As fans of Michael Hudson and/or students of economic history know, one of the strongly-held policy views of classic economists was that constraining rentier activities was essential to promoting growth. They understood that rentier-ism could often produce more profits than investment in productive activities. For instance, they favored usury ceilings because lenders would otherwise lend to the most desperate borrowers who still could eventually be compelled to satisfy most of their obligations, which in their day would be gamblers from aristocratic families. They would pay very high interest rates to satisfy gaming debts, far more than commercial borrowers could afford. Usury ceilings would result in lenders not being able to charge enough to compensate for the risk of lending to compulsive punters, and so the most attractive debtors would be industrialists and other businessmen.
We’re embedding an oddly neglected paper at the end of this post, which offers empirical support for these long-standing warnings about the economic costs of rentier activity. Admittedly, authors Daniel L. Greenwald, Martin LettauUC Berkeley, and Sydney C. Ludvigson settled on a not-terribly revealing title: How the Wealth Was Won: Factor Shares as Market Fundamentals. I’m not in a position to assess their methodology, but they claim that their assessment of the source of stock market returns shows a marked shift, starting in 1989. Before that, stock price gains came almost entirely from economic growth. After that, they find that the biggest driver was shareholders deriving the benefits of economic rents. From the abstract:
We provide novel evidence on the driving forces behind the sharp increase in equity valuesover the post-war era. From the beginning of 1989 to the end of 2017, 23 trillion dollars of real equity wealth was created by the nonÖnancial corporate sector. We estimate that 54% of this increase was attributable to a reallocation of rents to shareholders in a decelerating economy. Economic growth accounts for just 24%, followed by lower interest rates (11%) anda lower risk premium (11%). From 1952 to 1988 less than half as much wealth was created,but economic growth accounted for 92% of it.
Now readers might wonder why 1989 was the inflection point. After all, the neoliberal era arguably started in 1976, when workers started getting short-changed on sharing in productivity gains, or perhaps with the Reagan era. After all, by the mid 1980s, Michael Milken and his raider allies were striking fear in Corporate America and forcing lots of companies to defensively shrink bloated corporate centers and reverse not-sufficiently-related acquisitions.
However, it appears that simple circling of wagons to forestall hostile takeovers, as much as they were the regular fodder of headlines, was not the big driver of changed corporate behavior. It was instead the spectacle of CEOs like Michael Eisner at Disney and top execs become egregiously rich when they took an equity cut in deals that worked out. The business press in the 1980s touted the idea that corporate chieftans needed to be paid like entrepreneurs despite not taking entrepreneurial risk. Harvard Business School’s Michael Jensen and USC’s Kevin Murphy, in a seminal 1990 Harvard Business Review article, CEO Incentives: It’s Not How Much You Pay, But How, argued forcefully for the heavy use of equity options in executive compensation. That turbo-charged the trend towards stock-linked pay. Executives indeed set about to goose the prices of their companies since that was what they were paid to do, irrespective of whether their actions were good for the business.
Jensen later repudiated that view in a 2005 article, How Stock Options Reward Managers for Destroying Value and What to Do About it, but by then, that horse was out the gate and in the next county.
I hope you’ll circulate this article. It deserves to be more widely read.00 How the Wealth Was Won