Curbing excessive economic rents might bolster productivity and address rising inequality.
Productivity growth—a necessary (though not sufficient) condition for rising incomes in the long run—has slowed since 1973, growing at a 1.8 percent annual rate, as compared to a 2.8 percent annual rate in the 25 years prior to 1973. At the same time, inequality in the United States is higher and, in recent decades, has risen faster than in other major advanced economies. In 2014, the top 1 percent captured 18 percent of income, up from 8 percent in 1973. These two major trends have been the major causes of the slowdown in income growth for the median household.
These dual trends—that is, the slowdown in productivity growth and the increase in inequality in recent decades—have many distinct sources, but insofar as they have some causes in common, there is the potential to address these causes in ways that simultaneously improve efficiency and equity. To this end, the evidence that a rise in rents is contributing to both phenomena is important.
Although definitive data are scarce, considerable evidence at the macroeconomic level supports the existence of growing rents, and a number of microeconomic examples illustrate the point as well.
One important piece of evidence that rents are on the rise in the United States is the divergence of rising returns to capital and declining real interest rates. In the absence of economic rents, the return on corporate capital should generally follow the path of interest rates, which reflect the prevailing return to capital in the economy. But over the past three decades, the return to productive capital generally has risen, despite the large decline in yields on government bonds.
Other firm-side evidence points to an increased prevalence of supranormal returns over time. Between 1997 and 2012, market concentration increased in 12 out of 13 major industries for which data are available, and a range of micro-level studies of sectors including air travel, telecommunications, banking, and food-processing have all produced evidence of greater concentration.
The fact that variations in the rate of return to capital have increased enormously across firms may also at least partially reflect increased concentration and the role of economic rents. Finally, there is evidence that land-use regulation may also play a role in the presence of increased economic rents, decreasing housing affordability, and reducing nationwide productivity and growth by restricting supply.
Recent work by the Council of Economic Advisers has focused on the influence of economic rents in a number of areas. For example, our work on occupational licensing has focused on how the share of the U.S. workforce covered by state-level occupational licensing laws grew five-fold in the second half of the 20th century, from less than 5 percent in the early 1950s to 25 percent by 2008. In some states, one must obtain an occupational license to work as a florist or an interior decorator. Although licensing can play an important role in protecting consumer health and safety, there is evidence that some licensing requirements create economic rents for licensed practitioners at the expense of excluded workers and consumers—increasing inefficiency as well as potentially increasing inequality.
What makes the recent trend of decreased competition in both product and labor markets concerning is that this trend has occurred at the same time that a longer-term trend of reduced dynamism in the labor market and among firms is taking shape—suggesting that these barriers may be playing a role in both increasing inequality and reducing productivity growth. In particular, although the United States historically has been very successful in new firm formation and growth, the trend in recent decades has been in the wrong direction: entry rates are falling, with a commensurate increase in the average size and age of firms. A range of measures of labor market fluidity—including rates of job creation and destruction, the likelihood of employee shifts between industries and occupations, and interstate mobility—are down as well.
Additional measures that would reduce the scope and unequal distribution of economic rents include the promotion of competition through rulemaking and regulations, as well as the elimination of regulatory barriers to competition. A recent Executive Order signed by the President aims to do just that, by instructing departments and agencies of the federal government to identify specific actions that they can take to foster greater competition in the marketplace, with the actions grounded not in traditional antitrust enforcement (which is a law enforcement issue) but in a broader space that includes policies like freeing up set-top cable boxes from being tied to cable providers and freeing up more airline slots at airports.
The bad news, however, is that rents have beneficiaries and these beneficiaries fight hard to keep and expand their rents. As a result, political reforms and other steps aimed at curbing the influence of regulatory lobbying are important for reducing the ability of people and corporations to seek rents successfully. Such actions would help ensure that economic growth in the decades ahead is robust, sustainable, and widely shared.
(Note: Jason Furman is the 28th Chairman of the Council of Economic Advisers, a role in which he serves as President Obama’s Chief Economist and as a Member of the President’s Cabinet. This post originally appeared in RegBlog, an online source of regulatory news, analysis, and opinion affiliated with the Penn Program on Regulation.)
[…] ProMarket has covered much of this research, reviewing papers that studied the effects of consolidation in the wireless industry, in the airline sector, in finance, online platforms, health care, and the labor market. In the past year, some economists have linked increasing concentration to some of America’s biggest economic and political problems, such as the rise in inequality, prices, and rents. […]
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