Rentier Consumption and Neoliberal Capitalism

Abstract:

This article puts forward a theoretical model and some empirical evidence arguing that a central contradiction of neoliberal capitalism arises from changes in financial structure and corporate governance that have simultaneously effected a massive redistribution of income from workers toward corporate profits and the incomes of C-level executives while diverting corporate managers from the forms of real investment spending that could potentially relieve the shortages of aggregate demand that are inevitably generated when real wage growth becomes uncoupled from productivity growth. As a result, the neoliberal model of capitalism relies on the consumption spending of a capitalist class responding rentier-style to wealth effects from a rising and historically high corporate valuation or q-ratio. This model of capitalism has proved to be unworkable at the zero lower bound on interest rates, which explains the emergence of secular stagnation.

Keywords:

• corporate capitalism
• neoliberal capitalism
• q-theory
• secular stagnation
• zero lower boundary

ACKNOWLEDGMENTS

The author thanks participants (particularly Leila Davis, Matheus Grasselli, Steve Pressman, Mario Seccareccia, and Matias Vernengo) and two anonymous reviewers of this journal for stimulating comments.

Notes

This argument has its roots in Duménil and Lévy (2011) and my review essay (Michl 2011). It also draws on Michl (2016).

This paper is also available as Working Paper No. 419 at the Political Economy Research Institute at the University of Massachusetts-Amherst (www.peri.umass.edu).

Foley and Michl (1999) call this closure the classical conventional wage-share model. Note that the anemic recovery from the GFC in the United States, particularly the depressed level of the working-age employment–population ratio, which is still 400 basis points below its 2000 peak, calls into question the idea that models of mature capitalist economies must of necessity incorporate labor constraints on growth. Without these constraints, the concept of “potential output” becomes indistinct and poorly defined but normal utilization of the capital stock remains coherent.

The model operates in continuous time so wealth is measured at the beginning of the period.

These models of consumption and investment have respectable heterodox provenance, having been taken from Foley and Taylor (2006).

In this model, changes in corporate financial policies do not affect the return on stocks. A change in the retention ratio merely redistributes the return between the dividend yield and the rate of capital gains.

This formalization of worker saving leads to some counterintuitive results that might call it into question. For example, an increase in the capitalist propensity to consume, β, can leave the distribution of wealth unchanged when investment is infinitely elastic with respect to the valuation ratio. See (Michl (Forthcoming), n. 13).

Note that the top 1 percent by wealth are not the same households as the top 1 percent by income, although obviously there is considerable overlap.

Kopczuk (2015) discusses this and the Fed staff themselves have weighed in on the debate in Bricker et al. (2015) in defense of the accuracy of the SCF.

It should be said that Thomas Piketty, in the same issue of the Journal of Economic Perspectives, offers rather the opposite judgment.

See his blog, Beat the Press for April 18, 2016, “Secular Stagnation and the Trade Deficit.”

This equation takes into account other assets and liabilities on real corporate balance sheets that the QG model abstracts from, such as cash, bank loans, and corporate bonds. This framework is also used by Gruber and Kamin (2015).

For a rigorous econometric treatment of the financialization–investment link and a useful survey of the literature, consult Davis (2013), who finds that firms operating in industries with large buybacks (a measure of financialization) invest less, controlling for other determinants of investment. This effect is particularly strong for large corporations. Significantly, buybacks increase noticeably after 2001, which is consistent with the break in investment spending discussed above.

Kotz and Basu (2015) and Michl (2010) also cite the uncertainty about prospective yields on current investment as a cause behind the decoupling of accumulation and profitability. Greater uncertainty is arguably a consequence of globalization. For empirical evidence that rising sales volatility—a measure of uncertainty—has reduced investment spending, particularly among smaller corporations, see Davis (2013).

See Summers (2016) for a sample. In a sense, Summers has belatedly rediscovered Paul Sweezy’s understanding of monopoly capitalism, without his historical depth or analytical sophistication.

See Kotz (2015) and Kotz and Basu (2015) for more discussion of this point.

Available at www.newyorkfed.org/research/data_indicators/term_premia.html.

See Krugman (1998) or Summers (2014) for explicit references linking demographic factors and depression economics.

Additional information

Notes on contributors

Thomas R. Michl

Thomas R. Michl is Professor of Economics, Colgate University. E-mail: [email protected].