Some #inequality Books I’ve Read Recently

The Establishment: And how they get away with it by Owen Jones

Behind our democracy lurks a powerful but unaccountable network of people who wield massive power and reap huge profits in the process. In exposing this shadowy and complex system that dominates our lives, Owen Jones sets out on a journey into the heart of our Establishment, from the lobbies of Westminster to the newsrooms, boardrooms and trading rooms of Fleet Street and the City. Exposing the revolving doors that link these worlds, and the vested interests that bind them together, Jones shows how, in claiming to work on our behalf, the people at the top are doing precisely the opposite. In fact, they represent the biggest threat to our democracy today – and it is time they were challenged.

Just because this book is about the United Kingdom doesn’t mean that there aren’t parallels to New Zealand. The revolving door details are quite interesting, also the links between the media barons and the political elite in the UK.

The New Class Conflict by Joel Kotkin

In ways not seen since the Gilded Age of the late nineteenth century, America is becoming a nation of increasingly sharply divided classes. Joel Kotkin’s The New Class Conflict breaks down these new divisions for the first time, focusing on the ascendency of two classes: the tech Oligarchy, based in Silicon Valley; and the Clerisy, which includes much of the nation’s policy, media, and academic elites.

The New Class Conflict is written largely from the point of view of those who are, to date, the losers in this class conflict: the middle class. This group, which Kotkin calls the Yeomanry, has been the traditional bulwark of American society, politics, and economy. Yet under pressure from the ascendant Oligarchs and ever more powerful Clerisy, their prospects have diminished the American dream of class mobility that has animated its history and sustained its global appeal.

This book is definitely interesting. If you’ve visited Joel Kotkin’s website New Geography, you’ll find this an interesting insight into the changes in the US over the past few decades. It’s always hard to understand another country’s politics from the outside, but this book helped fill in some gaps in my knowledge.

Matt Nolan hits the Blue-Green nail on the head

Over at TVHE, Matt Nolan has a good rant about that Blue-Green thing many people on Twitter have been up in arms over recently. I don’t think there is a need for any real change in the Green Party’s positioning because demographics is destiny for the Green Party.

This really stood out to me:

How many people who accuse the “other side” of not caring about people have actually tried to understand the other sides argument?  How many have actually gone through detailed empirical policy work trying to understand what trade-offs exist, and trying to figure out what we can know about social issues?  I tell you what it is a lot of work to do and no-one has the hours in the day – but I find it amazing anyone can have such a negative view of others intentions after doing all this work, let alone before doing it.

My mental of politics and political activists is that it’s all about teams, policy be damned, except when it’s important. That isn’t to say parties don’t have good policies from time to time – just pointing out that confirmation bias is a major risk for everyone involved in politics. Think about how some politicians are able to reframe any topical issue in the language that appeals to their voter base.

But there is a major misunderstanding of the Green Party that political journalists are trying to project onto it – it’s member driven and simply won’t “move to the centre” because that’s not what the Green Party *is*. It should make people on the left raise their eyebrows when right wingers seem to think Stuart Nash is the right person to lead the Labour Party and that the Greens should “move to the centre”. Who really benefits from those two things happening? Bueller? Bueller?

Elected governments are temporary

The most important post-election documents are not coalition and supply agreements. They’re the Briefings to incoming Ministers that each government department prepares for whomever has been appointed responsible Minister for their department. That’s obviously just my opinion.

Elected governments are temporary, bureaucracies are permanent. The structural reforms in the New Zealand public sector over the past 30 years have lead to a high level of corporate-like behaviour, but there is still a major lack of understanding around how power is actually distributed in Wellington.

The shenanigans the Labour Party is currently going through around David Cunliffe are a sideshow. The election was a sideshow. Democracy itself is a side show. Every day, thousands of people go to work and open up Word documents that detail policies, regulations, interpretations and draft legislation. They do this under the nominal control of the government of the day, but no one is dictating every single word to them.

For some, this isn’t a big deal. I’m not that concerned about the public service – almost every public servant has the public’s best interests at heart. They’re not evil conspiratorial creatures, they’re just people. New Zealand has a highly competent public sector relative to almost all the others. The attacks on the public sector by the right is something I don’t understand. The changes in policy and move towards more intervention in our day to day lives didn’t just happen through legislation – it happened through substantial changes in the people who start with blank Word documents.

In Wellington Central, there is a bubble. And this bubble doesn’t much like the National government, but it is immaterial if National or Labour form the government. If Grant Robertson is the new Labour leader this afternoon, and the National party doesn’t win the next election, the bubble will be very pleased. It makes things easier if the temporary government is very much aligned with the permanent government.

