My Review of Bike Bird's "The Land Trap: A New History of the World's Oldest Asset"

 Civilization held Hostage to Land

 

Mike Bird, the Wall Street editor of The Economist, has written a detailed history of the role of land in society in general and the economy in particular starting with the Babylonian Empire. He makes three broad generalizations about land: it is fixed in quantity, it is immobile and it doesn’t depreciate. Although land is definitely immobile, it is not really fixed in supply, and it can depreciate. The application of capital to land can increase its supply. Witness a good portion of lower Manhattan buildings sitting on landfills and provisioning of water to desert lands to make them productive. Phoenix is a clear example here. Although there are no depreciation schedules for land, the value of land has suffered long term declines due to changes in the broader economy and environmental pollution.

 

Because I once headed real estate research at the old Salomon Brothers, I found Bird’s narrative particularly interesting. I was a careful student of the Japanese real estate bubble in the 1980’s and I chronicled the real estate boom and bust in the United States from the early 80’s to its nadir in 1992. In the Japanese and the U.S cases the collapse in real estate values caused a debt crisis in both countries. As Bird notes the ability to borrow on real estate can put a real estate cycle on overdrive, both on the upside and the downside. The 1990 real estate bust turned out to be small change when a collapse in real estate values triggered the global financial crisis in 2008. On the other owner occupied real estate has served as collateral to fund numerous businesses, some of which have become quite large. Bird cites McDonald’s as an example.

 

If there is a hero in Bird’s book it is Henry George, the author of “Progress and Poverty.” An 1879 best seller. George rightly argued that much of the gains associated with rising land values are the result of improvements in society and are thus unearned. The landowner just sits there and takes advantage of the improvement in society and the economy. George’s solution was to tax perceived unearned increment away to fund the government. At the time he thought a single tax on land would suffice. His ideas became all the rage, and he was almost elected mayor of New York City on his single tax platform. Unfortunately, his movement faded away.  

 

Bird is very cognizant of the fact that in much of the developed world today the ownership land has become a major driver of income inequality. Simply put, those who have it are far better off than those who don’t and because the value of land is very sensitive to interest rates, the easy money policy pursued by central bankers since 2008 has sent land prices skyrocketing. In a real sense, we are living in a neo-feudal world that separates the landed from the landless.

 

Aside from discussing the history of land in the Anglosphere, Bird discusses land policies in China, Taiwan, Hong Kong, Singapore, Korea, and India with the all-time biggest bubble ever taking place in China. In his discussion of Asian land policies, he cites the work of Wolf Ladejinsky a U.S. Department of Agriculture staffer and later private consultant who was instrumental in creating the land policies in Taiwan, Korea, and India. To Bird, Singapore comes across a model where the government own the land and leases it to condominium developers that attaches pricing regulation to make the units affordable. As a result, Singapore has the lowest house price/income ratio in the developed world. Albeit it is a very expensive program.

 

In sum Bird argues that society is trapped by the high price of land. For example, policies that would lower the price of land to make housing more affordable would have the knock-on effect of lowering the wealth of existing owners and possibly triggering a financial crisis if those owners default. This policy bind will be with us for a long time.

My Amazon Review of Matthew Klein's and Michael Pettis' "Trade Wars are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace"

Global Keynesians

Barron’s economics columnist Matthew Klein and  Peking University economics professor Michael Pettis have written a widely discussed book bemoaning the global savings glut that they believe to be the cause of the increase in trade tensions over the past two decades. And it is the high rate of savings by the wealthy that reduces aggregate demand globally thereby suppressing output and wages. It is Keynes’ classic under-consumption view of the world. Klein and Pettis try to prove their point by examining the economies of China, Germany and the United States.

But before that they go through a serious history of trade policy and economic crises from the 1820’s on. Unfortunately they make a few mistakes along the way. They admire Henry Clay’s American System of tariffs, internal improvements and national bank. However they ignore the secret sauce of American protectionism in 1800s, that being a tidal wave of immigration. Instead of importing products, America imported labor, much of it skilled. When immigration was cut-off in the 1920s and record high tariffs were imposed, the economy collapsed into the Great Depression. Along the way the authors surprisingly have some nice things to say about the gold standard.

Klein and Pettis early on cite Keynes’ discussion of how well the French economy fared with the payment of an indemnity arising out of their defeat in the Franco-Prussian War. What they leave out is that the excess savings generated by the French economy in the 1850’s and 1860’s was the source of funds. Hence what the Asian nations and Russia learned after the 1997-98 crisis, was the need for central banks to establish precautionary balances. It is those balances that make nation resilient to the vagaries and vicissitudes of the international economy. And as Klein and Pettis rightly note, the Asian and Russian response to the crisis greatly contributed to the savings glut.

