It is well known that globalization has put strong downward pressure on wages and benefits of workers in wealthy countries, as companies have offshored and outsourced labor to lower-wage locations and justified wage cuts to try to stay competitive. But politicians and economists have yet to come to terms with the fact that in the rich world the income distribution system itself has broken down irretrievably.
The 20th century was the only century in which most income was divided between capital (profits) and labor (wages), with the struggle for shares mediated by the state through regulations, fiscal policy and a system of social protection. But once economic liberalization took off in the 1980s, the struggle was won decisively by capital, and labor’s share of total income has shrunk everywhere.
Meanwhile, rental income, linked to the control of natural resources, property, financial assets and intellectual property, has become a dominant force in the global economy.
This is the age of rentier capitalism; rich countries are becoming rentier economies. A rising share of global income is going to rent, rather than to wages or profits from productive activities. This perpetuates inequalities: It disproportionately favors the wealthy, and accentuates inequality over generations.
Rental income enables people to make money simply through the possession of scarce assets. Sometimes assets may be “naturally” scarce: if fertile land is owned by a few landlords, they need not work themselves but can rent it out to others for a high price. This income is rent, not profits from a productive activity, as the landlords do nothing to earn it aside from owning the land.
These days, rental income is mainly derived from “contrived scarcity.” This is explained by the Lauderdale Paradox, named after the eighth Earl of Lauderdale, who in 1804 observed that as private riches grew, public wealth fell. This is because the more the rich own, the more they can limit the availability for others, driving up the price. Today, such contrived scarcity has become pervasive and global, which is paradoxical, since globalization should have resulted in a surge of extra goods and services.
While there are indeed more goods and services than ever, the means of obtaining rental income have multiplied. They include control of natural resources by a few corporations and plutocrats, a new intellectual property regime, a system of state subsidies that go to asset holders, and myriad mechanisms that entrap people in debt.
Through the spread of trademarks, trade secrets, copyright and, above all, patents, intellectual property has become a key source of rental income. The number of patents registered annually has exploded. Patents are supposed to enable inventors to obtain a return on risky investment, but what qualifies as an invention has been diluted to the point that trivial tweaks designed to block competition can be patented.
Over 2.3 million patents were registered in 2012 — more than double the number in 1995, the year the World Trade Organization’s Agreement on Trade-Related Aspects of International Property Rights (TRIPS) came into force. Before TRIPS, many countries did not have patent laws or gave patent holders only a few years of rental income. Now most countries have strong patent laws and give patent holders a guaranteed monopoly rental income for 20 years. In the U.S. in particular, patents have been liberally granted for business methods and for medical discoveries (for example, a breast cancer gene) that should not qualify as inventions at all. But they allow many more activities to generate rental income.
Where money goes, patents follow. In 2011, China topped the league table for total patent filings for the first time, ahead of the United States. Foxconn, the world’s biggest employer, with over 1.4 million employees, has registered more than 12,000 patents. Significantly, there has also been a big increase in the number of Chinese patent applications filed abroad, signaling their rising value.
Governments claiming to promote free markets have promoted the growth of rental income via patents, which block competition.
Globally, the stock of patents in force, some 8.7 million in 2012, may be worth more than $10 trillion. Revenues from royalty and licensing fees (which do not include profits from patents exploited internally) were estimated by the World Intellectual Property Organization (WIPO) at more than $200 billion in 2010, seven times the amount in 1990. These enormous monopoly rents have spawned a lucrative industry of “patent trolls” — firms that produce nothing but buy up patents with the sole intention of tracking down supposed patent violators, suing them and enriching themselves.
Meanwhile, a few powerful corporations are building up huge patent portfolios to entrench their monopoly status or are engaging in patent battles to secure billions of dollars in rental income (the smartphone patent war between Samsung and Google being a recent example). Ironically, governments claiming to promote free markets have promoted the growth of rental income via patents, which block competition. The engine of rental income is out of control.
While patents mushroom, other avenues of rental income have also grown. One is the use of brand names protected by trademarks. Another is the spread of copyright, famously opposed by Thomas Jefferson as being a tax on knowledge. Historically, copyright was pushed not by creators of ideas but by publishers, with protection lasting 14 years. Now, for literary works, copyright rules guarantee sole income for 50 years — and in a rising number of countries for 70 years — after the death of the author. It thus gives an income flow stretching over generations, producing intergenerational inequality.
