution? Tax the top 1%, as suggested by Piketty:

The agenda that Stiglitz, Abernathy, Hersh, Holmberg, and Konczal arrive at for reducing financial rent-seeking should look pretty familiar. It’s a straightforward left-of-the-Democrats economic platform. They want to raise taxes on the wealthy by hiking rates and converting deductions (which are most valuable for the rich) into credits (which are worth the same to everybody). They want tougher enforcement on Wall Street. They want to end “too big to fail” by imposing a capital surcharge on large, risky firms, and to create a financial transactions tax to discourage short-term trading. They want subsidized child care, smaller prison populations, immigration reform, and Medicare for all.

Not all of this can be explained through the prism of reducing rent-seeking. Subsidized child care, for example, doesn’t really do a whole lot to curb bank speculation.

But all the same, limiting banks’ opportunities to profit without actually creating wealth is a major throughline. It motivates the report’s most striking proposal, a plan to replace the current housing finance system, in which government and quasi-governmental agencies like Fannie Mae/Freddie Mac and the Federal Housing Administration back up private loans from banks to ensure mortgages remain affordable, with a “public option” for mortgages, in which the federal government just loans money for houses directly. That would largely eliminate banks’ involvement in consumer housing finance, depriving them of an arena rich in rent-seeking opportunities.

There are subtler ways in which the agenda would grow the economy by undermining rent-seeking, as well. The report calls for expanding subsidies for higher education, such as by making community college free (as Obama has proposed) and making income-based repayment of student loans universal, as it is in Australia, to minimize the burden of paying them back while in one’s 20s and at the nadir of one’s earning potential. That doesn’t directly relate to the financial sector; most student loans in the US are already issued directly by the federal government.

Hmm..

The interesting bit is role financial sector has played in this surging inequality. Despite this kind of serious unintended consequences, most emerging countries are just going ahead with fin liberalisation and benchmarking  against the developed peers. It does not help that most of emerging market policymakers themselves are just plain slaves to the thinking of developed world. No body even discusses all these issues despite inequality being already high in the emerging world..

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