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Saturday, July 9, 2011

A new theory of the leisure class: Revenge of the rentier

by John MacBeath Watkins

Via Retirement Blues, a blog you really should read, we have this information (although he uses a different graph):

From this source:

Yellow is dividends, red is undistributed corporate profits, blue is corporate taxes. Since 1951, dividends have gone from 21.1 percent of profits to 50.7 percent, undistributed profits have remained fairly stable as a percentage, and taxes have gone from 50 percent to 21.5 percent.

And remember, the estate tax rate in 1951 had a top rate of 77 percent. Now, 50 years later, the top rate, for those few who pay it, is 35 percent, and one of our political parties is dedicated to eliminating the estate tax entirely.

If they succeed in eliminating it entirely, it will hasten the restoration of a "leisure class" like the one Thorstein Veblen wrote about in the late 19th century. It has often struck me how modern Republicans seem to pine after a new Gilded Age, in which families with great wealth engaged in conspicuous consumption to overawe the hoi polloi.

The Gilded Age, of course, ended in the panic of 1893, when the railroad bubble, built on shaky finances, burst, and resulted in a depression that really only ended with World War I (although it officially ended in 1897, the economy was shaky until 1913.) The panic of 1893 was followed by political realignment, progressive politics, trust busting, and a general consensus that concentration of wealth in few hands and the social Darwinist philosophy that justified it were Very Bad Things. This consensus was only reinforced by the Great Depression, which again produced realignment and, in addition, the New Deal.

From the standpoint of the conservatives of the time, New Deal institutions like Social Security seemed like socialism. From the standpoint of socialists such as Frederich Engels, it seemed like a way to resolve the contradictions in capitalism. As George Watson noted in The American Scholar:

In 1908, when Asquith became prime minister, there were almost no models of state welfare anywhere on earth. The exception was Bismarck’s Prussia, which to the dismay of German Social Democrats had instituted compulsory health insurance in 1883. That created a sudden panic on the left. Karl Marx had died weeks before, so the socialist leader August Bebel consulted his friend Friedrich Engels, who insisted that socialists should vote against it, as they did. The first welfare state on earth was created against socialist opposition.

By the new century Prussia was setting an example. Lloyd George and Churchill, as members of Asquith’s cabinet, went there to watch state welfare in action; Churchill, the more studious of the two, read published reports. In 1909 he collected his speeches in Liberalism and the Social Problem, where he made a case for seeing state welfare as an essential prop to a free economy. The Left had good reason to fear it, as he knew. Welfare promotes initiative, initiative promotes growth, and “where there is no hope, be sure there will be no thrift.”

Welfare, what is more, had an imperial dimension. The Boer War had been won with a volunteer army, and the nation had been shocked to hear of the high incidence of ill health among recruits. An empire needs troops. There was nothing socialist about state welfare, and socialists were right to fear the specter of a national health service.
 I do recommend following the above link and reading Watson's full article. With Bismark and Churchill in favor of "socialized" medicine, and socialists, both Marxist and Fabian varieties, opposed to it, one would think this would be remembered as a conservative initiative, which it was. But what is conservative in other countries is often liberal in ours, and only the defeat of the leisure class could have produced any social insurance in this country.

Of course, the distinctive thing about the rentier class is that their ability to earn rents is not impeded by advancing age, physical infirmity, or even a large degree of mental decline. They continue to own, so they continue to collect rents (and before you say dividends aren't rents, check out the definition of economic rents, defined in the preceding Wikipedia link as follows: "Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply.[1] A recipient of economic rent is a rentier.")

Clearly, these are not people who need social security, because for those whose rent incomes are large enough that they don't have to labor, their income never declines because they have retired.

And this is the class that benefits from high interest and low inflation. This is the class that considers Social Security a waste of money. This is the class that considers the estate tax a threat to (their own) prosperity.

Most of us, even if we own a few stocks and collect a few dividends, do not belong to this class, and should be skeptical of anyone who advocates policies that benefit mostly this class. We have the history to study, we don't really need to repeat it to know where a society with a substantial rentier class leads.

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