Demographics

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Trump’s Election Win Shows That The Bank Bailouts And Quantitative Easing Have Failed

The bigger picture of the early 21st century follows: Western nations experienced a massive blowout bubble of leverage, irrational exuberance, and Hayekian pseudo-money creation.

Yet this money was not going to overwhelmingly productive causes. The real output of the Western world did not follow anything close to the ebullience of the financial markets. Without the growth and jobs needed to service the debt load, many of the debtors—including most famously subprime mortgage borrowers—defaulted.  And thus the securitized debt bubble burst when—in the midst of two large and expensive American wars—the animal spirits of the market turned to panic over debt defaults.

What followed was not, it turns out, enough to right the ship. In theory, when markets are frightened of the future and productive human and financial capital lies idle, government borrowing can re-employ these resources until the animal spirits of the market emerge from their slump. In my view, there are two key measures of this: unemployment, and interest rates on government borrowing. High unemployment rates signify idle human capital. Low interest rates signify idle financial capital.

But this balancing did not occur. Even as the Brown and Obama governments engaged in a degree of fiscal stimulus, voters were not won over by the logic of this, and austerian conservatives came to parliamentary power in both the United States and United Kingdom. Government purse strings tightened. Instead, stimulus came down to central banks, who kept interest rates super low, and used quantitative easing as a form of simulated rate cut to cut interest rates beyond the lower bound of zero.

In my view, the political collapse we have seen since in the last year in both the United Kingdom and United States illustrates that this was not enough. Moreover—and more importantly— the continuation of the low interest rate environment illustrates that this was not enough. If quantitative easing had been worked as intended, interest rates would surely have bounced back by now, rather than remaining depressed? Certainly you can make an argument that we are now in an era of depressed interest rates as a result of our ageing society, where rising numbers of retirees mean that demand for savings is outpacing demand for productive investment opportunities. There is certainly some truth in that view. But ultimately, that is just one of many facts that governments and central banks had to weigh in getting the economy back to normal after 2008.

And maybe more quantitative easing would have allowed the market to bounce back and renormalize faster. Somehow, I doubt it. Why? Because quantitative easing is a Rube Goldbergian form of stimulus. It is a matter of pushing on a string. It is leading the horse to water. But there is no guarantee that the horse will drink. And the horse—in this case, the market—has not drunk. Demand for productive investment has not recovered, in spite the fact that that the central banks have made it super cheap. So the banks that got access to the cheap financing just sat on the money, instead of using it productively.

There is a bigger picture here, and it is something that I referred to in 2011 as Japanization. To wit:

Essentially, in both the United States and Japan, credit bubbles fuelling a bubble in the housing market collapsed, leading to a stock market crash, and asset price slides, triggering deflation throughout the respective economies—much like after the 1929 crash. Policy makers in both countries—at the Bank of Japan, and Federal Reserve — set about reflating the bubble by helicopter dropping yen and dollars. Fundamental structural problems in the banking system that contributed to the initial credit bubbles—in both Japan and the United States—have not really ever been addressed. Bad businesses were never liquidated, which is why there has not been aggressive new growth. So Japan’s zombie banks, and America’s too big to fail monoliths blunder on.

They have now blundered on into full on systemic contagion. Unhappy voters have lashed out and thrown out incumbents—the European Union and David Cameron in Britain, and the Bush-Clinton dynasties in America.

Unhappiness with the economy is at the very core of this. There has already been a quite voluminous debate about whether or not Trumpism and Brexitism were fuelled by economic anxiety or whether they are a traditionalist cultural backlash. Such debates present a false dichotomy. If Trumpism and Brexitism were not about the state of the economy, why did they not occur when the economy was strong? Why did they suddenly start rising after a financial crisis in the presence of a depressed economy—just as they did in the 1930s during the Great Depression? Hitler did not come to power when Germany was economically strong. Mussolini did not come to power when Italy was economically strong. The reality is that economic weakness and economic anxiety open the door to cultural backlash. People who feel that the economy is bad are primed to listen to scapegoating. Immigrants, rising foreign powers, and establishment politicians like David Cameron and Hillary Clinton provide easy targets.

However, even within the false dichotomy of anxiety vs backlash, there is substantial evidence that the Trumpist communities that were falling behind. A Gallup analysis in August of this year found that: “communities with worse health outcomes, lower social mobility, less social capital, greater reliance on social security income, and less reliance on capital income, predicts higher levels of Trump support”. Indeed, as Max Ehrenfreund and Jeff Guo of The Washington Post—who took the “it’s not economic anxiety” position—noted, “there does seem to be a relationship between economic anxiety and Trump’s appeal”, even if that relationship is not as simple as unemployed and poor people diving into Trump’s camp.

