It’s about the rents, stupid.

Anytime an economic thinker is confused, befuddled, or in love with his own genius, it is profitable to go back to Adam Smith; and realize that most of what has been done is footnotes to The Wealth of Nations. In the case of political economy, the desire to be free of competition and collect revenue forever based on work that was done in the past is the single dominating factor that leads to the dissolution of free markets. Rent is an interest which, almost by definition, knows how good it has it.

In the case of the US, the powerful rents are banking, education, health insurance, defense, suburban real estate, and energy. How are banks doing? Let’s read what one finance guy who was on board with the bubble bursting early:

These companies don’t want to allocate funds to the shadow-banking market and don’t want to hire people to trade. You have the likelihood that loan-loss provisions will increase. The state of the bank balance sheet will now support substantially higher earnings than was ever the case before. The competitive environment changed to focus more heavily on banks as the drivers of financial system than the shadow banking unit. I’m arguing that stocks are very cheap and will triple in value in the next few years.

Dick Bove, in a Forbes.com interview.

How about health care? Here’s the money shot from the Economist’s cover article:

Jonathan Skinner, an economist at Dartmouth College, cautions that factors other than health-care systems—attitudes to teenage pregnancy, say, or smoking—may influence the numbers. Even so, he thinks the system is wasteful. In a paper in the Journal of Economic Perspectives last year he and Alan Garber, of Stanford University, argued that America’s health system was “uniquely inefficient”, producing too little per unit of input and consuming far too much of the country’s resources.

Mr Skinner is involved with another worrying line of research. The Dartmouth Atlas project has scrutinised variations in health outcomes and spending involving Medicare. It has found wide differences in costs across the country—less than $5,000 per person in Salem, Oregon, in 2006; a bit more than $8,000 in San Francisco, in line with the national average; more than $16,000, and rising fast, in Miami—but no connection between higher spending and better outcomes. In fact, the evidence points in the other direction: outcomes tend to be better where costs are lower. Mr Orszag points to the Dartmouth work to argue that up to 30% of America’s health-care spending is sheer waste.

This 30% number is roughly in line with other estimates. Dr. Orzag isn’t wrong, but his budget plans do not reflect his own state of knowledge. What is worse is the spin. Consider that the number of people who like their own health care is touted as 68%. Let me turn that around: consider that only two companies in a recent survey of customer dissatisfaction scored worse than 32% customer dissatisfaction. Both were telecom companies, including Sprint, which may be the most hated company in America. 

What about energy? Global warming denial is still fashionable:

 The American opponents of climate-change legislation are already taking heart from the setbacks to the Australian scheme. They are also seizing upon a new book by Ian Plimer, an Australian professor and climate-change denier. Actually, I hate that phrase “climate-change denier” – since it (possibly deliberately?) links disputing the consensus view on global warming with “holocaust denial”. It might be brave, it might be irresponsible – but taking issue with global consensus on global warming is not like claiming that there were no gas chambers as Auschwitz.

Which is just about the most stupid thing that Gideon Rachman has written in the last year. Climate change denial is like denying gas chambers; in this case, we are turning the entire world into one large gas chamber. The reality is that what has happened in the last few years is simple and was predictable, because we’ve seen it before. During the peak of the Iraq War and the global boom, there was not only a higher level of carbon dioxide emission, but a massive increase in soot. Soot does global warming, but falls out much faster. There was also the peak of a natural cycle in 2000-2007; and even though climate change is driven by human activity, it does not, yet, swamp out all natural cycles. The triple turbo boost of war, boom, and natural cycle created a short hot house. The very drive of heat put more ice into the oceans and lowered the energy density of the oceans. And while carbon drives global warming, it is water that stores the energy. The hydrologic cycle is where the action is.

What links all of these is that there are people who are drawing excellent income on the pain of others, and they know that they only need to hold out a little bit longer for their own share. Taking on these interests is not a matter merely of political will and circumstance, but culture. A culture that lives to collect rent, rather than build capital, will not disturb rent, for fear that its own small rents will be destroyed. The simplest way to see this is that the US has a larger share of world wealth than of world GDP. That means we live on rent.

At the present time, the rents collected through banking, real estate, energy, and the health care system are then funneled back out as profits to those who are buying our debt. These rents then are a tax. The United States is paying tribute to the holders of these rents. 

Since rent is the burden that is preventing ordinary Americans from getting ahead, and those rents cannot be disturbed because they are the tax we pay for our money; and since we hate visible direct taxes, the only efficiencies left must come out of what ordinary Americans make and get. Since we have refused to cram down the debt holders, everything else must come out of promises made to the equity holders of America, namely its citizens.

But these facts are old, this reality is old. What is new, and news, is the passage of climate change legislation. It is mistakenly called cap and trade (since it does not really cap and it gives away permits), so it creates little need to trade. Instead, what it is, is an industrial policy bill; and it creates back door protectionism. By setting thousands of standards, it places barriers to imports and to goods that do not meet these standards. This is the worst way to accomplish pressure on the global system to improve carbon dioxide efficiency; and it places all of the cost on consumers, who must pay for all of the changes, and who have no pricing power. But it is the business end of this bill: protectionism to drive changes in the global consumer economy. Since the United States is the single largest consuming nation, this will have a larger global impact than people yet realize. 

More than the ineffective cap and trade system, it is industrial policy that is born with this bill. Congress, which has relinquished so many powers over the last generation, has stuck its toe back in the water of economic responsibility with this bill. However bad it is on other merits, and it is one of the worst designed bills in an era of badly designed bills, this change is quite a milestone. More than anything else Waxman-Markey re-links Congress to economic growth and policy, a role that they abandoned almost a generation ago

[Illustration courtesy of Tracy O ]

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2. Waxman: Blue Dogs Trying to “Eviscerate” Health Care
3. Waxman to Eshoo: You’ve Got an “Evergreening Problem”
4. Progressive Groups Target Companies over Their Chamber of Commerce Membership
5. Five Arrested in Philadelphia Protesting CIGNA Practices – Who’s the Real Criminal?