Category Archives: Income

Economic Bullies Are Fattening Up: Where are the Monitors?

When at middle school, some few years ago now, monitors would troll the break-rooms, corridors and playgrounds. If a bully or bully-like behavior was observed, a faithful monitor (sometimes of a more diminutive size) would wade in to neutralize the issue. In industry, economic bullies are getting larger and more powerful and the monitors are missing in action.

What we knew was happening in America is now clearly happening in the UK. In this week’s Economist there is an article titled, “More money, more problems” in the business section. The article reports on new research that suggests industry concentration is well established and getting more pronounced; large, dominant firms are getting larger and more dominant. As a result, a greater proportion of economic profits are being hovered up by the bullies and the rest of each industry is sucking on less and less.

If the market was operating efficiently and freely, the opportunity for start-ups to innovate and create the ‘next big thing’ would help foster creative destruction. But public policy has played a key part in (over?) regulating how business start and operate; and lobbying is running rampant such that, more clearly in America, firms with deeper chests can invest in lobbyists to ensure their masters’ interests are protected; putting more pressure in the smaller guys. The monitors have become the employees of the bullies.

There are implications a-many, some reported in the Economist article, touching innovation and its diffusion (or lack thereof), wage rates, productivity and employment. Larger firms tend to achieve higher degrees of economy of scale; this is a large playground where automation can help drive productivity thus helping the bullies get stronger. Other data from the OECD and other sources suggest that diffusion of knowledge and ideas, needed to help firms share in productivity-inducing work, is slowing down between innovators and followers; in other words between those who already have, and those that already don’t. This reinforces industry concentration or the barriers around the OECD’s ‘frontier firms’.

Employment opportunities and where we collectively go to work changes; and who is able to pay a higher wage becomes self evident. So all in all the controlled environment we live in is a far cry from the free market that was operating 20 or more years ago.

It seems the pundits feel that we need more competition. Can we legislate for more competition or can we undo the constraints that put us where we are today? I think that what is needed is:

  • Less regulation overall and particularly on small and medium business, spanning financials, hiring practices, IP development, and so on
  • Increase investment in primary R&D
  • Increase vocational collaboration with education and industry
  • If you want more regulation, point it at the lobbyists: reduce their spend and power
  • Tinker with the tax code to help motivate investment in smaller firms and Tomory for it, tax larger firms more.

But these items are not even popular topics in politics today. It’s much more likely we will talk about fake news and Russians and Facebook, than economics, growth and hard work. Oh well.

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The Debt Chickens Are Coming Home to Roost

A story it today’s Us print edition of the financial times highlights a building ‘bubble’ of disquieting proportions. The article, ‘Britain’s Pizza Chain Boom Faces Debt Reckoning’, highlights how a large number of restaurant chains have been snapped up over recent years using debt. This might be by a private equity firm or a leveraged buy-out. In either and other cases, many acquisitions were executed using cheap debt which was facilitated by central bank policies such as near-zero interest rates and quantitative easing (QE), both of which massively distorted the price of corporate bonds and debt. Add to this public policy and pressure on banks to increase loans to help drive growth, you can see signs of a perfect storm.

The UK example is specific, but the problem is wide and applicable to most developed economies. The US has just come off a long-run marathon of high and record levels of corporate acquisitions, again much funded by cheap debt. There must be many organizations hanging by a thread, just waiting for interest rates to nudge up resulting in unsustainable debt burdens and interest payments. Unless growth drives the top-line of these businesses at a faster rate, the chances are many such firms will go to the wall.

This situation was created as an unintended consequence of near-zero interest rates for such a long time and massively price-distorting quantitative easing. Though most governments have ceased buying sovereign and corporate debt, the damage is done. Massive, trillion dollar, balance sheets at central banks need to be unwound in such a way as again, not upset the market. The act of creating the balance sheet did upset the market. In reducing their balance sheets, central banks will do it again.

And the sad part about all this, as it will play out? Smart investors with lots of money and a high risk-tolerance will hedge against such business failures and reap huge rewards. The rich investor-class will get richer, and the poor will just lose their jobs or otherwise miss out. Politicians will have a field day, calling out the failure of capitalism. Of course, it’s not a failure of capitalism since central banks and their policies are not part of any capitalist model: central bank operations are closer to a socialist model where the few take decisions to ‘help’ the many, as if they know better and how to help us.

Oh well, such is life. Just buckle down and wait the storm. The debt chickens will soon be home to roost. Maybe not by this Easter but expect them home by next year.

Trouble for The Eurozone with Trump’s Tax Deal

There was an excellent Opinion piece in today’s Wall Street Journal that calls out the less thought through implications of Trump’s domestic tax deal on international business. The piece, US Tax Reform Has Europe Worried, by Joseph C Sternberg, explores the writings of a German research group that details some thinking suggests some organizations will think twice about new investments in Europe – specifically Germany – with the new US corporate tax rates being leveled. The research piece is from ZEW and is here: Germany loses out in US Tax Reform. This is another dimension not modeled by US economists when they try to determine the impact of the tax reform on US growth.

The more important point however in Mr. Sternberg’s piece comes toward the end of his excellent article. The author suggests that US tax reform highlights a different opinion for taxation from an ideological perspective. This point needs to be talked about more since we have lost our Mojo for ideology in favor of a left-right populist dichotomy. The US reform is being used to alter tax incentives to drive growth, investment and job creation. Most of Europe, with is more socialist (and Democratic-leaning) policies, uses tax incentives mostly as a redistributive process for sharing an assumed pie. There is much less effort in driving growth or influencing investment to grow jobs. This is the dialog we had in the 1980s and it leads to the dialog about big government versus small government.