The same is true for the Brexiteers. As Ben Chu of The Independent notes: ” new research by the labour market economists Brian Bell and Stephen Machin… suggests the Leave vote tended to be bigger in areas of the country where wage growth has been weakest since 1997″.

The financial crisis of 2008 provided politicians with an opportunity to re-engineer the economic system to prevent these groups from falling behind so dramatically. The system failed, completely and utterly. Policy makers were in a position to re-design it. The financial system could have at very least been re-engineered to provide financing, training, and education to people in areas which lost out on manufacturing jobs thanks to automation and globalization.

Instead politicians capitulated utterly to Wall Street, and bailed out a fragile zombie system, as Japan did in the 1990s. The machine keeps blundering on, sitting on vast quantities of productive capital instead of setting it to work. Later, they set in place reforms like Dodd-Frank to shore up some of the fragilities in the banking system. These—in combination with the ongoing quantitative easing—may have prevented a financial crisis since 2008 (and Trump repealing such things may make the system much more fragile again). But that did not address the underlying problems. The fragility in the financial system was absorbed by the political system, and thus transferred into the political system. And now we reap the whirlwind of those choices, in the shape of a new nationalist populism that blames globalization, trade policies, and migration for the failures of Western politicians.

Trump already is setting his stand out as a builder and an investor in infrastructure, just as Hitler did.

As Keynes wrote in his introduction to The General Theory:

The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.

The laissez-faire West failed to implement his ideas and avoid an economic depression (albeit a relatively mild one compared to the 1930s) following 2008. Now proto-totalitarians like Trump will get their chance, instead.

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Are teen pregnancies good for the economy?

At Pew Research Center, Eileen Patten points out that “[t]he teen birth rate in the U.S. is at a record low, dropping below 30 births per 1,000 teen females for the first time since the government began collecting consistent data on births to teens ages 15-19”:

[Pew]

What’s changed? “The short answer is that it is a combination of less sex and more contraception. Teenagers have a greater number of methods of contraceptives to choose from,” Bill Albert, the chief program officer of The National Campaign to Prevent Teen and Unplanned Pregnancy, told TIME. He added, “The menu of contraceptive methods has never been longer.”

Reducing teenage pregnancy has long been a matter of policy for the federal government, and the latest trends represent a policy victory for successive administrations who have tried to achieve that goal. While liberals and conservatives manage to find ways to disagree on issue after issue, teen pregnancy is one point on which they largely agree. Though they diverge on the means — many conservatives advocate abstinence while liberals tend to favor contraception — both sides happily shake hands on the common goal of reducing teen pregnancy.

Read More At TheWeek.com

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Is the rent really too damn high?

A new study from Harvard University shows that in the last thirty years, rents have risen and the income of renters has fallen:

[America’s Rental Housing]

Read More At TheWeek.com

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Would you cuddle a stranger for $80 an hour?

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Cuddling feels great. But cuddling also has lots of quantifiable medical benefits. It releases the trust hormone oxytocin, which creates a sense of well-being and happiness, and endorphins, which are a natural painkiller. It also relieves stress, reduces inflammation, lowers blood pressure, and may prevent depression.

A way to create and maintain social bonds within families, most cuddling takes place between sexual partners, or between children and parents. But a new slew of businesses have appeared offering cuddling as a paid-for service. And the prices can be steep.

Read More At The Week.com

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Why so many Americans are missing out on the stock market boom

The stock market has been on a major tear for the last four years, with both the Dow Jones Industrial Average and S&P 500 climbing to all-time highs:

But the gains aren’t trickling down to the majority of Americans.

Read More At TheWeek.com

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No, wrecking shopping carts won’t help the homeless

Hawaii state Representative Tom Brower (D) has been taking a sledgehammer to Hawaii’s homelessness problem. Literally. Wielding a sledgehammer, the lawmaker has destroyed over 30 shopping carts used by homeless people to store and transport their belongings.

Brower claims his actions are a product of his frustration over the existence of homelessness in his district, telling Hawaii News Now, “I got tired of telling people I’m trying to pass laws. I want to do something practical that will really clean up the streets.”

Brower also wakes those he finds sleeping and tell them to sleep somewhere else. “If someone is sleeping at night on the bus stop, I don’t do anything, but if they are sleeping during the day, I’ll walk up and say, ‘Get your ass moving,'” he said.

