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What We Read Today 29 May 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • Southeast Asia's Regression From Democracy and Its Implications (Joshua Kurlantzick, Council on Foreign Relations) As you travel east from India democracy actually has a pretty spotty record with only Indonesia and Philippines having a continuous record of uninterrupted democratically elected governments. Thailand, Malaysia, Singapore, Cambodia, and Myanmar have struggled.

  • Car-Hacking Goes Viral In London (William Pentland, Forbes) Nearly half of the 89,000 vehicles broken into in London in 2013 were entered using electronic gadgets. With more expensive vehicles having 50 or more low powered computers on board, access to any one of those by a hacker can allow access to others in the network including entry locks and the ignition system. The tools? Electronic devices originally developed for use by locksmiths and now available for purchase on the internet. Econintersect: Will electronic security end up costing more than the electronic devices themselves?
  • What Happens after Coal? (Jenifer Weeks, Daily Climate, Scientific American) When coal-fired power plants close communities can face painful transitions: jobs are lost, sites contaminated with ash, sludge, arsenic, lead, etc. and the tax base can be reduced.


Today there are 11 articles discussed 'behind the wall'.

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  • Housing Bubble 2 Already Collapsing For The 99% (Wolf Richter, Testosterone Pit) The priciest 1% of homes are seeing massive sales increases in many markets, while the lower 99% of home sales has shrunk in 25 of the top 29 markets. For the top 1% there have been increases of number of sales by 17% or more in 18 of the 29 markets; 24% or more in 15 markets; and 50% or more in 9 markets.

homes-sold-testos-ytd-2014-may-27

  • Europe’s Ukrainian Lifeline (George Soros, Project Syndicate) Finding a way to initiate a growth policy in Ukraine could start the entire EU on a path out of morass, according to Soros.
  • Is Wall Street Dangerously Adrift? (Bob Veres, Financial Planning) Veres says that the concern about HFT (high frequency trading) is really secondary tom a far more important problem. Has the financial system structure itself moved away from the "core values and purposes of our investment institutions"? Veres focuses on the role of regulation to assure that institutions adhere to there fundamental purposes. Econintersect suggests that he might well have pointed out that the fundamental purpose of an investment institution can not be only to maximize it's own profit per se, but to do so within the constraints of providing a systemic function with controlled systemic risk. When were the days that the customer came first? That was quite a while ago.
  • Parsing Piketty: Is Wealth Inequality Rising in the U.S.? (John Cassidy, The New Yorker) Chris Giles of the Financial Times has made a very penetrating criticism of Thomas Piketty's book Capital in the Twenty-First Century. Cassidy reviews the details and find a lot needs to be clarified, modified, corrected or defended by Piketty. But he also looks at the larger picture of conclusions and finds that if Piketty has drawn the wrong conclusions then most of the published research of the past 10-20 years is also wrong. In one discussion Cassidy suggests that concentrating on the data of the top 1% is hiding information that is more apparent for other cohorts: the top 10%, the top 5% and the top 0.1%, for example. Econintersect would paraphrase what Cassidy appears to be saying with an example of characterizing a piece of sandstone: It is easy to mischaracterize the block when examining only one grain of the incorporated sand. See the following two articles for background.

top-0.1-walth-us-1913-2013

[W]hen writing an article on the distribution of wealth in the UK, I noticed a serious discrepancy between the contemporary concentration of wealth described in Capital in the 21st Century and that reported in the official UK statistics. Professor Piketty cited a figure showing the top 10 per cent of British people held 71 per cent of total national wealth. The Office for National Statistics latest Wealth and Assets Survey put the figure at only 44 per cent.

This is a material difference and it prompted me to go back through Piketty's sources. I discovered that his estimates of wealth inequality - the centrepiece of Capital in the 21st Century - are undercut by a series of problems and errors. Some issues concern sourcing and definitional problems. Some numbers appear simply to be constructed out of thin air.

When I have tried to correct for these apparent errors, a rather different picture of wealth inequality appeared.

  • Piketty response to FT data concerns (Chris Giles, Financial Times) Repeated from 'behind the wall' last week. Piketty says "if the FT produces statistics and wealth rankings showing the opposite [of my conclusion], I would be very interested to see these statistics, and I would be happy to change my conclusion! Please keep me posted." The following is a worthwhile excerpt:

As I make clear in the book, in the on-line appendix, and in the many technical papers I have published on this topic, one needs to make a number of adjustments to the raw data sources so as to make them more homogenous over time and across countries. I have tried in the context of this book to make the most justified choices and arbitrages about data sources and adjustments. I have no doubt that my historical data series can be improved and will be improved in the future (this is why I put everything on line). In fact, the "World Top Incomes Database" (WTID) is set to become a "World Wealth and Income Database" in the coming years, and we will put on-line updated estimates covering more countries. But I would be very surprised if any of the substantive conclusion about the long run evolution of wealth distributions was much affected by these improvements.

