Three Cheers for the Rentier

J ohn Maynard Keynes famously called for “the euthanasia of the rentier” — and killing them wasn’t enough; he had to use the French word for them (a nod to Marx, who used it too — and not complimentarily) to show his disdain for middle-class savers who had managed to accumulate a little capital. Judging by recent interest-rate moves, the Fed and the world’s other central banks share Keynes’s views. However, as he did so much, Keynes got this precisely backwards. Rentiers are the principal source of capital, and without capital you cannot have capitalism. Rentiers are the essential ingredient that makes our economy work and should be cherished accordingly.

It is not a coincidence that the world got the Industrial Revolution only when a regime had been created of absolutely sound money and absolute protection of property rights. John Locke defined the essentials of civilization as “Life, Liberty and Property.” (Jefferson messed up the Declaration of Independence by replacing “Property” with sentimental talk about “the pursuit of happiness.”) The British 18th-century system provided absolute protection for property rights; they were finally safe from marauding kings, marauding barons, and, through a solid legal system, even marauding commoners. As for money, Isaac Newton (yes, the Isaac Newton) put Britain on the gold standard in 1717. Through the Consols government-bond system, invented in 1751, the rentier could then be sure of a modest but completely safe return on his investment, protected against inflation, and with liquidity should he need the money or see alternative uses for it such as a promising industrial investment.

Today the rentier, in the form of the middle-class saver, is the keystone in the arch of the economy. The saver puts money toward his retirement, hoping that the returns on that money will be enough for him to live comfortably into old age — longer these days than 50 years ago, thanks to improved health care. He is then the source for much of the capital on which the economy depends (even if that dependence is indirect, through pension funds, 401(k)s and such).

The smaller the business, the more direct the dependence on middle-class savings. The media focus on the gigantic pools of venture capital that have grown up over the last 40 years, mostly financing tech companies. However, almost all venture capitalists do not like less exciting (but no less essential) startups; they are too small and too risky. The true source of small-business finance is middle-class savings, either those of the entrepreneur, those of his friends and relatives (most common in the very small businesses that make up the vast majority of business formations), or occasionally those of a benign “angel” individual investor.

It is not a coincidence that small-business formations have halved in the last 40 years, even though the amount of venture capital available and the public plaudits for success have vastly increased. Middle-class savings have been abominably treated for a long time, whittled away by inflation (a phenomenon that the taxation of interest income ignores). Adding to savers’ misery, interest rates since at least 1995 have been forced far below their natural level by a Fed that believes in perpetual monetary “stimulus.” That in turn has raised asset and real-estate prices, rewarded leverage, and reduced the risk-free returns available to savers. The very rich have benefited, because they own assets and have access to large amounts of cheap leverage. Short-term speculators and crooks have benefited because, to them, leverage is a “heads-I-win-tails-you-lose” bet. However, savers have been deterred from saving, because the returns available on new risk-free investments are still generally below inflation, and yet still fully taxable.

It may be about to get worse for rentiers. The Fed has reduced rates to zero, and there are strong lobbies seeking to push them below zero, as in Europe and Japan. The main protection against this is the ability to hold cash, which at least offers a safe zero return. That is why Keynesians are trying to move us to an all-electronic payments system, in which the cash alternative would no longer be available, and, of course they will never let a crisis go to waste. Writing in the Financial Times recently, Gary Cohn, who was also Donald Trump’s chief economic adviser, wrote that “if we shifted to digital, no one would carry dirty cash or coins or deal with a cheque again.” In the same article Cohn noted that Valdis Dombrovskis, European Commission vice president for financial services, had tweeted: “Time to swap your coins for payment cards — safer for containing coronavirus.”

Should cash be eliminated, there would be nothing to stop “stimulators” from pushing interest rates to negative 5 percent, wiping out small savings and making speculative real-estate and private-equity investments hugely profitable. That would be inflationary — further damaging savers.

There is also talk of a “debt jubilee” in which the excessive debts of U.S. corporations and the government would be written off. Once again, the real loser here would be the humble rentier, either directly or through pension funds that suddenly suffered defaults on debt instruments on which they were counting.

Then there is the possibility of a wealth tax, which would further drain the wealth of the more successful rentiers. That tax’s proponents would initially impose it only on fortunes of perhaps $50 million and above, but that limit would quickly come down to middle-class levels when the government needed more money, as it always does.

You cannot run a capitalist economy without capital. What is more, you cannot run a capitalist economy in which capital is continually attacked, mistreated, penalized, wealth-taxed, and removed from its owners. Far from euthanizing rentiers, you must protect them, help them, and try to grow more of them. They are essential to capitalism — and nurturing them is essential to freedom.