The overarching thesis of the book is that capital flows drive trade flows. Simply put a trade deficit in the U.S. requires a capital inflow and a trade surplus in China requires a capital outflow. The authors use accounting identities to make their point. However accounting identities do not define causation because other items are not held constant. For example an increase in government spending, other things being equal increases GDP, but other things do not remain equal as consumption or investment or exports could be simultaneously reduced.

The authors make a very straight forward case that China should reduce its exports, which line the pockets of the Communist Party Bigs and the industrial elite at the expense of the workers. In turn the economy should shift towards domestic consumption through a policy of higher wages and a stronger social safety net. That all makes sense, but the high wage-stronger social safety net policy is inimical for the trade deficit-prone United States. All that would do is increase the U.S’s trade deficit.

Klein and Pettis also offer up other polices one of which is akin to modern monetary theory. Simply put, if the world is short of safe assets, the U.S. should sell all the bonds the rest of the world is demanding. They leave unsaid the impact of that policy on the foreign exchange value of the dollar. They also believe that the Dollar Standard that the global economy is now is instead of it being an exorbitant privilege, it is now an exorbitant burden. They would substitute Keynes’ Bancor, an idea that failed at the 1944 Bretton Woods Conference, but it is certainly worthy of discussion today.

There was one line in the book that really intrigued me. The authors note that the three areas of intense government involvement; housing, healthcare and higher education are the primary drivers of U.S. inflation. I would suggest that it would be in keeping with their concern about the immiseration of the U.S. working class to focus their next book on this topic.

To sum up, the Klein-Pettis book is being taken very seriously in policy circles and it could very well have a real influence on a potential Biden Administration. It is worth a critical read.

For the full Amazon URL see: https://www.amazon.com/gp/customer-reviews/R4B7PKBQT8DPR/ref=cm_cr_arp_d_rvw_ttl?ie=UTF8&ASIN=B087TJKJRQ

My Amazon Review of Jonathan Haskell's and Stian Westlake's "Capitalism Without Capital: The Rise of the Intangible Economy"

UK economics professor Jonathan Haskell and UK consultant Stian Westlake have written an important book on the ever growing importance of intangible assets in the modern economy. Unfortunately the book is too long and it would have better been written as a long magazine article. Nevertheless they succeed in pointing out that the values of firms are now largely dependent upon intangible capital and that society at large is increasingly being ordered around it. In very simplified terms the mode of production has shifted from hardware to software and we witness that every day with our use of Google, Facebook, Amazon, Netflix, and yes Starbucks. Why Starbucks? In the case of Starbucks it is the managerial software behind their organizational instructions that makes each coffee shop run.

Unlike tangible capital, intangibles are readily scalable, offer huge spillover effects and generally work synergistically with other intangibles. However in order to create intangible capital the sunk costs are unusually high and risky which makes debt finance difficult to obtain. A bank will lend on a machine, but not on in process software code.

This book should be read in conjunction with Baruch Lev and Feng Gu’s “The End of Accounting” where they establish new rules for dealing with intangible capital.( https://shulmaven.blogspot.com/2016/07/my-amazon-review-of-baruch-lev-and-feng_19.html)    In the case of the public sector, national GDP accounting has introduced intellectual capital as a form of investment. That category includes such things as computer software, research and development and filmed entertainment, for example.

On the societal level the growth of intangible capital tend to exacerbate income inequality. Success no longer flows to the tinkerers and mechanics of the 19^th century but rather to the degreed knowledge workers of the 21^st century. I would note one small error in the book. The authors called Robert Reich a future Treasury Secretary when, in fact, he was future Labor Secretary. All told Haskell and Westlake have given us a good overview as to how modern economies are being transformed.

The full Amazon URL appears at: https://www.amazon.com/review/R3JEO64PYDQCJS/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Steven Brill's "Tailspin: The People and Forces Behind America's Fifty-Year Decline - and Those Fighting to Reverse It"

The Unprotected

I wanted to like “Tailspin”. Author Steven Brill had very nice things to say about my alma mater Baruch College in its efforts to create successful paths for its student body that is largely made up of immigrants and children of immigrants. To mention Baruch in the same sentence as Amherst warmed my heart. He had nice things to say about the Financial Leadership program of which I am a co-founder. As an example of the program’s success is that the son of a night cleaning lady became an analyst at the major investment bank where she worked.

He starts off with a very simple thesis that the meritocracy created by opening up the Ivies to all comers in the 1960s created a new self- perpetuating elite. That is all to the good, but then he conflates this with campaign finance, the decline of unions, the smug civil service of the Veterans Administration, the “rubber rooms” of the New York City teachers’ unions and the financialization of the economy. All of that has been said before. In fact he is a bit out of date because the big driver of income inequality has shifted from Wall Street to Silicon Valley over the past ten years. His representations of the economy would have been far more accurate in 2006 than 2018.

