Opinion

Edward Hadas

Wealth buys less lifestyle, more power

Edward Hadas
Apr 2, 2014 14:39 UTC

Many serious people think economic inequality in the United States and other developed economies should be a hot political topic. But the general public hardly cares. There is a bad reason behind lack of public interest.

President Barack Obama said last December that a “dangerous and growing inequality” is “the defining issue of our time,” but the most recent Gallup poll suggests that view is not widely shared. Only 3 percent of Americans chose the “gap between rich and poor” as the country’s “most important problem” and 4 percent went for poverty. Unemployment scored 19 percent.

The American indifference is surprising because the measured increase in inequality there has been relatively large by international standards, to judge from the recent Chartbook of Economic Inequality from the Institute for New Economic Thinking at the Oxford Martin School. But the lack of concern is widespread. Neither help-the-poor nor soak-the-rich politicians have gained much traction in any rich country.

Debilitating economic inequality is in fact diminishing on a planetary scale. Each year, fewer people have to live without the basic economic goods of adequate food, clean water, decent housing and clothing, electricity and so forth. More people are experiencing a middle-class lifestyle. Almost every year, the gap between average incomes in developing and developed countries narrows.

However, the Chartbook shows that income and wealth are both increasingly concentrated at the top of society in countries from Canada to Germany. Why is the rest of the population not burning with indignation? The best explanation is that the statistics are misleading. In developed economies, actual consumption is not becoming more unequal to the degree suggested by most widely cited measures.

Russia and the unreliable West

Edward Hadas
Mar 12, 2014 16:13 UTC

The revival of East-West tension over Ukraine looks thoroughly geopolitical. But the context is bad economics. In the last century, Russia was damaged by flawed ideologies which originated in the West. And today it is damaged by Western economic policy.

It is easy for Western Europeans and Americans to look down on the Russian economy. Since the breakup of the USSR, the nation’s real GDP per person has increased at a 3.9 percent annual rate. That is a modest accomplishment for a middle-income country with a great deal of resource income. While Ukraine’s 1.7 percent growth rate is even worse, Armenia, Poland and Romania have all grown faster than Russia.

Now look at it from the other side: what the West has given Russia. There are good things, from markets for energy exports to many types of sophisticated technology. However, these positives are dwarfed by two disastrous ideologies in the past and two selfish and hostile policies in the present.

How hunger and obesity go together

Edward Hadas
Feb 26, 2014 15:32 UTC

Global hunger is shrinking. Yet each winter operators of food banks in rich countries like the United States and Britain speak movingly of the plight of those who must choose between heating and eating. The desperation seen by Feeding America and the British Trussell Trust is real enough, but this is not a massive economic failure. The weakness is predominantly social.

When people do not have enough to eat, there are three possible causes: an inadequate food production system, a bad political choice or poor personal arrangements. Through most of history, the first problem was the most important cause of hunger. However, as the economist Amartya Sen pointed out three decades ago, food shortages can no longer be acts of nature.

The reason for Sen’s judgment is that nature has been tamed. More than enough food is already produced globally to feed all the people, and the technology of food transport and storage is sufficiently advanced to get the food to those who need it most. When that does not happen, there must be a human problem. Within a country, a shortage of food comes down to a failure of government to serve the governed. Internationally, it is a failure of the strong countries to help the weak.

Favour labour over consumption

Edward Hadas
Nov 13, 2013 16:09 UTC

Unemployment is a problem in most developed economies. Any politician, central banker or professional economist in the United States or Europe will admit that the published rates are unacceptably high, that too many people have left the paid labour force and that young people starting out have a particularly bad deal.

Americans often say their problem was caused by the 2008 financial crisis. That isn’t exactly wrong. After the failure of Lehman Brothers, many indicators of labour market depression – for example, the proportion of unemployed people who have been unemployed for more than six months – jumped to the highest levels on record (generally since 1948). Most of these indicators have improved, but remain uncomfortably high.

However, I think that the recession only uncovered longstanding structural weaknesses, and the problems I have in mind are not exclusively American. They just showed up in European statistics much earlier. Unemployment rates there have been persistently high, especially among the young, for decades. And the recorded unemployment numbers are flattered everywhere by the expansion of what might be called the non-labour force: those classified as suffering from incapacity, involuntary students and healthy retirees.

Economists overvalue stock markets

Edward Hadas
Oct 31, 2013 13:07 UTC

Is it possible to construct portfolios which perform better than the overall stock market? Two of the three recipients of the latest Nobel prize in economics have tried to answer that question. Roughly speaking, Eugene Fama said that all efforts are in vain, while Robert Shiller said that they are not.

These nearly contradictory views are typical of an intense but inconclusive argument stretching back four decades. Market researchers have produced a mountain of studies, but they rarely consider the macroeconomic, ethical and social meaning of equity investing. That’s a shame. If more attention were paid to these issues, everyone could calm down.

