Charles R. Morris
The American public is catching on that almost all the benefits from the still-fragile U.S. recovery have gone to the top 1 percent of earners. One sign is that “inequality” has suddenly become a fighting word. Legendary venture capitalist Tom Perkins recently denounced the “demonization” of the rich — and was quickly forced to apologize for comparing it to Kristallnacht.
Perkins is too sensitive. He is one of the creators of the U.S. venture capital industry, and played a big role in nurturing the hardware and software revolutions that made the United States so dominant in high technology. Americans admire people like Perkins, who earned their wealth — whether they are financiers like Warren Buffett or George Soros, entrepreneurs like Bill Gates and Steve Jobs, or superstars like Michael Jordan.
But Americans abhor “rentiers” — unproductive citizens who make good incomes by collecting tolls on other people’s production. In the early days of economics, rentiers were the owners of stagnating estates who partied in London on the earnings of their peasants and tenant farmers.
More recently, they are the beneficiaries of special privileges, like the web of congressional protections that protect sugar farmers from international competition. Or they have effective monopolies. Can anyone imagine that the Internet would have grown so explosively if AT&T still ruled American telecommunications?
Rentiers profit from falling productivity, preserving their privileges on the backs of the rest of us. John Maynard Keynes once mused that economic progress would require the “euthanasia of the rentiers.”
The special animosities felt toward the big banks stems from the feeling that they are rentiers — sitting athwart the sluice gates of global finance, dipping out bucketsful of glittering tolls from the passing stream.
There is a lot of evidence to support that view. The financial sector, for example, accounts for just under 10 percent of U.S. gross domestic product. But for much of the 2000s, it consistently captured between 30 percent to 40 percent of corporate profits. Bank earnings tanked in 2007 and 2008, of course, but by 2009 they were once again claiming 30 percent of profits. So the penalty for causing a global financial thrombosis was just a couple of off years, and then back to the big bonuses — as the rest of the economy still struggles in the mire.
The U.S. financial sector enjoyed astonishing growth in the 2000s. From 2001 through 2006, the seven biggest banks doubled their assets and tripled their net profits, while the real economy poked along at an annual growth rate of only 2.9 percent. The bankers took advantage of easy money, financial deregulation, and a hunger for yield on the part of wealthy investors to construct a vast wheel of credit that generated outsized fees at every turn.
Reckless finance drove up the price of houses, and supported a big increase in consumer credit. From 2001 through 2006, Americans borrowed $3.5 trillion against their houses, net of any mortgage paydowns. Over those same years, the U.S. trade deficit, which was heavily consumer-driven, increased by $3.1 trillion. The biggest beneficiary was China, which used the windfalls to accelerate its rise to economic and military parity with the United States.
On the corporate side, the private equity industry has thoroughly financialized most large American companies. Executive tenures are short, the share price is the sole metric, and share-based compensation schemes have increased the executive-to-worker pay ratio by 100 times. Buyout firms pile on debt, cut costs and narrow focus to jack up earnings in the hope of selling the property back to the public markets.
The private equity footprint is now so large that most companies have adopted that behavior pattern. So cash piles up on corporate balance sheets, employees are utterly disposable, and investment lags.
For their success in inflicting such strategies, two leading private equity moguls, Stephen Schwarzman of the Blackstone Group and Leon Black of Apollo Global Management, between them took home more than $1 billion in compensation in 2013. Rubbing it in, they will pay lower marginal tax rates than the typical upper-middle-class American family.
Unproductive churning that benefits no one but the churner sucks the resilience out of an economy. The poster boy for financial churning, perhaps, is the old Merrill Lynch. From 2001 through 2007, it booked more than $100 billion in revenues. Consistent with contemporary practice, half was paid to employees, largely to the most senior levels. In 2008, Merrill was suddenly on the brink of insolvency. It agreed to a shotgun wedding with Bank of America. When the accountants had sifted through all the rotten paper on Merrill Lynch’s books and totted up the losses, it turned out that from 2001 through 2008, despite the terrific profits made during the financial boom, Merrill had earned a negative $21 billion.
This must be some sort of record in the annals of unproductiveness. Just before the deal with Bank of America closed, however, Merrill still paid out $3.6 billion in bonuses. Roughly 700 employees received payouts of more than $1 million each.
Such are the rewards of dead weight. Opposing the rentiers, in all their forms, is not the same as opposing wealth, honestly earned. It’s not envy, and it’s not sour grapes.
We need a well-functioning financial system. But not one that misallocates resources and generates crises and instability. The banks, however, are fighting a quiet, but grim, take-no-prisoners war in Congress and before the regulators to preserve their old privileges.
This is a battle the public cannot afford to lose. Rooting out the rentiers is essential for the future health of the country.