euthanasia of the rentier – Michal Rozworski

The Conservatives’ balanced budget legislation: Silly economics, smart politics

I wrote up the Conservatives’ new balanced budget law for Ricochet. In short, the law is really silly in terms of economics, but simply pointing out its economic stupidity is not enough, because the whole point is to shift the political consensus. Politically, it’s not that dumb. So rather than play games about who cut better and balanced budgets faster as many are doing, we need to look at the balance of economic power that drives these moves. The full piece is below:

The Conservative government’s balanced budget legislation is a classic attempt to shift the boundaries of acceptable public debate. In terms of economics, it is a silly exercise in arbitrary rule-making and its rules are bound to be broken. In terms of politics, it is another step in consolidating a consensus that puts punitive cuts to the many in the service of ever-larger gains for the wealthy few.

The legislation set to be introduced by the federal Conservatives along with the upcoming budget has been attacked as myopic and the result of twisted logic. Pundits left and right agree that the legislation will be unenforceable and thus unsuccessful in the long run. The problem with the law, however, is the already visible success of those pushing Canadian politics wholesale to the right.

While details are still scant, the legislation aims to force subsequent federal governments to refrain from deficit spending except in as-yet-undefined “exceptional circumstances.”

We’ve seen this movie before. In Canada’s largest province, Ontario premier Mike Harris introduced balanced budget legislation only to have it repealed in 2004 and replaced with a softer version that does not stipulate outright balance every year. Most Canadian provinces have balanced budget legislation, but not surprisingly all suspended it at some point in the aftermath of the global financial crisis of 2008.

Even the Eurozone, the current poster child for austerity, has a limit on national government deficits (equal to 3 per cent of GDP) rather than a ban on them. Like other rules of this type, though, the number itself is not as important as the lack of flexibility and the push for spending cuts as the default response to crisis. The Eurozone rule has certainly contributed to Europe’s inability to escape stagnation and prolonged crisis since the financial crash — despite being broken by various countries, largely those powerful enough to get away with it.

Arguments like these, however, do not get at the heart of the matter. It’s good to have a few of them out there, but balanced budget legislation is most dangerous not because it’s bad economics, but because it is good politics.

There is no good value

A piece in the Financial Times from several days ago has finally pushed me to scribble down a few initial thoughts on value – a topic I been thinking about more and more. Titled “The attack of the rentier killers”, the article argues that the wealthy who hold and receive income from assets will fight low interest rates and rising inflation tooth and nail because it lowers the value of their assets. Paul Krugman has recently picked up on this topic as well, while the notion that only sustained low interest rates can “euthanize” a dangerous, politically-motivated rentier class originally comes from Keynes.

There is much to be said about this claim. One question is whether there currently exists a well-defined rentier class whose interests are opposed those of a class of capitalist producers. The growth of finance and its increasing integration into all other aspects of the economy challenge this idea. Furthermore, the current application of extraordinary monetary policy has produced a combination of low interest rates and low inflation. The former decreases the flow of gains from interest-bearing assets; at the same time, the latter means that all assets better maintain their value. Finally, current policy has led to a greater concentration of assets (I posted some thoughts on this here), which has disproportionately benefited the wealthy.

In writing this, however, I was motivated by a smaller point that comes right at the end of the Financial Times article:

Based on [the previous] analysis, the surest sign that our society is on the verge of […] a secular stagnation story is the increasing frequency and severity of bubbles today. But if they’re really symptomatic of the death throes of the rentier class, then perhaps they shouldn’t be feared by central bankers at all?

Instead, central bankers should start thinking about ways to create entirely new forms of positive value in society based on social, educational, sustainable or even humorous activity? Carbon credits, RINs, energy rationing units, brownie points and Dogecoins, and so forth.

I want to focus on the phrase “positive value.” I take this to be opposed to “negative value.” A likely example of the latter would be the financial returns that accrue to rentiers while asset price bubbles are being inflated; with the problem being that these same bubbles also end up harming others when they burst. The argument is that rather than continue to allow for the creation of financial bubbles that have negative economic impacts, we should instead create sinks into which rentiers can pile their money looking for higher returns, but which will also be socially-useful. Tongue firmly planted in cheek, the author even suggests feel-good brownie points as a worthwhile “positive value”-generating asset bubble vehicle.