Start with the economics. For the economy as a whole, changes in individual stock prices are basically irrelevant. The companies receive no cash when existing shares trade hands, whatever the price. The trading shareholders may have gains and losses, but they cancel each other out. The net economic effect of frenetic stock markets is zero.

America says it has got poorer. That’s rich

Edward Hadas
Sep 25, 2013 14:45 UTC

The U.S. Census Bureau says the median American household’s income was 1.3 percent lower in 2012 than in 1989 after adjusting for inflation. That suggests stagnant American consumption for the last 24 years. That assertion is not as ridiculous as North Korean propaganda about the United States – “their houses blow down very easily and they have to live in tents” – but it’s still misleading.

To start, the country is currently enjoying the fruits of major technological advances in electronics. In 1989, there were almost no mobile phones. Today, more than 90 percent of American adults have one, according to the Pew Internet and American Life Project – and more than half of those phones count as “smart”. The same project estimates that about 70 percent of U.S. adults are daily internet users, compared to zero in 1989.

Considering the increased consumption of electronic goods, a typical American household could only be poorer now than then if there were matching declines in the consumption of other goods and services. But none of the statistics I could find shows this. On the contrary.

A dangerous lie about debt

Edward Hadas
Aug 21, 2013 09:41 UTC

I have spent much of the last five years searching for financial villains. The 2008 crisis and the extremely slow subsequent economic recovery have exposed a deeply flawed system, and some people, groups or ideas must be responsible.

There are many obvious culprits: greedy bankers, undercapitalised banks, lax monetary policymakers, reckless governments, weak international institutions and imprudent lenders and borrowers. They’re all guilty, but some of the worst offenders are intellectual – the dangerous ideas that encouraged overconfidence during the credit bubble and ineffective policy in the aftermath. Financial theory is a big problem. In particular, I accuse the risk-free rate of return of being the devil’s work.

Some aspects of the theory have already received a great deal of criticism, but the complaints are mostly quite technical. Beta, or market return, is too often dressed up as alpha, the extra return attributed to an investor’s skill (or luck) picking particular investments. And the distribution of daily returns is actually not mathematically normal, as much of the theory assumes. But I think the problem starts right at the beginning, with the assumption that there is a readily available, perfectly safe investment. The theory basically compares the range of likely returns on every other investment to the certain gain from the risk-free alternative. Additional returns are expected to compensate for additional risk.

UK’s economic woes are basically social

Edward Hadas
Aug 14, 2013 09:23 UTC

Four decades ago, everyone knew that the UK had a social problem. Class divisions stunted the development of a substantial, well-educated middle class, leaving the economy in a strangely Victorian state – divided between a gruff working class, which was prone to strikes and obstruction; and the incompetent elite, which seemed unable to adjust to the end of Empire.

Times have certainly changed. Britain is now prosperous and predominantly middle class. Union strangleholds have given way to flexible labour markets. The country is a magnet for global talent, drawn by a cosmopolitan culture, not to mention the use of the leading global language. High value-added international services are its speciality.

But something is still wrong. A country with so many advantages should be doing better. Think Switzerland – another country of social peace, high skills and a post-industrial economy. The Swiss run a hefty trade surplus. The country has a very low unemployment rate, low inflation and a fiscal surplus. The nation’s biggest monetary challenge is to keep the currency from rising.

Detroit, decay and solidarity

Edward Hadas
Jul 31, 2013 14:29 UTC

The bankruptcy of the city of Detroit has many causes, including poor management, industrial history and dysfunctional American sociology. I think there is also an ethical problem: too little cross-border solidarity.

I don’t want to downplay the other failures. A more competent city government would have addressed, rather than added to, the problems. The U.S. car industry proved a disastrously weak economic anchor. And without widespread racism, there would have been fewer ghettoised African-Americans.

Still, the economic and sociological poison has not been spread equally. On the contrary, it is concentrated inside the legal borders of the city of Detroit. The Detroit of common speech and common sense – the big blob on a national map, the urban area served by a single international airport – has suffered much less.

Get used to zombie economics

Edward Hadas
Jul 10, 2013 12:15 UTC

Zombies are neither really alive nor fully dead. Moviegoers know that, but the idea is also useful in demographics and economics. Although economic zombification receives little attention, its effects could be as important as monetary policy, fiscal deficits and structural reforms.

The demographic trends are well known. For the past three or four decades in most developed economies, the number of children born has been too low, often by a wide margin, to keep the population constant. Japan is the leader in this decline. Indeed, the zombification of the Japanese population could well be the most dramatic such shift in history, at least during a period of peace, prosperity and good health.

Of course, Tokyo and Osaka are not actually filled with walking, flesh-eating corpses. But as in a horror film, the nation’s life-force is waning. Over the last decade, the number of Japanese people aged between 20 and 25 years old has declined by 22 percent. Since there is almost no immigration, the demographic future is easy to predict: another 22 percent drop over the next 20 years.

  •