This debate over economic inequality is getting confusing. Am I supposed to be furious that America charges Warren Buffett a lower tax rate than his secretary, or proud that this is the land that let an entrepreneur like Steve Jobs change the world?
In his State of the Union address last week, President Obama took all sides of the question, calling for higher taxes on the rich while praising Jobs as the widow of the late Apple billionaire looked on.
But I don’t really blame Obama, because if the president was talking out of both sides of his mouth, he was merely voicing the conflicting emotions of his fellow citizens. We Americans admire the rich and try desperately to copy their success — when we’re not questioning the legitimacy of their wealth or rooting for someone to knock them down a peg.
Of course, the fact that Americans feel this much ambivalence toward the rich sets us apart from other countries. In continental Europe, the debate is over how, not whether, the government should redistribute wealth and income.
We need a principled approach to the competing claims of social justice and wide-open opportunity. Fortunately, there is an economic concept that can help clarify the issues: rent.
In this context, “rent” doesn’t mean only what a landlord charges each month. Rather, it refers to any kind of income that people get by controlling existing resources — or exercising officially conferred privileges — as opposed to creating new wealth through labor or investment.
A classic example of economic rent is the profit reaped by owners of the “medallions” that confer the right to operate a taxicab in New York. Two of these sold for $1 million apiece last year.
Not surprisingly, much political activity consists of trying to create, or keep, opportunities to collect economic rent. That’s what lobbyists for various licenses, tariffs, tax breaks and subsidies — from the sugar industry to Solyndra — have in common.
Rentiers of various stripes are well-represented among the top 1 percent of the income scale. Indeed, roughly one-quarter of the ultra-rich are lawyers or doctors, a study by economists Jon Bakija, Bradley Heim and Adam Cole found. Both professions are open only to people who meet certain eligibility criteria, which are enforced by existing members and by government.
As those examples illustrate, of course, not all economic rent is necessarily illegitimate or even undesirable. On the whole, medical licensing beats a free market in quackery. Those who hold patents and copyrights get to collect rent, a.k.a. royalties. That’s how society rewards innovation.
Many calls for government intervention are self-interested and disingenuous, but not all. Sometimes it is necessary to correct “market failure” — to ensure the supply of things such as “orphan” drugs or basic research or public parks, which benefit society but in which the private sector underinvests.
Americans may never agree on an optimal distribution of income, either morally or practically. But they probably could agree that, to the extent possible, government should limit its interventions to bona fide cases of market failure, and that the system should reward productive effort and discourage rent-seeking. My hunch is that this is already the consensus view, or close to it. What annoys Americans is not that some of us get rich — it’s that some of us get rich just through connections.
Newt Gingrich’s influence-peddling for Freddie Mac and its government-protected mortgage finance business is a pretty pure case of the latter. Mitt Romney’s private-equity career, however, is a hybrid. He took risks to start Bain Capital and provided a service — corporate turnarounds — that the market demanded. On the other hand, his rewards have been magnified by a special tax break, the favorable treatment of “carried interest” income, that is hard to defend in economic terms.
Eliminating rent-seeking won’t be easy, partly because some of it is unavoidable — and partly because our two political parties are, to a great extent, coalitions of rent-seekers. The oil and gas industry shelters under the Republican tent, while trial lawyers flock to the Democratic banner. Wall Street and ethanol-makers are well represented in both camps.
This is why it’s so hard to reform the tax code, even though eliminating loopholes in return for lower tax rates would boost fairness and efficiency.
New York gubernatorial candidate Jimmy McMillan gave us the Rent Is Too Damn High Party. Maybe someone else can start a Too Damn Much Rent Party. Sign me up.