Read More At TheWeek.com

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The London Real Estate Bubble

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In October, London real estate asking prices jumped 10%. In my view is kind of parabolic-looking jump has developed out of quite a silly situation, and one I think is a good exhibit of just how irrational and weird markets can sometimes be.  London real estate prices have been rising strongly for a long while, and a large quantity — over half for houses above £1 million — of the demand for London real estate is coming from overseas buyers most of whom are buying for investment purposes. It is comprehensible that London is a desirable place to live, and that demand for housing in London might be higher than elsewhere in the UK. It is a diverse and rich place culturally and socially, boasting a huge variety of shopping, parks, art galleries, creative communities, restaurants, monuments and landmarks, theatres and venues, financial service providers, lawyers, think tanks, technology startups, universities, scientific institutions, sports clubs and infrastructure. Britain’s legal framework and its straightforward tax structure for wealthy foreign residents has proven highly attractive to the global super rich. With London real estate proving perennially popular, and with the global low-interest rate environment that has made borrowing for speculation cheap and easy, it is highly unsurprising that prices and rents have pushed upward and upward as the global super rich — alongside pension funds and hedge funds — sitting on large piles of cash have sought to achieve higher yields than cash or bonds by speculating in real estate. In some senses, London real estate (and real estate in other globally-desirable cities) has become a new reserve currency. And while this has occurred, price rises have proven increasingly cyclical as both London residents and speculators have sought to buy. The higher prices go, the more London residents become desperate to get their feet on the property ladder in fear they won’t ever be able to do so, and the more speculators are drawn in, seeing London real estate as an asset that just keeps going up and up.

Yet the bigger the bubble, the bigger the bust. And I think what we are seeing in London is a large psychological bubble, a mass delusion built on other delusions. Chief among these delusions is that real estate should be seen as a productive investment, as an implicit pension fund, or as a guaranteed source of real yield. While investors can look at real estate however they like, there is no getting away from the fact that real estate is a deteriorating asset. Sitting on a deteriorating asset and hoping for a real price gain — or even to preserve your purchasing power — is a speculation, not a productive investment. For commercial enterprises buying as a premises for business, or for residents buying as a place to live this is not in itself problematic. But as an investment this can be hugely problematic. It is just gambling on a deteriorating asset under the guise of buying a “safe” asset.

Of course, in the UK where housing has been treated by many successive governments as an investment, and as a haven for savings and pensions, real estate owners have done particularly well. Governments have been willing to prop up the market with liquidity via schemes like Help To Buy and via restrictive planning laws to rig the market to restrict supply. This may make investors feel particularly secure, but governments can be forced — not least by demographics — to swing in another direction. An important side-effect of continually rising prices and a restricted supply of housing is that many people will not be able to afford to buy a home. With the house prices-to-wages ratio sitting far above the long-term average, the next UK government will come under severe pressure within the next few years to allow — and probably subsidise — much more housebuilding to bring down housing costs for the population. The past-trend of government-protected gains may have inspired a false sense of security in investors.

But such a reversal of policy would not in itself crash the London real estate market. After all, London is a unique place in Britain, and the majority of the new housebuilding may take place away from London. More likely, the bubble will simply collapse under the weight of its own growth. Sooner or later, even with liquidity cheap and plentiful, the number of speculators seeking to cash out will exceed the number of speculators seeking to cash in, and confidence will dip. Sometimes, this simply equates to a small correction in the context of a large upward trend, but sometimes — especially when it can be negatively rationalised — it manifests into a deeper malaise.

When this occurs, one probable rationalisation is as follows.  Domestically, many of the relatively low-income artists, designers, technologists, musicians, students, artisans, academics, service workers and professionals (etc) who make London London are priced out, then they will go and contribute to communities elsewhere where rents and housing costs are lower — Birmingham, Manchester, Glasgow, Paris, Berlin, out into the sprawl of the home counties, and deeper into the English countryside, to places where a four bedroom house costs the same as a studio apartment in central London. Where once this would have been culturally, professionally and socially prohibitive, fast, ubiquitous internet allows for people to live a culturally and socially connected life without necessarily living in a big city like London. Internationally, other cheaper cities and jurisdictions will simply catch up with London in terms of amenities and desirability to the global super class. Competition for global capital  is huge, and while London as an Old World metropolis has done well since 2008, it may suffer in the wake of renewed competition from newer, cheaper, faster-growing Eastern metropolises.

