Rentiers and debtors have long fought for the upper hand, and the United States economy reacts to the financial struggles of each inconsistently. What can be done to ease financial disparity — and how will this equilibrium benefit the real estate market?
Income and economic disparity among Americans
In the years since the housing crash and financial crisis of 2008, the unequal distribution and generation of wealth among United States citizens has become increasingly apparent. Despite forward strides in employment and the ongoing housing recovery, the economic scale is struggling to stay its tilt towards disproportionately favoring those who earn passive income, also called unearned income. Today, the difference between working for a living and reaping investment income is painfully obvious — and it’s bad for real estate.
This difference manifests in two main economic classes among Americans:
- rentiers, who use accumulated money to make money by placing their wealth in assets which produce passive income; and
- debtors, who use their labor or skills working for paychecks, including self-employed business operators, to fund their living expenses until retirement.
Rentiers and debtors go by many names, depending on their particular financial situations or role in a real estate transaction: landlords versus tenants, lenders versus property owners, etc.
Perhaps one of the starkest monikers to emerge in recent years is “The 1%” (rentiers) and “The 99%” (debtors), a statistical divide made part of today’s conversation by the fleeting Occupy Wall Street movement which harnessed the public’s attention in 2011.
Regardless, the elite 1% are not inherently evil, nor are the 99% automatically earnest laborers — despite the reductionist social sentiments that too often dominate the discussion.
An individual’s involuntary circumstantial upbringing and financial awareness most often factor significantly into where they end up on the economic spectrum. However, the U.S. economic structures do have a firm hand in how rentiers and debtors earn their income and how they are treated when they experience financial distress — and this guiding hand is not unbiased.
Debtors reliant on rentiers’ assets
Debtors constitute a wide, sturdy base on which rentiers build their wealth. Debtors can earn anything from minimum wage to a six-figure salary — so long as they pay their dues to the rentiers.
As mentioned above, rentiers hold the assets debtors need to function and maintain their quality of life. For example, a rentier may live off rental payments generated from multiple income properties they own— paid by the debtors occupying the properties.
This holds significant ramifications in today’s ownership and rental markets. California tenants in major (mostly coastal) metropolitan areas are wrung for their last cents in overpriced urban rental units, while landlords and property owners bask in the fruits of their accumulation of wealth from ultra-high tenant demand. However, some landlords play both the role of rentier and debtor, owing mortgage debts on their rental income investment properties.
Matthew Rognlie, an economist at Massachusetts Institute of Technology (MIT), published a 2015 research study analyzing this effect. The economist concluded the high demand and lack of supply (inventory) gives housing the most significant portion of capital income growth today that is realized by rentiers. However, for the 1%, the capital gains tax is capped at 20% — allowing for significant retention of the excess income presently flowing from tenant demand.
Meanwhile, the 99% are stuck with higher tax rates despite their distantly lower income. This leads to greater buyer purchasing power for rentiers than debtors, although debtors currently have an exponentially higher need for financially feasible housing than rentiers. Rentiers simply use wealth to provide their debt-free housing, not monthly wages for rent or mortgage payments.
Actions to remediate such an inordinate allocation and taxation of wealth among rentiers and debtors can have an unintended destabilizing effect.
Attempts to alleviate such disparity are pushing rentiers to abandon what they deem unproductive enterprises in search of debtors able to supply more “reasonable” (read: lucrative) returns. For example, the induction of steeper development fees across Oakland is persuading developers to leave behind needy residents for other municipalities where developments encounter minimal expenses and bring maximum returns from able debtors — a population evacuation which will entice rentier landlords to follow.
Accordingly, Rognlie suggests local policymakers ought to closely monitor housing costs when considering remedies for disproportionate wealth among income tiers. Restrictive zoning and limited construction opportunities artificially force housing costs up, reinforcing the aforementioned prominence of housing in capital income cycles — a problem to which first tuesday has frequently called attention.
