Archive for the ‘Political Economy’ Category

owners vs renters of housing

Saturday, September 20th, 2014

Everyone needs a roof over their head, a place to live. This need can be satisfied by owning or by renting. The choice has consequences for tax that is payable. Homeowners pay no tax on benefits (notional income) they receive from housing. Renters, in contrast, pay full income tax on the rent they pay for housing. I always thought that fairness required taxation of the imputed rent of owner-occupied housing. FT columnist Martin Wolf has another, very feasible solution that never occurred to me: give renters the same privilege that homeowners receive. How? Make rental payments tax-deductible.

Some countries provide even more perks to homeowners, by providing cash grants to first-time purchasers of housing, or by making mortgage interest tax-deductible. Such policies should also cease, unless government wants to subsidize homeowners. I can’t think of any rational reason for such a policy. Owners tend to be wealthier than renters, so the subsidy is very regressive. In addition, home ownership discourages labour mobility. Unemployed renters can move easily to a location where jobs are available. Selling a home is costly, especially in an economic downturn, so discourages relocation.

Here is a small excerpt from Martin’s column. There is much more in the full column, so do read it. His main point is that finance of housing is important, and is a major contributor to macroeconomic instability.

Rising house prices justify more lending; and more lending then drives house prices higher. In the process, housing finance may generate asset-price bubbles, huge increases in leverage and unsustainable household spending. This is exactly what happened in many countries in the run-up to the post-2007 crises.

Behind all this lies a strong social consensus in favour of owner-occupation. This has justified a range of subsidies for this form of tenure. One of these is widely ignored: the universal failure to tax “imputed rent”. Owner-occupiers in effect “rent” from themselves. But this notional “rent” is tax-free. Landlords, however, pay tax on the rent they receive This makes owner-occupation far cheaper than renting the same property. Interestingly, this tax advantage would be ended if rent were tax-deductible.

Martin Wolf, “Deeper reform of housing finance is vital for stability“, Financial Times, 19 September 2014.

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democracy in Hong Kong: the Chinese view

Tuesday, September 9th, 2014

Hong Kong residents, for the first time, will be allowed to choose their chief executive on the principle of one man-one vote. Critics complain that this is sham democracy, as voters will have to vote for one of three candidates, all of whom have been vetted by the Chinese government.

C Y Leung, Hong Kong’s current chief executive, responds to pro-democracy critics in today’s Financial Times. He claims, not without reason, that China has done more to move towards democracy in Hong Kong than the British did during 155 years of colonial rule. In due course, we will be able to judge for ourselves whether this is true. Recently, on the BBC television channel, I heard a member of Hong Kong’s legislative council state categorically that Hong Kong was moving towards the Iranian model of democracy.

The 28 British governors who ruled Hong Kong for a total of 155 years before 1997 were dispatched by the British government without any input at all from the Hong Kong people – or the British people, for that matter.

The Sino-British Joint Declaration signed in 1984, now cited as the basis of Britain’s legal or moral obligation to Hong Kong, makes no mention of universal suffrage.

It only states: “The chief executive will be appointed by the Central People’s Government on the basis of the results of elections or consultations to be held locally.”

Only the Basic Law, promulgated in 1990 by the National People’s Congress, China’s parliament, and implemented in July 1997, states that the ultimate goal is to elect the chief executive by universal suffrage.

C Y Leung, “Hong Kong must seize the first chance to elect its own leaders“, Financial Times, 9 September 2014.

Although Mr Leung does not mention him by name, this was obviously written in response to a column of the last British governor (Lord Patten), published in last Wednesday’s Financial Times.

no future for Gross National Happiness

Friday, September 5th, 2014

Raising a standard against happiness is never going to be popular, but here goes.

The mountain kingdom of Bhutan has got a lot of mileage out of its practice, first adopted in 1972, of using a broad “Gross National Happiness” (GNH) measure of its people’s welfare rather than a narrow measure like income.

… [M]any people … have fallen in love with the idea – the UN went as far as declaring March 20 the “International Day Of Happiness” ….

Unfortunately for its international enthusiasts, its originators are losing faith. Tshering Tobgay, elected with a thumping majority last year in only the country’s second parliamentary election, has distanced his government from the concept. ….

GNH has proved no guarantee of individual human rights. Taking it at face value, you would never know that Bhutan has for decades been carrying out a brutal ethnic cleansing policy against the country’s Nepali-speaking minority. Once around a sixth of the population, a “Bhutanisation” campaign that began in the 1980s resulted in tens of thousands of Nepalis being expelled from the country. Their houses were seized or burned down and people deported for speaking Nepali, refusing to eat beef (Nepalis are generally Hindu while ethnic Bhutanese are Buddhist) or declining to wear traditional dress. The displaced are still living in refugee camps in Nepal, or have been resettled in the US or elsewhere: none has been allowed to return. ….