It is about time ideology got a fair crack again!

When Connecting the Dots Disagrees with the Data: Something Fishy in the Housing Market.

My original title for this blog was going to be just, “Something Fishy in the Housing Market”. But I changed the title once I realize that this blog was more about how conclusions, based on data change, once triangulation of that data is sustained.
First the good news from the Global Dailty Economic News alert from the World Bank’s Economic Prospects Group October 26, 2016:  Advanced Economies, US:

“New U.S. single-family home sales rose 3.1 percent (m/m, saar) to 593,000 in September, from downwardly revised 8.6 percent decline to 575,000 sales in August, and above the market expectations of a 1 percent decline. On a yearly basis, new home sales jumped 29.8 percent in September, according to the Commerce Department. Demand for new homes remains strong, reflecting employment growth, wage gains, positive demographics and mortgage rates near all-time lows.”

So it seems good news. The economy is functioning well, yes? 

Now the bad news Bloomberg July 28, 2016: Homeownership Rate in the U.S. Drops to Lowest Since 1965.  

The U.S. homeownership rate fell to the lowest in more than 50 years as rising prices put buying out of reach for many renters.

The share of Americans who own their homes was 62.9 percent in the second quarter, the lowest since 1965, according to a Census Bureau report Thursday. It was the second straight quarterly decrease, down from 63.5 percent in the previous three months.

Now the analysis that emerges when you overlay the two data points.

Per the World Bank, it seems that demand for housing is up. But per Bloomberg, the new housing is not actually housing that is sold. It so happens that many new (and old) houses are being acquired – that’s true. But who is buying them? It turns out, according to Bloomberg, that large swathes of the housing sector are being snapped up by cash rich organizations that are then renting the property. 

Actual home ownership is down – which is caused by a number of factors. One is that many cannot afford the first-time costs, either through lack of a job, low wages, or a bad credit score. And as more and more housing is purchased and turned into rental property, the pricing for those houses increasing, making the challenge harder.

So the increased demand for new housing is not a sign of increased wages and strong employment, as the World Bank suggests. It’s very likely the investor class, flush with cash from quantitive easing and cheap loans (due to historic low interest rates), are snapping up property and then renting them.

The two articles, taken separately, lead to one conclusion. But when you link the two, a new analysis comes forth. What will happen next? I can foresee several items.

We should now expect socially progressive typesto suggest that the market is working against the middle-class, and that government should force mortgage firms to lower standards and let those with weaker credit scores and low paying jobs to obtain loans for these new houses. The problem is with QE and near-zero interest rates. It is ruining numerous markets and distorting all manner of normal investor practices, such as capital investment for future productivity and now the housing market. 

There is a possible silver lining to all this rental action going on. A third factor is dragging the US economic growth down. It is the reduction in the American worker’s willingness to move to where the jobs are:

“Census Bureau data show that the annual rate at which people relocated to a different state — which is often an indicator of job changes — fell to between 1.4% and 1.7% of the overall population since the Great Recession. That contrasts to interstate migration rates at or close to 3% from 1947 through the middle of the last decade, with only a few exceptions.”  LA Times, June, 2016

If more and more people set up shop in a rental property, it might lead to an increased ability to move. It is possible this may happen and this should help the labor market and the economy – that is assuming there are jobs worth moving for.

But there is also a cloud related to the drop in home ownership. It will likely lead to more instability in the nuclear family, the so called bedrock of modern society. The nuclear family has been under attack since the 60’s as wave after wave of progressives have taken up power and decided they know what’s best for us, even more than we do ourselves. The declines in home ownership will likely undermine the nuclear family again. But we cannot afford, we must not, adjust policy to accommodate the need to encourage the proportion to middle class. We should focus on opportunity and growth instead and let the invisible hand do its work.

Turns out global trade is good for you and me

It is all the rage that global trade is bad for the middle classes. We have only just finished consuming the research from the “China Shock” that suggests that the injection of a massive cheap labor pool, represented by China entering the global workforce, may have overwhelmed western governments ability to develop support policies to help transition workers replaced by this China ‘shock’ of workers. As such global trade has been painted as the bad boy, and we are all now looking for ways to protect ourselves from global trade.

Well, it turns out that the China Shock may be a concern for specific industries and disruptions, but global trade overall has lifted the middle classes incomes and not made the richer as rich as we first were led to believe.

In Tuesday’s US print edition of the Financial Times there was a most fascinating article titled, “Incomes study tears up ‘elephant chart’“. The so called elephant chart refers to a graph from research by economist Branko Milanovic who famously demonstrated how global trade created a gap in incomes for middle classes (which went down) at the same time as for the rich (which went up). New analysis of the data suggests this conclusion is wrong and that the gap is much, much smaller and that middle class incomes were not negatively impacted; and Milanovic even updated his original thesis with new data and he now seems to agree with the new review.

The new analysts has found that some of the data used in the original analysis acted as out-layers to the broad tend and by removing that data, the great majority of peoples’ incomes don’t fall. For example, data from emerging markets that experienced accelerating population growth dragged down income data. The large number of Chinese families, for example, made it appear that the US poor were further up the income scale. Other data from former soviet states in Eastern Europe and Japan also caused issues in the data.

The bottom line according to the new analysis is that the middle-class incomes have not been negatively impacted by global trade, but regional differences do exist so analysis needs to look carefully at country specific data. Additionally the rich have not gotten that much richer – in fact the very rich lost the largest proportion of income during the period under review. 

If only our politicians understood this report.  But since its findings do not reinforce their message, it will likely be ignored.