High debt, house price risk and income inequality

Over at Capital Ideas, published by Chicago Booth School of Business, there is an excerpt from Amir Sufi & Atif Mian’s book “House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again“.

Debt plays such a common role in the economy that we often forget how harsh it is. The fundamental feature of debt is that the borrower must bear the first losses associated with a decline in asset prices. For example, if a homeowner buys a home worth $100,000 using an $80,000 mortgage, then the homeowner’s equity in the home is $20,000. If house prices drop 20%, the homeowner loses $20,000—his full investment—while the mortgage lender escapes unscathed. If the homeowner sells the home for the new price of $80,000, he must use the full proceeds to pay off the mortgage. He walks away with nothing. In the jargon of finance, the mortgage lender has the senior claim on the home and is therefore protected if house prices decline. The homeowner has the junior claim and experiences huge losses if house prices decline. 

I recommend reading the full article if you have time. The reason why this makes sense is that one household’s debt is another household’s asset. A key risk to the New Zealand economy is the outsized proportion of household assets made up by home equity. A way to reduce that risk is to build up the financial assets of households. This is the real benefit of Kiwisaver and state wealth funds like ACC and the NZ Super Fund. They’re reducing the severity of any house price collapse induced recession in the future. If your household has a diversified portfolio of assets – including across asset classes – then house prices dropping 20% won’t have as much of an impact than if your household has almost 100% of its assets in home equity.

Secular Stagnation And Housing Craziness

I’ll briefly discuss the idea that balance sheet recessions take a long time to recover from. Debt fuelled asset bubbles don’t always wind down in an orderly fashion. There are bumps along the road. In the New Zealand experience of the GFC, we entered a recession earlier than the rest of the world and now, find ourselves in the monetary tightening phase as some countries like Australia are starting to slow down.

I think that the balances sheet restructuring hasn’t gone far enough. There is still too much private sector debt in New Zealand and no one has adjusted their portfolio allocation behaviour. New Zealand obviously has way too much allocated to property as an asset class and the inability of many people to think clearly about this issue is a major risk, in fact I’d say it is a bigger risk than even officials have indicated in some works.

Whilst I’d agree that servicing ability is what matters for mortgages – I disagree with the idea that highly leveraged housing loans aren’t a key driver of higher house prices. Most first home buying couples are broke and some even need their parents to help with the deposit. That makes them high risk because with labour market insecurity, the fact that many relationships don’t last and external shock risks like another global trade slump, lending money to these people is really silly stuff.

If the loan term has to be extended to 30 years in order for a mortgage to be “affordable”, that’s nothing different to what sub-prime experts Countrywide and Washington Mutual did in the US. They’d come up with fancy interest rate reset or balloon repayment structures to make the monthly payment affordable. When interest rates rose, the music stopped for millions of US households locked into these sorts of contractual agreements some were even fraudulently induced into.

If you look at the contribution employment growth in Canterbury is making to employment growth nationally, then you can’t help but realise that we’re in another asset price fuelled mirage. The balance sheet restructuring necessary to ensure that capital shallow firms can get the financing they need simply hasn’t happened. The only “businesses” that have received funding are farms on the back of high commodity prices.

I don’t think this is going to be fun in the medium term. Constantly deferring the day of reckoning makes the inevitable reversal worse than it has to be. It’s even more worrying when you realise that NIMBY homeowners have enormous political power – the housing sector in New Zealand is basically “too big to fail” as evidenced by National’s announcement last week of more fuel on the fire for first home buyers.

Tax revenue estimates and positional goods

I’m a bit late to the party on tax revenue estimates where Matt Nolan at TVHE and Seamus Hogan at Offsetting Behaviour both weighed in on the Green’s proposed tax changes.

I would add that although estimating tax revenue is extremely difficult, the behavioural response isn’t that complicated for many people who would be affected by the top tax rate kicking in at an income of $140,000.

This level of income is likely to be received by mid-career professionals who have fixed levels of expenditure on positional goods like school fees, automobiles and mortgage repayments. Reducing their after-tax income doesn’t reduce the level of outgoing cash flow commitments many of these households have.

When you add in the desire to maintain relative status, reducing the after tax income of some people in this category could lead to an effect rarely considered by those on the right – people working harder and billing more hours in order to maintain the same level of after-tax income that they did before the top tax rate increased.

Given that the costs of setting up a contracting structure to benefit from a lower company tax rate of 27% include having to renegotiate your employment arrangements and get your employer to incur costs in order to monitor a different type of contractual relationship, I think the level of behavioural response on this level would be a bit lower than you may think.

Of course it’s all speculation. I would point out that the risk of such a proposal is that if the revenue stream doesn’t match what was expected, something else has to come off the table. Spending some time on Google Scholar will make you realise that the literature couldn’t be easily summarised into a sound bite for Morning Report.

