Posts Tagged ‘Wealth’

4 May

Will growing wealth pull us out of the recession?

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

You may if you are particularly devoted recall the analysis in Slash and Grow – about whether exports, households or investment can lead us out of recession.  The bearish view is that households can’t, because they are very indebted and need to keep saving, after a credit crunch has shown them how dangerous it is to be reliant on debt. Oh, and the banks also don’t want to offer credit, as they fear for their capital ratios.

But you might also argue that it is not just gross debts but net wealth that matters.   To use the archetypal example, it does not matter if I have debts of 3 times my income if I also own assets of 5 times.   The wealth effect is something long investigated as one of the channels through which assets affect economic demand.

Mark Thoma on Economist’s View has a graph relating US wealth to its savings rate (and the savings rate is the inverse of the consumption rate).  As you would expect,  it is downward sloping – the wealthier the economy, the less it needs to save.  Now the US has had a much worse housing bust than we have.  From their current position the US is expected to increase its savings rate from 5 to 7%, according to the graph.  But the UK is in a different position – housing up 10% in a year, and our savings rate already much higher.

So the question is can the UK expect more growth from its relatively wealthy households?  My answer – as I observed in Credit Where It’s Due – is not necessarily.  Yes, wealth has recovered.  But it is still too concentrated in the top deciles, where the propensity to consume from added wealth is much lower.   I keep coming back to the idea of wealth taxes as an answer to more than one problem ….

1 Feb

Who is your favourite Conservative?

Posted by freethinkingeconomist in Economics. Tagged: , , , , .

Mine is probably David Willetts.  I met him a couple of years ago, and may well have passed him a canape, as that was the role I played at the event he spoke at.  He is famously brainy, and worked under Nigel Lawson when the latter was Chancellor*.  He got in trouble with the Right of his party over grammar schools, questioning their sacred view that these schools are the key to social mobility, in a speech that my better informed education expert friends think is one of the best ever made on education.

the trouble is that the chances of a child from a poor background getting to a grammar school in those parts of the country where they do survive are shockingly low. Just 2% of children at grammar schools are on free school meals when those low income children make up 12% of the school population in their areas  . . . If the evidence were different and if grammar schools could still work as they might once have done, transforming the opportunities of many children from poor backgrounds then we would be obliged to look very seriously at the case for their introduction. But the fact is that grammar schools don’t any longer work like that.

Anyway, commenting on the death of Salinger, he has written a good column in the Times that clearly denies some of the views of miserabilists who think the young are, well, bad:

Many other indicators show the generation gap healing. Parents spend more time with their children than they used to. One in ten parents of children aged 16 to 24 say that they have serious arguments with them, but one in five say that they had big rows with their own parents when they were the same age.  . . . And young people themselves respect their parents’ values. The conventional wisdom that young people lack aspiration is wrong: most young people have mainstream aspirations. They want a decent job and to settle down and raise a family. Surveys of our most disengaged young people, the Neets (not in education, employment or training), found that they had surprisingly mainstream aspirations — one unemployed young person said that his ambition was to have a utility bill addressed to him personally.

So, they are not bad: they are badly off, for generational reasons that less thoughtful advocates of freemarket thinking would ignore or fail to spot:

This generation gap is even more stark when we look at who owns what. As we slowly accumulate wealth during our lives we might expect the older generation to be richer. But again the gap has widened: it is the generation ahead that sits on all the wealth tied up in their houses and their pensions. It is going to be much harder for the younger generations . . .  (of the baby boomers) First, they borrowed to buy their first house, then high inflation in the 1970s and 1980s wiped out their debts. Then they had high wages when they were young. Now, as retirement looms, the arrival of China and India in the world trading system is holding down the wages of their children. And on top of that we are now leaving a heavy burden of public debt around their necks.

A Conservative who recognises that we don’t have a total collapse of respect in this country; who doesn’t think that grammar schools solve all educational issues; who recognises that the distribution of wealth is a problem.  How much more difficult would be my voting decision, if Willetts were Shadow Chancellor, rather than the current lot who seem to be getting more and more muddled (see Paul C on LibCon) and is prone to making wrongheaded comparisons with Greece.

*say what you like about Lawson’s views on climate change, but his qualifications to be Chancellor were awesome, and his book on that period is arguably the best account of being a Chancellor, or antagonist to Lady T, that you can read.  All 1000 pages of it.

15 Dec

Pre WWII things were different

Posted by freethinkingeconomist in Economics. Tagged: , , , , , .

There was the Treasury View of the desirability of the gold standard back then.

Now, just about everyone except probably Richard Wellings of the IEA accepts that Britain going back on the gold standard under Churchill was one of the worst economic decisions ever. He should read Lords of Finance to learn that even Churchill realised this, and wandered around afterwards gnashing his teeth about the decision.  Whatever out of context quote Churchill may have given spouting Treasury view (see IEA blog), the truth is he learned to distrust them, terribly.