As for the future of GNH in Bhutan, Mr Tobgay seems to have exactly the right idea. He wants the king (now happily reduced to the role of a constitutional monarch) to proselytise for it in an abstract way, much as Queen Elizabeth II is sent abroad to chunter vaguely about Britain’s enduring values while the UK government gets on with running the country according to what its voters want.

Alan Beattie, “Gross National Happiness: a bad idea whose time has gone“, FT Beyond Brics blog, 4 September 2014.

household income inequality in the USA

Friday, September 5th, 2014

The Federal Reserve has just released its Survey of Consumer Finances for the year 2013. ….

The most striking finding is that the median American family earned 5 per cent less in 2013 than in 2010 after inflation even though the average American family took home 4 per cent more.

The discrepancy can be explained by the fact that only people in the top tenth of the income distribution experienced any real income gains since 2010. Put another way, more than all of the growth in real GDP went to a very small subset of the population while everyone else became worse off.

Matthew C Klein, “US income and wealth inequality facts of the day“, FT Alphaville blog, 4 September 2014.

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income inequality and economic growth

Friday, September 5th, 2014

Standard & Poor’s recently downgraded its forecast for US growth – and specifically cited fears that rising inequality will lead to political gridlock and distrust, and will therefore sap growth.

This is a novel move in the rating agency world. However, it is an argument that would seem to make sense. And other business voices are echoing these concerns, including on the right; Alan Greenspan, the former US Federal Reserve chairman who calls himself a life-long libertarian Republican, has cited inequality as the “most dangerous” trend afflicting America.

Gillian Tett, “An unequal world is an uncharted economic threat“, Fiancial Times, 5 September 2014.

The blessed Adam Smith also disliked income inequality:

“No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” (WN, I.8.35)

“The wages of labour are the encouragement of industry, which, like every other human quality, improves in proportion to the encouragement it receives. A plentiful subsistence increases the bodily strength of the labourer, and the comfortable hope of bettering his condition, and of ending his days perhaps in ease and plenty, animates him to exert that strength to the utmost. Where wages are high, accordingly, we shall always find the workmen more active, diligent, and expeditious, than where they are low ….” (WN, I.8.43)

Source: Wealth of Nations (1776).

democracy in Hong Kong: a British view

Thursday, September 4th, 2014

During a visit to a mental hospital before I left Hong Kong, a patient politely asked me how a country that prided itself on being the oldest democracy in the world had come to be handing over his city to another country with a very different system of government, without either consulting the citizens or giving them the prospect of democracy to safeguard their future. Strange, said one of my aides, that the man with the sanest question in Hong Kong is in a mental hospital.

But we did promise him democracy. We should go on making that point, ever so diplomatically. If not us, then who?

Chris Patten, “Britain is honour bound to speak up for Hong Kong“, Financial Times, 3 September 2014.

A more appropriate question is “If not then, why now?” Hong Kong’s pro-democracy movement would be stronger today if free, direct elections for a Chief Executive and all members of the Legislative Council had been introduced when the territory was a British colony.

Lord Patten (born 1944) was the last British governor of Hong Kong (1992-1997). C. H. Tung (born 1937) succeeded him (as Chief Executive and President of the Executive Council, 1997-2005).

publication alert: secular stagnation

Tuesday, August 19th, 2014

Vox, in collaboration with CEPR Press, has launched a free eBook, with chapters written by some of the world’s best-known macroeconomists and economic historians. The full text can be downloaded without charge, so there is no excuse for not reading it.

Economic growth is still anaemic despite years of zero interest rates. Is ‘secular stagnation’ to blame? What does secular stagnation really mean? And if it’s for real, what must be done?

Today, launches an eBook that gathers the views of leading economists including Summers, Krugman, Gordon, Blanchard, Koo, Eichengreen, Caballero, Glaeser and a dozen others (edited by Coen Teulings and me). Collectively, the chapters suggest that something historic is afoot.

Richard Baldwin, “Secular stagnation: Facts, causes, and cures – a new Vox eBook“, Vox, 15 August 2014.


The link above contains a summary of the 179-page book. The full text can be downloaded without charge as a pdf. This is the table of contents:

Coen Teulings and Richard Baldwin

1 Reflections on the ‘New Secular Stagnation Hypothesis’
Laurence H Summers

2 Secular stagnation: A review of the issues
Barry Eichengreen

3 The turtle’s progress: Secular stagnation meets the headwinds
Robert J Gordon

4 Four observations on secular stagnation
Paul Krugman

5 Secular joblessness
Edward L Glaeser

6 Secular stagnation? Not in your life
Joel Mokyr

7 Secular stagnation: US hypochondria, European disease?
Nicholas Crafts

8 A prolonged period of low real interest rates?
Olivier Blanchard, Davide Furceri and Andrea Pescatori

9 On the role of safe asset shortages in secular stagnation
Ricardo J Caballero and Emmanuel Farhi

10 A model of secular stagnation
Gauti B. Eggertsson and Neil Mehrotra

11 Balance sheet recession is the reason for secular stagnation
Richard C Koo

12 Monetary policy cannot solve secular stagnation alone
Guntram B Wolff

13 Secular stagnation: A view from the Eurozone
Juan F. Jimeno, Frank Smets and Jonathan Yiangou


inequality and poverty

Tuesday, August 12th, 2014

Professor Deirdre McCloskey has written a thoughtful column for today’s Financial Times. In it, she argues that the percentage of wealth owned by the richest members of society does not matter. What matters is the living standards of the poorest. Implicitly, she restricts her analysis to living standards within countries rather than looking at relative living standards across the entire world. The distinction is important.