 

A New Direction For My Blog

Blogging and working full-time is a difficult task. Over the past few years I have written a lot of content that has never made its way to my blog. I simply haven’t had the time to do the fact checking and analysis necessary to produce compelling content. I have ended up writing a lot of short posts when I’d rather be writing more detailed responses to things I’ve read that include more footnotes and awesome charts.

I don’t want to let working full-time turn into an excuse for not writing or writing throwaway blog posts that don’t add any value. We should write and we should publish what we write because without writing down our thoughts we can’t be too sure of what we’re really thinking on any issue. There is a difference between a sound bite and a paragraph, and that difference includes a more accessible way of tracking the changes in your thinking over longer periods of time.

When I think about how the way we consume content has changed over the past decade with blogs, social media, smartphones and less face to face communication, I wonder what we’re losing by not encouraging people to move beyond 140 characters. The problem with Twitter is that, just like all communication that doesn’t take place face to face, context and body language cues aren’t present.

The risk in this situation is that writing a throwaway comment that is misinterpreted by the hive mind and the wider context of what led to such a throwaway comment being made is lost. There are no second chances if a stray tweet is retweeted and misinterpreted by thousands of people. #SocialMediaFail is an ever present phenomenon in 2014 across all types of users let alone some of the political and economic actors who seem to clog up my own Twitter feed 🙂

Because it is easier to shut out voices we disagree with, I think we need to make a conscious effort to read the writers who outrage us or read the writers who challenge our deeply held beliefs. Skeptical enquiry has a lot of benefits, and I think that in “forcing” myself to read different viewpoints my own views of the world have softened somewhat over the past few years.

I was reading an article recently that explained how people who read fictional novels on a regular basis were more understanding of the perspective of people other than themselves. It might be bunkum – but I’m certainly aware of the bubble I live in. In fact, I’d say that a lot of things I read on Twitter and other websites make me a sad panda because so many people are unaware of the bubble they inhabit and how it can lead to saying really out of touch things.

I’d like to think observing all of this has lead to a greater awareness that there really are different perspectives out there and filtering them all out because we want to construct a bubble where no one ever challenges the way we see the world is a slippery slope towards sounding like an automaton.

The new direction I intend to take with this blog is a more regular writing schedule with a lot more content that is less related to the news cycle or what I’m reading and more linked to a broader story I’m interested in. That story is how my generation will fare in the new normal when the political process is broken.

The Hive Mind And The Policy Panopticon

Did civilised political discussion ever exist? Today, in the networked age, anything that does not conform will be pounced on immediately by the hive mind and condemned.

There is no point engaging in political advocacy because over time, only the people with the worst motives remain in the pool.

We shouldn’t be surprised at the welfare maximising behaviour of List MPs when it comes to free travel and spouting crazy talk like the RBNZ being owned by foreigners.

But we should be surprised at the fact some people still think that there is some sort of egalitarian playing field where everyone gets to contribute.

This was never the case, never will be, and it is a waste of resources to engage in advocacy to create some sort of twisted opinion or policy panopticon to simultaneously enable “direct democracy” and complete subservience to group think.

Non-partisan doesn’t mean what you think it means. In fact, it is an abuse of the English language to say that encouraging voting by young people is a “non-partisan” activity.

Licensed Occupations And Income Inequality

One of the features of the Journal of Economic Perspectives is the Recommended Reading section.

Aaron Edlin and Rebecca Haw have an article in the Penn Law Review entitled “Cartels by another name: Should licensed occupations face anti-trust scrutiny?

When only about five percent of American workers were subject to licensing
requirements during the 1950s, the anticompetitive effect of these state sanctioned
cartels was relatively small. Now, however, nearly a third of
American workers need a state license to perform their job legally, and this
trend toward licensing is continuing. The service sector—the most likely to
be covered by licensing—has grown enormously, with its share of nonfarm
employment growing from roughly 40% in 1950 to over 60% in 2007. Some
recent additions to the list of professions requiring licenses include locksmiths,
beekeepers,  auctioneers,  interior designers,  fortune tellers,
tour guides, and shampooers.

If you’re pressed for time, just reading the introduction will prove valuable. Licensing costs consumers a lot, and it’s not really clear if they benefit from better quality services or lower error rates.

When income inequality talk is all the rage, could licensing be functioning as a proxy for things like union membership or collective agreements? What I’m getting at is the idea that where a decline in union membership can be offset to some extent by expansion of licensing programs.

It should be noted that those in the bottom quintile are least likely to benefit from licensed occupations privileges – licensing boards seem unlikely to offer payment plans so could have a non-trivial impact on social mobility.