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blue bits. red rocks.
Wednesday 12 August 2009

Rent-seeking means effectively a tax extracted by one sector from the rest of the economy. We’re used to thinking of this as something that occurs through trade restrictions and the big breakthroughs in this area came from analysis of tariffs and quotas. If a tariff, for example, will make your life cushy, you will devote great resources to getting one established or increased – irrespective of the effects on the rest of the economy (call this strategy “let’s hammer the unprotected consumer”). Finance is rent-seeking. The sector has devoted great resources to tilting all playing fields in its direction. Consumers are taken advantage of; consumer protection is vehemently opposed. And great risks are taken, with the downside handed off to the government (and the consumers again, as taxpayers). This downside protection allows an overexpansion of debt-financed finance – reaching the preposterous levels seen in mid-2008 and now re-emerging. Finance in its modern American form is not productive. It is not conducive to further sustained economic growth. The GDP accruing from these activities is illusory – most of finance is simply a tax on what is done by more productive members of society and a diversion of talent away from genuinely productivity-enhancing activities. The rise of China does not necessarily imply slowdown or demise for the United States. But if they specialize in making things and we specialize in finance, they will eat our lunch. The Baseline Scenario

Notes

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