For instance, my US series have already been extended and improved by an important new research paper by Emmanuel Saez (Berkeley) and Gabriel Zucman (LSE). This work was done after my book was written, so unfortunately I could not use it for my book. Saez and Zucman use much more systematic data than I used in my book, especially for the recent period. Also their series are constructed using a completely different data source and methodology (namely, the capitalisation method using capital income flows and income statements by asset class). The main results are available here: http://gabriel-zucman.eu/files/SaezZucman2014Slides.pdf.

As you can see by yourself, their results confirm and reinforce my own findings: the rise in top wealth shares in the US in recent decades has been even larger than what I show in my book.

In the attached graph, I compare their series with the approximate series that I provide in the book. As you can see by yourself, the general historical profiles are very similar. This is exactly what I expect as we collect more data in other countries as well: we will certainly improve upon my series and adjustments (some of which can certainly be discussed), but I don't think this will have much of an impact on the general findings.

(see also this paper pp. 91-92 of pdf: http://gabriel-zucman.eu/files/PikettyZucman2014HID.pdf)

Finally, let me say that my estimates on wealth concentration do not fully take into account offshore wealth, and are likely to err on the low side. I am certainly not trying to make the picture look darker than it it [sic].

piketty-vs-saez

  • Thomas Piketty Says He Was Ambushed (Leah McGrath, Newsweek) Hat tip to Nicholas Wapshott. This is a thorough discussion of the Giles (Financial Times) - Piketty debate over how data was treated in Capital in the Twenty-First Century. McGrath finds that there are not only questions about how Piketty handled data but also for the Giles treatment. For example, she reports that the UK government wealth data which Giles criticized Piketty for not using is actually characterized by the government Office of National Statistics as in an "experimental stage".
  • Bank of Japan, more confident about recovery, quietly eyes stimulus exit (Leika Kihara, Reuters) The 13-month monetary stimulus program of the BoJ (Bank of Japan) may soon be coming to an end. This article reveals that "former central bankers familiar with internal discussions" say that "informal debate" is underway to end the quantitative easing which has been a key [art of Prime Minister Shinzo Abe's program to end nearly two decades of deflation. With inflation above 1% are the central bankers ready to declare victory and go home? Haruhiko Kuroda, BoJ Governor has previously said that monetary expansion would continue until the 2% inflation target "was in sight"? Just how farsighted is the BoJ? See also next article.
  • Bank of Japan Seeks to End Stimulus, Currency Market in Disbelief (Mike Shedlock, MISH'S Global Economic Trend Analysis) Hat tip to John O'Donnell. Shedlock says that if the economy were strengthening then currency would be appreciating and bond yields would rise. Neither has happened in the last three months so he thinks the consensus about economic growth is wrong.

yen-mish-2014-may-28

  • The Impossibility of Growth Demands a New Economic System (George Monbiot, Common Dreams) Hat tip to Rob Carter. Monbiot argues that fossil fuels have created an abnormal period of human history. And as these energy sources are used up growth must not only stop but there must be a collapse as the maintenance of the status quo will no longer be achievable. He says that the economic collapse will be the salvation of humanity because the bottom will put us in a sustainable place. Econintersect: What is missing from Monbiot's thinking is the potential for solar energy (and other renewable energy sources). More energy falls on the surface of the earth in an hour than is used by the entire global population in a year. That is an energy ratio of 8,760:1. If just 1/10 of one percent of the solar energy were converted to power human activities, there would still be an excess of 8x current energy consumption by the planet. Add to that geothermal and wind power sources and the level at which power production would peak would probably be more than 10x current usage. And once reached the peak for those sources would be maintainable indefinitely. Collapse is not inevitable as Monbiot argues. But it can still happen because human society is not noted for its wisdom.
  • Fed Official: We're Sitting On A "Ticking Time Bomb" (Gary Halbert, Advisor Perspectives) Halbert is confused about why Fed Governor Charles Plosser thinks the excess reserves held by the Fed could "pour out of the Fed" and create inflation. Halbert also appears to be confused. Both Plosser and Halbert speak as if banks lend against reserves or deposits. That is entirely incorrect. Banks lend against assets and that process creates deposits and reserves. If the banks increase lending it will be because they find assets worth lending against, whether there are excess reserves at the Fed or not.

fed-excess-reserves


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