Permissibly parasitic rentiers and the economic consequences for everyone
The issue of underwater homeownership sparked a renewed awareness of crippling financial class disparity in the wake of the Millennium Boom. Though negative equity is no longer the predominant issue it once was in California (March 2016 saw the lowest mortgage delinquency rate since 2007), current economic policies favoring rentiers still foreshadow steep pitfalls for debtors – most homeowners – in the years to come.
Economist Michael Hudson echoes Rognlie’s sentiments about the relevance of housing-cost conditions to greater economic disparity and financial woes. In a recent interview, Hudson states:
Basically, you can think of the economy as the 1% getting the 99% increasingly into debt, and siphoning off as interest payments and other financial charges whatever labor or business earns. The more a family earns, for instance, the more it can borrow to buy a nicer home in a better neighborhood — on mortgage. The rising price of housing ends up being paid to the bank — and over the course of a 30-year mortgage, the banker receives more in interest than the seller gets.
Hudson extends this point to reflect potential ramifications for the American economy, as mortgaged property owners and renters feed their earnings into expensive homes and rental payments (all for the financial end benefit of the rentier class). With all their financial attention focused on myriad debt payments, including mortgages, student loans and consumer credit, residents have little surplus cash for savings or to expend on goods and services for an enhanced standard of living (or invest in income-generating real estate assets, for that matter). Thus, lack of debtor participation for lack of disposable income wounds the larger economy and real estate sales in particular.
However, rentiers and pseudo-rentiers — comprised of syndicators and Wall Street bankers who earn their income aggregating and managing the wealth of others into an investment product on which they earn interest — continually garner wealth from the management of debtors’ overextended financial obligations, which are encouraged by government policies on mortgaged housing.
Hudson refers to this as a form of financial parasitism, in which rentiers and pseudo-rentiers reap the benefits of tangible production by others, and transfer it to the more conceptual arena of finance and investment.
In other words, rentiers and their upper-tier middlemen leach wealth from the laboring and self-employed masses (both from debtors and other rentiers), all the while pretending to contribute to the active production of goods and services which influences the cyclical fluctuations of income for the laboring class.
Resolving debt disparity
How then can the gap be closed?
Often, it can’t; those born into the rentier class learn to be rentiers through exposure and pursue that method of economic survival by virtue of upbringing — inculcation by family, like-type friends and elite schooling.
Alternatively, those born into the debtor class generally learn to be debtors by earning their income off their labor and services they supply — the hardworking American, rather than smart-working American. Thus, the cycle continues, a constant turn of the Rota Fortunae which in a democracy somehow sustains the rentiers’ position at the top.
But is this all just financial fatalism?
There is always potential for change, for those who understand the system needs some reordering. When U.S. economic policy is modified to provide debtors the same benefits rentiers enjoy — particularly through tax reform — the mass of debtors generate more disposable income to balance financial disparity.
How we collectively solve this riddle is highly contentious and deeply tainted by political allegiances, but doing so will certainly re-instill some balance to the system and encourage a more equitable sharing of our resources at the source of income. The sharing of corporate earnings at the moment for setting salaries and business profits — the stakeholder versus the stockholder and corporate bondholder — reflected in the minimum wage and higher up the pay ladder makes homeownership possible as the escape from permanent tenancy.
Balance between rentiers and debtors levels the real estate market. When debtors are able to avoid getting stuck beneath anvils of perpetual debts, they are better able to invest their savings into assets, such as a home. Although buying a home means obtaining a mortgage for nearly all debtors, their return in equity buildup will stave off the compounding indebtedness to rentiers that comes with renting. Rentiers keep their passive income through mortgage payments, and debtors slowly gain value through the steady increase in their home’s equity through amortization.
Eventually, homeowner debtors who have paid off their mortgage — virtually freed from eternal debts imposed by rentiers — can invest their life earnings into passive income-producing assets, like a rental property. Thus, debtors are able to join the rentier ranks at last. However, the likelihood of paying off a mortgage in full in today’s savings-challenged economy is minimal; but one can dream.