More importantly Brill leaves out perhaps the most important factor in perpetuating his meritocratic elite, assortative mating. It is this mating process where investment bankers marry lawyers and doctors marry doctors and so on that is at the heart of creating a new establishment. In my opinion leaving out assortative mating is a major failure of his book. Brill also spends too little time on the role elitist zoning plays in perpetuating income inequality.

Brill also fails to cite Wall Street Journal columnist Peggy Noonan for coming up with the terms “protected” and “unprotected.” It came from her 2016 award winning column. To me the first two chapters are great and then the book goes downhill from there.

The full Amazon URL appears at: https://www.amazon.com/review/R2JNZF3OA414UZ/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Richard Florida's "The New Urban Crisis:......"

An Indictment of Urban Liberalism

I know urban planning professor Richard Florida did not intend it, but his new book represents an indictment of urban liberalism. To Florida the motive force in urban America is “The Rise of the Creative Class,” the title of a highly influential book he wrote in 2002. The creative class consists of occupations in the sciences, the arts, music, entertainment, media, management, finance, healthcare and education; in other words the educated elite. Sitting below them is the working class who represents blue collar workers and the service class consisting routine jobs food service, hospitality, maintenance and retail. In other words people like Florida, despite his humble roots, determine the destiny of a city. And to him the defeat of Hillary Clinton and the victory of Donald Trump in last year’s presidential election meant that the barbarians were at the gates. That may be true but the seeds urban liberalism failures were already planted well before the arrival of Trump. As an aside, my guess is that if Hillary won, Florida would now be sitting in a high post at HUD.

As Florida accurately notes the influx of the creative class into the cities of America brought with it rising real estate prices that exacerbated pre-existing income inequality, racial segregation and spatial segregation of the well-off from the  poor. This has been especially true in the super star cities of New York and Los Angeles and the education/tech hubs of Boston, San Francisco and Washington D.C. In those cities the demand-driven house price increases are exacerbated by the planning and zoning controls put in place by the very creative class that Florida champions. If you don’t believe me, just look at the over-the-top real estate ads that appear regularly in The New York Times and The Los Angeles Times. As a result the creative class has been enriched and the middle class is being forced out. Thus in urban America zoning is the engine of economic inequality.

All of this was true from the 1980s on and most, if not all of it, were accomplished under the auspices of urban liberal regimes. Florida’s major error is that he conflates social liberalism with economic liberalism. While his creative class may largely support immigration, gay rights and a high degree of tolerance for different lifestyles; they do not necessarily believe that social liberalism requires them to make personal sacrifices with respect to their tax burden, the schools their children go to and the location of affordable housing in their neighborhoods. For example the liberal voters of Los Angeles just voted to tax themselves to provide housing for the homeless. However there are no neighborhoods volunteering to accommodate such housing.

Now Florida to his credit understands all of this. He offers several commendable proposals to offset the income inequality generated by his creative class. I fully agree with him that urban/suburban densities ought to be substantially increased, additional density bonuses ought to be issued to allow for an affordable housing component in major developments, property taxation should build on the ideas of Henry George by taxing site value alone rather than land and improvements, transportation infrastructure should be expanded to accommodate higher densities, and low income earners need an expanded earned income tax credit. Further he sensibly understands that rent control is not part of the solution.

Where I would disagree with him is that he advocates a substantial increase in the minimum wage on metro-area by metro area basis. The problem here is that substantially higher minimum wages may worsen the problem it seeks to solve and recent research out of the University of Washington on Seattle’s minimum wage tends to support my skepticism. We are also in an age of artificial intelligence and that will work to obliterate routine task jobs in food service and retail.

Where I really differ with Florida is that he thinks that his creative class will support substantially increased urban densities. Here I am very skeptical because it is the legally savvy creative class who has refined protesting new developments to a high art. Listen, I hope he is right, but I am not holding my breath. Three last points, he leaves out a discussion on self-driving vehicles which might work to decrease urban densities by making long distance commuting far easier. He fails to even mention the underbelly of every major city in America, unfunded pension liabilities largely created by that bulwark of urban liberalism, the public employee unions. And third he is silent on the state sponsored child abuse that takes place in all too many urban school systems. I am hopeful he will discuss these three items in a future book.

Despite my critique, Florida’s data driven analysis told us how we got to this place in urban America today and for that he deserves much credit.

The Amazon URL is: https://www.amazon.com/review/R3G3AN9RIMTDM0/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv