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What We Read Today 29 April 2015

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 (and sometimes longer ones) 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.

This feature is published every day late afternoon New York time. For early morning review of headlines see "The Early Bird" published every day in the early am at GEI News (membership not required for access to "The Early Bird".).


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Articles about events, conflicts and disease around the world




Greece natural population development now negative as deaths have started to exceed births.

— Edward Hugh (@Edward_hugh) April 29, 2015

Saudi Arabia

Saudi king resets succession to cope with turbulent times (Reuters)  Saudi King Salman appointed a nephew as new heir and made his young son second in line to rule on Wednesday, a major shift in power towards two princes who have overseen a more assertive stance at a time of almost unprecedented regional turmoil.



A 26-year-old MIT graduate is turning heads over his theory that income inequality is actually about housing (in 1 graph) (The Fernstein Wire, Medium)  Hat tips to Brad Lewis and Roger Erickson who sent some comments as I was drafting these notes. Wealthy tech founders and the automation of middle-class jobs are often blamed for increasing concentrations of wealth in fewer hands. But, a 26-year-old MIT graduate student, Matthew Rognlie, is making waves for an alternative theory of inequality: the problem is housing.  If this is born out by further research is makes the idea of taxing land seem like a good solution to mitigate income inequality.  Rognlie explains what Piketty missed in A note on Piketty and diminishing returns to capital.  Rising inequality can be entirely isolated to residential real estate which is a non-productive use of capital which has been inflating for almost a century.  The following graph from Rognlie's paper shows the dramatic rise in the ratio of housing capital to personal income over 40 years.  No other capital to income ratios show anything similar.

The one graph that The Fernstein Wire presents is from a Rognlie paper at Brookings: Deciphering the fall and rise in the net capital share.  This clearly shows that only housing capital increases have contributed to inequality over the past 60 years.  The implication of this graph is that labor share of income would have been rising faster than gains from capital until the 1970s and the two would have had nearly the same shares since if gains from housing capital had been unchanged throughout.

See the next article for corroborative evidence about the change in labor share of income since 1948.

A Reader’s Guide to Labor Share (Ben Gitis, American Action Forum)  Note in the graph below that labor share of income has fallen from around 65% of all income in 1947-48 to about 57% in 2011-13.  That is a decline of 8% in labor share of U.S. national income, nearly the same as the increase in share derived from capital invested in housing shown in the previous article ( about 7%).


Other Economics and Business Items of Note and Miscellanea

Taking a Strategic Approach to Currency Exposure (Morningstar Advisor)  No matter in which country they reside, investors shouldn't manage their currency exposure based on current conditions. Currency management demands the same sort of long-term thinking that applies to other strategic asset-allocation decisions.  But, that being said, the author admits what approach to use is not clear.  There are long periods of time when hedging has been protective and other long periods where it has produced increased losses.  With foreign bonds it is often beneficial to use currency hedges; with foreign equities hedges have historically reduced volatility but have costs in long-term returns.  The author suggests that hedging makes the most sense for developed economy currency exposures where the costs are lower and it makes sense to limit emerging economy investments to a proportion of the portfolio which can accomodate the inherent currency risks.

Catastrophe deals threaten reinsurance sector ‘collapse’ (Financial Times)  After a three-year study of the reinsurance sector, a team of business school academics has found that some companies are now packaging together catastrophe risks in a similar way to the carving up of subprime mortgages by big banks before the financial crisis.  Remember how mortgages that could never be repaid, in fact some that could never collect even a few months of payments, were packages uu and divided into tranches where 60% or more of them ended up with Triple-A credit ratings?  For a discussion of how this securitization process can get triple-A ratings for worthless debt and obligations see The Alchemy of Securitization from 2010.

Alibaba Has Secretly Invested In Amazon Challenger (Forbes)  Chinese e-commerce powerhouse Alibaba Group recently invested in, a soon-to-launch online retailer that hopes to challenge Amazon.  Other early investoors include Bain Capital Ventures,  Accel Partners and New Enterprise Associates, among others.

There is More to Life than Manufacturing (The Growth Economics Blog)  Hat tip to mark Thoma.  Dietz Volrath says that the services sector is where employment growth will occur going forward, even as manufacturing grows but uses fewer and fewer people.  Econintersect:  An important underlying question is how will society benefit from manufacturing growth with ever and ever higher productivity unless some of that increased income is distributed to consumers (who no longer work in manufacturing) to buy additional services?

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