sabato 29 agosto 2015

It's time to lay siege to the robber barons

It's time to lay siege to the robber barons of high finance

Economic View: Political debate about the economy and business would benefit if people focused less on the sums made by individuals and took more account of how they earned it
http://www.independent.co.uk/voices/comment/its-time-to-lay-siege-to-the-robber-barons-of-high-finance-10468512.html



Ferrying goods along the Rhine in medieval times was an expensive business. Feudal lords who controlled land along the banks of the river (which was also the main European commercial thoroughfare in the period) had a habit of hanging iron chains across the width of the waterway and extorting a fee from anyone who wanted passage. The nobles grew very rich from their tolling activities, building fancy castles overlooking the Rhine with their ill-gotten proceeds.
This was a classic example of what is now known by economists as “rent extraction”. The operators of these tolls weren’t creating any wealth through their activities. They weren’t facilitating trade by maintaining the waterway, or making it any safer for the merchants. They were merely using their privileged geographical location to extract wealth from others – to shift money around.
Rent extraction, or “rent-seeking” as it is also often known, has evolved and broadened as an economic concept. It now covers a whole range of activities in a modern economy. A famous example used in economic textbooks is licensed taxis. Black cab drivers pressure city authorities to clamp down on the activities of unlicensed minicabs. More recently they’ve also tried to get new entrants to the taxi market, like those who work for the Uber web app service, banned. To the extent they are successful in these rent-seeking activities they boost the value of their own licences. It is their customers who end up paying in the form of higher fares.
But cabbies are small fry in the rent-extraction ocean. A more lucrative practice is found in the law firms that mildly tweak and re-file patents as a means of squeezing more money out of clients’ old intellectual property, or who aggressively sue other firms over minor and often spurious infringements. None of this incentivises more research or innovation. And it is the public who pay for this “patent trolling” in higher prices for products.
But easily the biggest source of wealth extraction in modern economies is the wholesale financial sector. Much of the activity of Wall Street and City of London traders in investment bankers constitutes a form of rent-extraction. Their phenomenally lucrative market-making activities in interest rates and foreign exchange don’t actually create new wealth – they merely shift money from the pockets of companies and pension funds into their own.
In a properly functioning market new players would enter and these outsize market-making profits would be competed away. But the sheer size of these financial dealers erects effective barriers to entry, curbing competition. And the “too big to fail” status of these mega financial institutions (which provides an implicit state guarantee) also secures them artificially cheap finance in the money markets, compounding their commercial advantage.
But how do we distinguish rent extraction from high profits due to legitimate business success? A good indicator is the extent to which their profits seem to be dependent on political and official connections.
The American financial sector has spent $6.6bn (£4.2bn) since 1998 lobbying US politicians, according to researchers. It seems unlikely they would spend such  sums for no reason. Our own ministers also seem to have an open door for the UK financial lobby.
The power of the lobby can be seen in the fact that widespread calls to simply break up the too-big-to-fail banks in the wake of the global financial crisis were rejected on both sides of the Atlantic by politicians.
The lobby’s influence is still readily discernible. In last month’s Budget the Chancellor took an axe to his annual bank levy in July after pressure from the likes of HSBC. The levy, which is based on the size of a bank’s global balance sheet, is to be partially replaced by a tax based on the size of a bank’s profits. Thus a tax that used to hit big banks hardest will now discriminate against the smallest. The likely long-term impact will be to reduce competitive pressures on the big players. That’s classic rent-seeking: firms use their political connections to gain a commercial advantage.
There is a heightened public interest in income and wealth inequality levels in Western economies, in particular in the soaring incomes of the top 1 per cent of earners. But Marilyne Tolle of the Bank of England recently made the point on the central bank's excellent new blog, Bank Underground, that too little attention in the inequality debate is given to tackling economic rents. She argued that a focus on redistributing income is actually helpful for the rent extractors since it represents a relatively cheap way of buying off the victims.
It’s a powerful and timely point. Rent extraction and rising inequality are two sides of the same coin. Research by Brian Bell and John Van Reenen last year suggested that up to two-thirds of the increase in the overall share of wages taken by the top 1 per cent of earners since 1999 is due to a massive increase in bankers’ bonuses. Nor was there any decline in bankers’ share of earnings after the financial crisis. In other words, rising inequality is largely a problem of bankers’ pay.
The right and the left squabble interminably over the merits of redistributive taxation. Yet both sides should be able to find much common ground on curbing rent-extraction. Those on the right should recognise that it doesn’t create wealth and that it distorts markets. Those on the left should see that it’s a clear way to reduce inequalities. Far better, surely, to stop people hanging chains across rivers in the first place, rather than taxing what they make from doing it.
The political debate about the economy and business would benefit if people focused less on the sums of money made by individuals and took more account of how they earned it. Is their sector truly competitive? Have they genuinely created wealth, or merely extracted it?
The medieval rent extractors of the Rhine went too far. In the end they provoked a popular backlash. The picturesque castles of what became known as “robber barons” were besieged and sacked by the angry subjects of the Holy Roman Empire.
The strange thing is that, despite bringing on the global financial crisis and taking a sword to the living standards of millions of their fellow citizens, today’s financial robber barons have been more or less untouched.
Twitter: @BenChu_

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