When the bubble begins to burst — something that I think could occur endogenously within the next five years, especially if the fast increases continue — speculators, and especially speculators who are heavily leveraged may face severe problems, resulting in a worsened liquidation and contraction, and possibly threatening the liquidity of heavily-invested lenders. As many people at the table are sitting on big gains, they may prove desperate to cash out. Just as many presently feel pressured to get in to avoid being priced out of London forever, a downward turn could be severely worsened as many who are heavily invested in the bubble and scared of losing gains on which they hoped to fund retirements (etc) feel pressured to get out. Such an accelerated liquidation could easily lead to another recession. While I doubt that London prices will fall below the UK average, prices may see a very sharp correction. The psychological bubble is composed of multiple fallacies — that housing is a safe place to put savings and not a speculation, that deteriorating real estate should yield higher returns than productive business investments, that the UK government will continue to protect real estate speculators, that large flows of capital from overseas speculators will continue into London. A bursting of any of these fallacies could begin to bring the whole thing into question, even in the context of continued provision of liquidity from the Bank of England.

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Obama Talks Bubbles & Bubble Avoidance

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Barack Obama is focusing his economic rhetoric on the dangers of bubbles:

President Barack Obama, who took office amid the collapse of the last financial bubble, wants to make sure his economic recovery doesn’t generate the next one.

Obama this month spoke four times in five days of the need to avoid what he called “artificial bubbles,” even in an economy that’s growing at just a 1.7 percent rate and where employment and factory usage remain below pre-recession highs.

“We have to turn the page on the bubble-and-bust mentality that created this mess,” he said in his Aug. 10 weekly radio address.

In the long run, this goal — of avoiding inflating economic bubbles that change the structure of production both as they inflate and deflate — is laudable. The best manner in which to achieve it is through the teaching and discussion of history. A key qualitative factor in most bubbles seems to be the forgetting of history, the sense that this time is different, the sense that we may have reached a new stable plateau upon which asset prices can only rise. With the rise and popularisation of notions like the Great Moderation or the end of speculation, investors put down their guard and increasingly engage in riskier behaviours, like flipping condominiums, or buying stocks with leverage. The bubble is a mentality — risks will remain at bay, sentiment will remain high, externalities won’t disrupt activity. This is fine if the risks that investors have begun to ignore never materialise, so not every asset that soars in price is a bubble. Many asset classes including treasuries and junk bonds today are at record high prices, but the Fed is determined to do whatever it takes, and so sentiment has held in spite of naysayers like Marc Faber and Peter Schiff talking of the inevitability of a crash since the recovery began in 2009. The risks have so far remained at bay. But very often the risks that are assumed to have gone away reappear, and all it takes for the market to go into freefall is for sentiment to turn and investors to start selling. Asset valuation is not a question of fundamentals. It is a question of abstractions away from fundamentals. As John Maynard Keynes noted:

[Investing] is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.

What this means, as Minsky noted, is that avoiding the possibility of economic bubbles is really, really difficult (if not impossible by definition). Each stabiliser leaned upon to stabilise markets becomes another assumption lulling investors into assuming that this time is different and thus into riskier behaviours. Keynes and Minsky both recommended fiscal policy as the stabilisation lever, but fiscalism has become unfashionable and politically challenging.

Obama’s chosen mechanism for avoiding bubbles is decreasing income inequality. In fact he sees income inequality and economic bubbles as being intimately connected:

Even though our businesses are creating new jobs and have broken record profits, nearly all the income gains of the past 10 years have continued to flow to the top 1 percent. The average CEO has gotten a raise of nearly 40 percent since 2009. The average American earns less than he or she did in 1999. … This growing inequality not just of result, inequality of opportunity – this growing inequality is not just morally wrong, it’s bad economics.

Because when middle-class families have less to spend, guess what, businesses have fewer consumers. When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy. When the rungs on the ladder of opportunity grow farther and farther apart, it undermines the very essence of America – that idea that if you work hard you can make it here.

It’s not sustainable to have an economy where the incomes of the top 1 percent has skyrocketed while the typical working household has seen their incomes decline by nearly $2,000. That’s just not a sustainable model for long-term prosperity.

This is all true. But it’s also all rhetoric. In his nearly five years in office, Obama has totally failed to get income inequality under control. According to Pew Research, since Obama came to office:

Mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%

Research from the Bank of England shows that the main transmission mechanism used by central banks — specifically, reinflating asset prices — disproportionately favours the richest in society; those who already have assets whose prices can be lifted. The policies that Obama and Bernanke have pursued for the past 5 years have been tilted toward assisting the wealthy. The recovery has been a recovery from and for the top, while the poor have continued to experience greater social fragmentation, weakened social programs, and long-term unemployment. This has all been cemented by Obama’s own policies.

