Imagine people did things they already do

I was struck by how comically bad this Josh Barro piece is today. Let’s count the ways.

Imagine if we bought food the way we buy housing.

Instead of buying the food you need right now, you would buy a contract giving you rights to a stream of food in perpetuity. Say, a contract entitling you to five pounds of chicken breasts, delivered to you every week, forever. That’s basically what buying a home is: securing the use of a residence, indefinitely.

People do something very much like this already. It’s called Community Supported Agriculture. But that’s an aside really.

Consider what happens when you change this analysis to dishes, which are much more similar to houses. Instead of simply paying per dish use, you buy dishes to give you rights to a stream of dish use in perpetuity. Is that weird? How about refrigerators or other appliances? How about furniture? Isn’t buying something for long-term use a very common practice for a category of things typically called “durable goods”?

We don’t actually need to change this analysis to dishes though. We can actually use housing services as a fitting analogy for housing services. Imagine, instead of renting sleeping, cooking, and entertaining space by the minute, people bought out whole time blocks of such space for a year at a time. Instead of renting a room each night at the hostel and an entertainment space every time they needed an entertainment space, they bought out an entire stream of these things for a full year. This would be really odd because, for large parts of every single day, they won’t even be using these facilities because they are at work. Sometimes they go out of town as well and fail to use the stream of housing services that they have purchased for days or even weeks at a time.

Why would anyone do such a thing? Aren’t apartment leases so stupid (edgy.jpg)?

People might start buying contracts on food they don’t even want to eat in hopes of selling later at a profit.

This is called a “futures contract” and you can buy them in things called “commodities markets.” Chicago has one, I hear. More generally, people buy out streams of rents all the time that they don’t even want for any personal reason in the hopes of selling them later at a profit and enjoying dividends on them in the meantime. I hear there is a whole thing called the “financial system” set up for that purpose.

And because home equity is often the dominant form of investment for a middle-class family, people bet their economic fortunes on the residential real estate market where they live, rather than making the less volatile bet on the overall condition of the economy that comes from a balanced portfolio of stocks and bonds.

This is nothing more than an argument against small businesses, which is precisely what a homeowner is. What do small business owners do? They “bet their economic fortunes on the [consumer] market where they live, rather than making the less volatile bet on the overall condition of the economy that comes from a balanced portfolio of stocks and bonds.” Of course, there is economic literature that actually puzzles over why anyone ever puts up capital to start their own businesses and why entrepreneurs exist at all that uses precisely Barro’s reasoning here. But if he is going to make it, he should make it in its totality about all small business owners, not the small business owners who happen to be in the business of renting out housing services to themselves.

I am not even trying to tell people to be homeowners. But Barro is not making very interesting points here. He also does a poor job of explaining that the return on owning a home is not purely a function of how high its value increases, but also the stream of imputed rents. I can tell he understands this (and maybe he is just using some present value discounting to pretend those returns aren’t real, reasoning that makes all investments returnless), but he doesn’t communicate it very well. In any event, you don’t need your property values to increase significantly to make money renting buildings out to people, whether renting those buildings out to others (landlords) or renting them out to yourself (homeowners).

Socialize finance to reduce inequality

I’ve been going on and on and on about socializing finance ever since Seth Ackerman’s pulled the idea out of relative obscurity by writing a piece about it in Jacobin. Without going into the particulars of how it is done, the basic idea is to have the government buy up some (or perhaps all) financial wealth, e.g. shares in publicly-traded companies. This would literally “socialize” finance because the owners of rent-gathering financial wealth would be the public, not private individuals.

After he wrote his piece, Ackerman clarified that his main interest in socializing finance had to do with making it easier to pass certain kinds of policies like basic guaranteed incomes. Because such policies go against the interests of capital, transferring ownership of capital (i.e. financial wealth) to the public would reduce the power of owners to block such policies. Presumably he has in mind a kind of Claus Offe capital strike analysis, which basically observes that private capital has the ability to check the power of government by divesting its capital, something that would not happen were the capital itself publicly held.

Socializing finance has other appeals as well, some of which I think are more important than greasing the wheels of decommodification. In particular, socializing finance helps capture the passive, unearned incomes of the investing class and redirect those incomes to the public at large. A recent study by Thomas L. Hungerford on what’s driving rising inequality highlights why capturing investment income is so important. According to the study (which Kevin Drum has coverage of), capital gains and dividends have contributed more to the increase in after-tax income inequality than all other factors combined:

The share of total income coming from capital gains and dividends has increased over the past 20 years, and this has had dramatic disequalizing effects. By socializing ownership of financial wealth, we could capture these gains and pay them out to everyone as a kind of social dividend. The Alaska Permanent Fund provides a fantastic example of how this might work. This kind of program would improve inequality in two ways: first by intercepting incomes largely flowing to the already-rich and then by paying out that intercepted income to everyone.

Now some will say that this is not necessary. We can just tax capital gains directly. The liberal line is that capital gains taxes have no effect on total growth. I’ve never been totally convinced by this. Sure you can cite periods where capital gains taxes are high and growth is high and then cite periods where capital gains taxes are low and growth is low. But none of that tells you how much growth or investment there would have been in the alternative. Just because growth was high during a period of high capital gains taxes, that does not mean it would not have been even higher without them. As we only have one sample of history, this kind of question is hard to definitively answer.

To the extent that we are concerned that capital gains taxes will cause short-term and long-term drags on the economy, socializing finance solves that through direct ownership. Instead of capturing some small fraction of the financial rents owners collect, we capture all of the rents on the publicly owned wealth, and do not do so in a way that affects the incentives of anyone else to invest. So socializing finance gets all of the benefits of a capital gains tax while avoiding all of the usually-cited problems.

Public ownership of financial wealth is one of those policies that just really stands out as hitting all of the points leftists complain about with respect to finance capital. Such ownership wrestles away unearned income flowing to wealthy people purely from ownership (regarded by Marx as exploitative theft). The captured income can then be used to create a more egalitarian income distribution in society (flattering those like myself who think distribution is key). Then finally, shifting ownership itself undercuts some of the power of private capital to fight against public programs that might help along a project of decommodifying society (which appeals to a very prominent set in the leftist milieu).

How to socialize finance tomorrow

Matt Yglesias has a piece today about how the current state of the bond market permits profitable leveraged buyouts. The interest rates on junk bonds have now dipped below the rate of return for the S&P 500 as a whole. So, if someone was able to put it together, they could raise a bunch of money issuing junk bonds and buy up entire companies with the raised money. Despite having to pay interest on the junk bonds, such a move would still be profitable.

But you know what actor could do this even more profitably? The United States federal government. While the interest rate on junk bonds appears to be around 6 percent (judging from the graph), the interest rates on Treasuries are much lower. The 1 year rate is 0.15 percent, the 5 year rate is 0.83 percent, and the 10 year rate is 1.99 percent. The federal government could use its rock bottom borrowing rates to buy up companies in the S&P 500 or even just dump money into an S&P index fund. Since the expected rate of return of such investments is considerably higher than the interest rates on Treasuries, this would be a profitable move.

I’ve mentioned this before, but it is worth highlighting given the recent uptick in discussion of socializing finance caused by Seth Ackerman’s Jacobin piece on the subject. In addition to providing a new source of revenue for the federal government (one wrestled away from rentiers), socializing finance in this way — even if partially — may also reduce the power of corporations to defeat reforms and programs that they currently stand strongly against, e.g. basic incomes, public goods, and transfers.