Royalties have also boomed for films, music, videos, computer programs, databases and much else. For sound recordings, the term of protection has risen to 70 years in the European Union and to 95 years in the U.S. According to the WIPO, in some countries at least, copyright-intensive industries are more profitable than construction, transport and mining, and the income going to them is rising rapidly.
Meanwhile, governments are spending more of their national income on massive subsidies and tax breaks, both forms of rental transfer. And multinationals have become rentier entities in their home countries, in that they derive a rising proportion of their income from abroad, with more workers employed outside the country of origin or ownership. Governments compete with others by offering large amounts to corporations to relocate to their country or to stay there. The U.S. Council on Foreign Relations calculated that U.S. state and local governments provide over $80 billion a year on incentives and subsidies to companies to relocate or to stay put. This does not raise output or employment in total. It is simply a vast transfer payment to already wealthy corporations.
Tax breaks are another growing form of subsidy, increasingly used in global competition, at the expense of ordinary people. For instance, in 2013 the United Kingdom introduced a patent box subsidy that provides foreign companies investing in the country generous tax breaks worth over 1 billion pounds annually on all profits derived from patented intellectual property. France, Ireland, Spain, the Netherlands, Belgium, Luxembourg, Switzerland and China have similar schemes. Because such subsidies lower tax revenue, they tend to increase government debt. Then governments argue their debt must be reduced by cuts in social spending, so those who depend on social welfare suffer the consequences through austerity. Unlike welfare claimants, corporations receive these subsidies without any conditions stipulated about their subsequent behavior.
Tax credits are an even bigger source of unearned rental income. The biggest of all is the U.S. earned income tax credit, ostensibly designed to supplement low wages. In fact, it allows firms to pay low wages, since both firms and workers know tight budgets will be eased by the credits. It exacerbates inequalities because it subsidizes capital from public revenue and taxes on workers’ earnings. This lowers wages and boosts profits.
Perhaps the saddest source of rental income is personal debt, the scourge of the precariat, those in and out of short-term jobs without strong rights. As real wages fall, they come under pressure to try to sustain the level of living they regard as the social norm. To do so, they borrow. As they have no security to offer and must borrow at short notice, they resort to high-interest lenders, notably payday loans, for which annualized interest rates can be as high as 5,000 percent.
Millions of people are living on the edge of unsustainable debt. Today in member countries of the Organization for Economic Cooperation and Development, net household debt exceeds 1.3 times annual disposable income, and millions of people must devote part of their earnings to paying off interest on debts that stretch far into the future. In effect, falling wages mean that money itself becomes an increasingly scarce asset, giving owners of money (such as loan sharks) unprecedented opportunity to obtain more rental income. For the precariat, indebtedness is systemic, not incidental or occasional. The asset of money is scarce, so its price is driven up.
To curb the negative economic and distributional effects of the rentier economy, a new income distribution system must be constructed in which wage earners and others receive part of the income accruing to rent and profits. Wages by themselves will not sustain living standards.
With the 20th century distribution system, it made sense to concentrate on wage bargaining. That will not work in this century. Wages will not give the precariat an adequate secure income. The struggle must be to create a new distribution system. While wages will continue to stagnate, innovative ways must be found to share and limit rental income, and to share profits. Otherwise inequality will continue to grow, along with ugly social and political consequences.
Two measures are essential. First, every country should set up democratic sovereign capital funds. Some of the proceeds of intellectual property rights should go into these, with at least 10 percent of the profits from natural resource production, along the lines of the Alaska Permanent Fund or the Norwegian Fund. The latter exists because Norway’s government retained ownership of its oil reserves, renting out areas of exploration to oil corporations. If fracking is to continue (and this writer is opposed), then part of the profits of that, too, should go into national capital funds. The reserves belong to the people.
The same could be said of banking profits, which are a form of rent, made possible by the state’s generous guarantee to bail banks out when they make a mess of their business. Part of their profits should go into the national capital fund.
Second, such wealth funds must be coupled with a means of distributing the proceeds to all citizens. The optimal solution would be to build up a social dividend system, providing every legal resident with a modest but growing basic income, largely paid out of the fund. This would have desirable and emancipatory properties. It would reduce income insecurity and increase rather than decrease the incentive to take paid work.
Those concerned with rising inequality condemn themselves to irrelevance if they try to resurrect the policies of yesterday. Instead, with wages no longer an adequate source of income security for many people — in the future, perhaps most people — the realities of today and tomorrow call for a radical rethink of how income is shared and distributed.