The idea of quoting Churchill to prove Keynes wrong is quite bizarre. Even more biizarre, Richard has recently been quoting Keynes to prove that the liquidity trap is wrong.  Which argument from authority are we likely to take next? Perhaps Chamberlain proving that Churchill was wrong.

Being on the gold standard at too high a level forced deflation upon the UK.  They put pressure on the US to keep rates low, therefore exacerbating the boom of US stocks.  It was a giant mistake.  And fiscal policy and the abandoment of monetary orthodoxy were what ultimately pulled us from recession.

The other different thing about pre WWII is the extremes of wealth inequality.  Chris Dillow has a simply brilliant post explaining how it all disappeared in the last 80 years.  I had always thought wartime expropriation, but had been waiting for a post like this to explain further.

5 Nov

House Price Gloat

Posted by freethinkingeconomist in News Summary. Tagged: , , , , , , .

If you don’t like capitalist gloating, skip this post.

House prices still rising. I’ll do some graphs on this some time.  Hell, here’s one: it was part of a dialogue with a friend a year ago, where I was arguing in favour of buying massively the Spreadfair Housing Futures, because surely house prices could not fall as far as the market was predicting without some radical monetary action:

houseprices jun08I was right.  Maybe a bit lucky, but right.  The market stabilized this year.  I was long loads of Dec09 and Dec10 houses at a price of 130-140, which now looks like settling at 162-170 – my best bet ever.  Sorry, but it doesn’t happen often.  I think the high level of house prices in this country is a real problem, but my small bets do nothing to exacerbate them.  And what were those people thinking, selling at a 20% discount? Jeez.

Housing wealth in unequally distributed in this country.  The effects of QE and a lack of supply has boosted the wealth of the top half/top third.  Here is my estimate:

700bn

This ought to be spelled out more.  Has QE rescued the economy?  It has certainly rescued the wealth of a segment of our society.

27 Sep

Weekend miscellany

Posted by freethinkingeconomist in News Summary. Tagged: , , , , , .

You can tell from my previous post that I have not had time for a thorough analysis of the world’s affairs this weekend.  But some stuff has penetrated through the domestic fog of dogs children flooded cellar and Cloudy, with a chance of Meatballs:

Hat-tip Dillow: Brown to go for Fiscal Responsibility Act (Telegraph). This reminds me of the German Hairshirt- some act that outlaws deficits  – which Wolfgang Munchau detested. Chris is right: this is posturing to put the oppo into a bind, though in Germany’s case they – wrongheadedly – believe it (as the letters to the FT after WM wrote shows). I think the Tories’ Office for Budget Responsibility was already going to tie them in this bind.

Will this help Labour?  Maybe, if “immolates the country in Deflation” is helpful to a party that really needs a fiscally solvent state one day to take over again.  But I don’t think Brown can utter the words “Fiscal responsibility” without getting huge guffaws from Commons benches and Press alike.

Matthew Parris is getting more Tory (though you can’t deny he writes well).  This is a lousy reason to prefer VAT to property taxes:

Most of us pay far more in VAT every year than in property taxes; and sales taxes (where the rich and the poor pay at the same rate) are undoubtedly a less “fair” way of raising revenue than council tax. Yet, though you see the VAT element as clearly on your bill as you see your council tax demand in the post, sales taxes never arouse the same fury. Some ways of taking money from people grate more than others.

Tory writer says: “we prefer stealth taxes, please. Don’t be upfront about where you get the money from, even if it’s fairer”.

Parris talks about the psychological abhorrence of stealing from the squirrel’s store of nuts.

All of us, all our lives, strive for laurels on which we can rest; high ground which, once reached, offers us permanent security; shelter which, once built, endures; honour/dignity/ status/certificates/legacies/initials; farms, fields, flats, cottages or mansions … things to our names which we can call our own and which, once secured, are ours.

Yes. This is precisely why wealth inequalities – less discussed by far than income inequality – are so important.  So many people never get that ‘permanent security’.  When a significant chunk – the majority? – comes from passively enjoying rising property values, which rise because of an artificial constraint on land-supply, a tax like this which helps, in theory, the poorer to keep more of their incomes becomes really compelling.  Parris gives every indication of not really knowing or thinking about people in this situation.

I had expected to be flinching at the sound “G20″ all weekend.   Particularly after the BBC’s spin was really positive – G20 replacing G8, etc – and the fact that rebalancing, surpluses-deficits, the whole Martin Wolf thesis, looked like being taken seriously.  But the ever-bearish Simon Johnson sees it as some sort of roadblock on the way back to secure, well-capitalized banking.  He comes up with a novel argument against worrying about the international-coordination aspects of this:

But stop worrying about what other countries might or might not do.  Establish high capital requirements in the US, and make this a beacon for safe and productive finance.And prepare for the crises that will sweep undercapitalized parts of the world financial system in the years to come.

I flinch every time I read another post about QE, since I am hoping to write something myself before Christmas.  But all the more so when it is by Willem Buiter. Because he can throw out more theory and data in one blog post than most think tanks manage in a whole series of pamphlets.  Worth reading.

Follow

Get every new post delivered to your Inbox.

Join 32 other followers