Tuesday, 29 April 2014

The Economics of Inequality

The Economics of Inequality is a book written by A B Atkinson and published in 1983. There's a copy on a bookshelf somewhere round here - bought when it was new and I was supposed to be studying economics (because it's easier to buy books than read them properly). I can't seem to lay my hands on it at the moment - the books I can find are a (perhaps sad) reflection on the bits of economics I spend more time with. From where I'm sitting I can see Glyn Davies' History of Money, Nicholas Mayhew's Sterling, Victor Argy's The Postwar International Money Crisis, Kindleberger's Exorbitant Privilege,  Keynes' General Theory and even This Time is Different. But almost all I can remember of Mr Atkinson's seminal work is that it is utterly unlike Thomas Piketty's Capital in the 21st Century - and not just because 'Capital' is on my iPad,  rather than in paper form.

This isn't a review of Capital  - there are plenty, written by far smarter people than me. The Economist's website has a series of analyses. Michael Bird at City A.M has collated a host of reviews. But what interests me is the way in which Mr Piketty has captured the Zeitgeist and tapped into the biggest topic in economics today. When I 'studied' economics in the early 1980s Milton Friedman was the rock star economist of the day. The weekly release of US money supply data on Thursday afternoons was a major market event. And there was an accompanying backlash against the policies of the Thatcher era (we held hands for jobs across the country, or in my case, Highbury Fields). Winding the clock forwards, the rock stars three years ago were Carmen Reinhart and Ken Rogoff, who were, too looking at huge macroeconomic issues in the wake of the great financial crisis. In short, it was all very macro.

Inequality is the biggest economic legacy of the Great Recession and the policies that western governments and central banks have chosen to escape it. Fiscal austerity and low interest rates accompanied by central bank asset purchases have been the chosen policies of the UK, US, Europe and Japan, albeit to varying degrees. The biggest winners have been those who own assets whose prices have risen as a result (directly or indirectly) of central bankers' actions. The biggest losers are those who are asset poor, and reliant on the state. The outcome is greater economic inequality and you'd have to be blind not to see it.

It's against this backdrop that Mr Piketty has published this work. To be clear, this is not a new theme for Mr Piketty - Wealth redistribution was the topic of his Phd thesis, 20 years ago (Ph.d at 22!!) and since Capital looks at 300-years worth of data to conclude that as long as the rate of return  on capital is higher than the growth rate of the economy, wealth will flow to the owners of capital unchecked, it's partly co-incidence that he's published his latest book now. But, the reaction to it is very much a reflection of the fact that this is a theory whose time has come. Money is cheap but severely rationed (Apple is likely to issue billions of dollars in debt to help move a vast cash pile around the world). So rich companies, countries and individuals can borrow very cheaply to invest, while the rest can't borrow at all. Young Londoners can only dream of owning homes, while the 'buy-to-let' market earns better returns than leaving money idling in a bank.

What is disturbing about Mr Piketty's analysis is not his proposed cures (taxation of capital and assets, which even he accepts won't happen in the way he would like), as much as the idea that inequality is built into our economic system. I read a piece by Simon Kuper about apartheid over the weekend, and it struck a small chord with the debate about inequality. His observation of South African apartheid is that it meant that an individual's life path was largely determined before birth, and he describes inequality as the new apartheid. Inequality of economic outcomes would be less disturbing if they were the result of choice (did you go to school or play hooky, did you save or waste your money?), innate talent or even chance. But  in Mr Piketty's world, the rich get richer until the masses rise up and revolt or until the state reacts. Even for people with liberal economic views in which the market is considered a 'good thing', the idea of an economic system where the odds are that heavily stacked against those who don't start out with a trust fund, is pretty unattractive.

If you have time to read the book, do so. If you don't, be prepared for the debate about inequality to rage on. And if you don't understand why this kind of inequality is a bad thing - they're coming to get you!

Sunday, 6 April 2014

Short update post US jobs

A short Sunday update after a week in the US.The US jobs report deserves two charts, but not more. The top one shows real GDP growth, and employment growth from the non-farm payroll data. Year over year employment growth on this measure picked up a bit to 1.66% in March. It's over three years since annual employment growth was outside a 1.5-1.9% range. The first Friday of the month isn't as thrilling as it used to be!

Since 1990 (the period covered by this chart), employment growth has averaged 1%, and real GDP growth 2.5%. The period of tediously boring employment data since Q4 2011, has seen employment growth average 1.7%, and real GDP average 2.3%, so more jobs are created than has been the norm since 1990 but productivity has lagged pretty badly. Why? the wrong kind of jobs (too many self-employed, or part-time jobs), perhaps?
The second chart shows the annual growth of average hourly wages for non-supervisory workers, and the unemployment rate (inverted). The slowdown in wage growth (on this measure, from 2.4% per annum to 2.2%), was the most significant piece of information in the jobs report because without a pick-up in wage growth there is virtually no chance that the Federal Reserve will deviate from its dovish policy stance. And indeed, very few investors, traders or financial market participants in general will be worried about inflationary pressures unless or until wage growth picks up a god bit further. Mind you, the current modest acceleration in wage growth is enough for the traditional correlation between lower unemployment and f aster wage growth to be re-asserting itself. So we may not worry now but as the unemployment rate falls, it seems wage growth is indeed responding. Now, I live in a country where wage growth is still well below inflation and I see this re-coupling in the US as good news for Americans, and a reason to be just a teeny-weeny bit jealous!
So there you have it  - an OK pace of jobs creation, a pause in the acceleration in wage growth, and nothing much for financial markets to get het up about. There's still lots and lots and lots of cash looking for a place to be invested.