In the UK since 1800, or Italy since 1900, or Hong Kong since 1950, real income per head has increased by a factor of anywhere from 15 to 100, depending on how one allows for the improved quality of steel girders and plate glass, medicine and economics.

In relative terms, the poorest people have been the biggest beneficiaries. The rich became richer, true. But millions more have gas heating, cars, smallpox vaccinations, indoor plumbing, cheap travel, rights for women, lower child mortality, adequate nutrition, taller bodies, doubled life expectancy, schooling for their kids, newspapers, a vote, a shot at university and respect.

Never had anything similar happened, not in the glory of Greece or the grandeur of Rome, not in ancient Egypt or medieval China. What I call The Great Enrichment is the main fact and finding of economic history.

Yet you will have heard that our biggest problem is inequality, and that we must make men and women equal. No, we should not – at least, not if we want to lift up the poor. ….

The Great Enrichment came from innovation, not from accumulating capital or exploiting the working classes or lording it over the colonies. Capital had little to do with it, despite the unhappy fact that we call the system “capitalism”. Capital is necessary. But so are water, labour, oxygen and pencils. The path to prosperity involves betterment, not piling brick on brick.

Taxing the rich, or capital, does not help the poor. It can throw a spanner into the mightiest engine for lifting up those below us, arising from a new equality, not of material worth but of liberty and dignity. Gini coefficients are not what matter; the Great Enrichment is.

Deirdre McCloskey, “Equality lacks relevance if the poor are growing richer“, Financial Times, 12 August 2014.

Deirdre McCloskey (born Donald McCloskey in 1942) is Professor of Economics, History, English, and Communication at the University of Illinois at Chicago  She is author of 17 books (all but one sole-authored). Her latest is Bourgeois Equality: How Betterment Became Ethical, 1600-1848, and Then Suspect (forthcoming, 2015). This is the third and last volume of “The Bourgeois Era” series. The first two books are The Bourgeois Virtues (University Of Chicago Press, 2006) and Bourgeois Dignity (University Of Chicago Press, 2010).

On Professor McCloskey’s home page, you will find a summary (Exordium) of Bourgeois Equality, and much more. It is worth a visit.

See also an earlier post:



finance and social mobility

Saturday, August 9th, 2014

This information is new to me. Financial services has a less than stellar reputation, but the sector does play an important role in social mobility, by providing ordinary folks an opportunity to move into the ranks of the super rich.

[T]he standing notion, especially in the land of opportunity, [is] that capital always flows to those who work hard enough for it. This is the core basis of the American Dream, a place where there are no barriers to super riches because hard work and ingenuity can always get you to the top level no matter what and that luck plays no part in it at all.

But this is simply not true. If you are of low or working class birth, the chances of becoming a gazillionaire by means of honest hard work alone are almost zero. Even in America. Yes, working hard can be the way to a better than average life, but it will never be enough to propel you to the ranks of the uber elite. To get there, you need to take risk and most poor people simply can’t afford to do that.

Consequently, in all of history, there have only been a few professions which have been able to project the average person with some level of security to the ranks of the uber rich: banking, money management and merchant trading. These all happen to be professions in which someone else is prepared to give you the capital to risk and, most importantly, to absorb your losses if they happen.

All other routes to obscene wealth are based either on huge amounts of risk and luck, pre-existing capital or, more sinisterly, muscle and manipulation.

Izabella Kaminska , “Piketty and the randomness of wealth“, FT Alphaville blog, 8 August 2014. (free access, registration required.)

There is much more in the full blog. Note to registered non-subscribers: FT blogs do not count against your monthly limit of 10 free downloads.

income inequality hinders growth

Wednesday, August 6th, 2014

The topic of income inequality and its effects has been the subject of countless analysis stretching back generations and crossing geopolitical boundaries. Despite the tendency to speak about this issue in moral terms, the central questions are economic ones: Would the U.S. economy be better off with a narrower income gap? And, if an unequal distribution of income hinders growth, which solutions could do more harm than good, and which could make the economic pie bigger for all? ….

Our review of the data, as well as a wealth of research on this matter, leads us to conclude that the current level of income inequality in the U.S. is dampening GDP growth, at a time when the world’s biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population.

Economic Research: How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide“, S&P Capital IQ, Global Credit Portal, 5 August 2014.

This is a long report, with many charts. What surprised me was not the analysis, but the conclusions, which I did not expect to see in a report from Standard & Poor’s.

HT Mark Thoma.