The Critical Difference Between Rentier Wealth and Wealth Creation

If you want to understand why our economy is stagnating and wealth inequality is rising, look at the rise of rentier skims and the resulting decline in wealth creation.

To understand why the real economy is stagnating, we have to understand the critical difference between rentier wealth and wealth creation. Rentier wealth is skimmed by fees that provide little to no value to the to the person paying the fee.

The classic example is a fee collected to pass from one fiefdom’s border to the next: no value is provided to the person paying the border fee; it is a rentier skim that transfers wealth from serfs to the fiefdom’s landowning nobility.

In the modern economy, rentier skims take a variety of forms. The government is adept at levying rentier skims. Harsh penalty fees piled on top of minor traffic violations are one example; another is extra fees to “expedite” services government is supposed to provide in a timely manner.

A California architect recently recounted the new fee structure in a Northern California municipality: the fee to have the city planning department review your building permit application leaped to $6,000. Since the department warned applicants it will take at least six months for the agency to process the application, they kindly offer an alternative: for a mere $4,000 more (an “expedited fee”), the applicant can get his application reviewed in a mere four months rather than six months.

This is pure rentier skim.

Planned obsolescence provides many other examples of rentier skims. Microsoft’s operating systems and hardware makers both operate a form of rentier skim, in that each new OS and device offers marginal benefits (if any) in terms of productivity. The rare printer that doesn’t break down in a few years is obsoleted as software drivers are no longer available on the new OS.

Cartels and quasi-monopolies offer a wealth (ahem) of rentier skims. Monopolies can raise prices and degrade services at will. Cartels maintain price controls while denying they do any such thing.

Compare the monthly healthcare insurance fees offered by the handful of providers in your area–the differences are either cosmetic or result from differences in benefits.

Finance offers the richest opportunities for rentier skim. Load up college students with tens of thousands of dollars in high-interest student loans for marginal educations that could be provided at a fraction of the cost (see The Nearly Free University and The Emerging Economy: The Revolution in Higher Education) and what do you get? A nearly lifelong rentier skim off the student debt-serfs.

Higher Education’s Aristocrats: Over five years, administrators enjoyed pay increases of between 40 percent and 135 percent, and as a result each received $450,000 to $3.3 million from cumulative increases by the end of 2012-2013, the most recent year for which tax data is available.

Higher education is basically a multilayered rentier skim.

The net result of an economy of endless rentier skims is stagnation and rising wealth inequality. Money that could be saved and invested in productive enterprises and infrastructure is skimmed off by financial and political Elites.

Simply put, the rich get richer and the poor get poorer. This is the teleology of every rentier economy: the built-in consequence of rentier skims is increasing wealth inequality and economic stagnation.

This reality is easily visible in the data. Note how the wealth of the bottom 90% declined since 2003, while the wealth of the top 5% rebounded smartly.

U.S. Household Wealth before/after Great Recession

Real median income declined from 2000 to 2014, while net worth (wealth) skyrocketed in the same time frame:

Real Median Income and Household Net Worth in the U.S., 1980-2012

Rentier skims are naturally owned by the wealthy, so their wealth increases as the earned income of the bottom 90% declines due to the ever-rising costs of multiple rentier skims.

Wealth Distribution in the U.S.

But this rising tide of wealth is concentrated in the accounts of those who own the rentier skims and the Upper Caste (Clerisy class) that serves them (for example, college administrators, ref. Protecting Elites and the Clerisy Class That Serves Them).

The resulting wealth disparity is made visible in this inverted pyramid of wealth:

The U.S. Wealth-Income Pyramid

If you want to understand why our economy is stagnating and wealth inequality is rising, look at the rise of rentier skims and the resulting decline in wealth creation from productive investment.

*   *   *

About the Author: Charles Hugh Smith as a writer and financial commentator living in Hawaii. His blog, Of Two Minds.com, is ranked #7 in CNBC’s top alternative financial sites, and is republished on numerous popular sites such as Zero Hedge, Financial Sense, and David Stockman’s Contra Corner. Smith is frequently interviewed by alternative media personalities such as Max Keiser, and is a contributing writer on PeakProsperity.com. This article originally appeared on Smith’s blog, and is republished here with permission.