So while avoiding asset bubbles and reducing income inequality are laudable goals it is highly questionable that Obama — who has embraced an austerity agenda — will come close to achieving either.

UPDATE: Miles Kimball on Twitter points me toward Anat Admati’s suggestion of implementing bank capital requirements to make bubbles less damaging. This is a very fair suggestion, because it is a stabiliser that does not lean on the idea of eliminating bubbles, but the idea of limiting their impact. Obviously, rules can be gamed, but if implemented properly it could systematically limit the size of bubbles, by cutting off the fuel of leverage.

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Of Obamacare & Part-Time Jobs

On healthcare and healthcare costs, I try to take a pragmatic approach. I’m for whatever combination of market and government that can deliver the best quality healthcare for the most possible. I am not a pro-market or pro-government ideologue. Obamacare — or to give it its proper name, Romneycare The Affordable Care Act — is a strange hybrid of market and government. Yet, I worry that it may encapsulate the worst of both worlds. I have listened keenly to criticisms of Obamacare — specifically, the idea that the healthcare mandate creates a subsidy for for-profit health insurers — and I have worried myself that the individual mandate creates the potential for mandates for the purchase of other market goods. Yes, there are incentives to bring down the cost of care, but evidence is so far quite mixed.

One aspect of criticism I have not paid enough attention to is the labour market impact — specifically, the idea that the employer mandate (which compels firms with 50 full-time employees or more to provide healthcare to fulltime workers) will result in a greater number of part-time jobs, and less full-time jobs. The Washington Times reports:

Since January 2009 the country has added a net total of 270,000 full-time jobs, but it has added 1.9 million part-time jobs, according to the House Ways and Means Committee.

The numbers come as Republicans argue that the president’s health care law is pushing businesses to save money and push workers into shorter schedules to avoid the penalties that come from hiring more full-time workers, who under the law will be required to be covered with health care insurance.

Yet correlation is not causation.  This effect cannot entirely be the fault of Obamacare. In this depressed economy, there has been a global shift toward part-time work. Obamacare and its employer mandate cannot be forcing employers in Europe or Britain to take on less full-time workers, and more part-time. But perhaps Obamacare is exacerbating an underlying trend. Because the shift at the margin is very pronounced:

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If it is really the case that Obamacare is disincentivising full-time work, then hopefully this shift away from full-time work is only a temporary one. Employers scared of the potential for a high-cost mandate at a time of economic upheaval might try to resist Obamacare, shedding full-time workers and hiring part timers to push themselves below the 50-worker threshold. Once Obamacare is up and running — and especially if it really does reduce costs, and if the economy is growing — employers might stop resisting, and begin hiring full-time workers again.

On the other hand, if healthcare costs remain high and rising, and employers remain resistant then the 30-hour threshold could increase in importance, and the growth of part-time work could continue. This raises larger questions. At this point, the 30-hour threshold seems ill-conceived.  Why should employers be responsible for the healthcare of a worker that works 30 hours a week, but not one that works 29?  In an era where the availability of full-time work is decreasing globally, should the government not try to avoid worsening this phenomenon with arbitrary thresholds? Shouldn’t large firms be responsible for their part-time employees’ healthcare too?

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What Do Rising Numbers of Welfare Claimants Really Mean?

As we know, food stamp claimants are soaring to new highs. But this just mirrors the numbers of people who are jobless:

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This isn’t a product of people getting lazy and choosing to live off the state. It’s a product of a weak economy that isn’t creating a large enough supply of jobs to meet the demand for work.

Because as we know, there are lots more job-seekers than there are jobs being created:

As I noted recently, solving the challenge of high unemployment is not a matter of job-seekers working harder to look for work. It’s a matter of the economy being able to create enough jobs and demand to absorb job-seekers.

I worry that we aren’t taking unemployment seriously even five years into a crisis that is defined by soaring unemployment. It may be hard for  policymakers and wealthy business people — the people who are in a position to spend to create jobs and seriously lower the unemployment rate — to have any idea what unemployment really means. After all, as a successful, wealthy person with a high quality of life, who has been successful in life from school, to university, to the workplace, then perhaps it is hard to empathise with the plight of people who are struggling to find a job. It seems easy to notice the rising costs of welfare, and the rising numbers of welfare claimants and jump to the conclusion that these things are caused by laziness or lack of discipline or immorality. Yet the simple, demonstrable fact that there are not at present enough jobs to go around entirely debunks this.

Trying to nudge unemployed people into looking harder for work seems like a futile exercise. If the government wants to get people off unemployment, the only real option is job creation.