I will be disappearing for a couple of weeks to the beach where there is no internet access. Therefore here are some books that might be worthwhile reading over the festive season – reviews are from amazon.com. I will be back again on 10th January – have a great xmas and new year.
Eight years on from the biggest market meltdown since the Great Depression, the key lessons of the crisis of 2008 still remain unlearned—and our financial system is just as vulnerable as ever. Many of us know that our government failed to fix the banking system after the subprime mortgage crisis. But what few of us realize is how the misguided financial practices and philosophies that nearly toppled the global financial system have come to infiltrate ALL American businesses, putting us on a collision course for another cataclysmic meltdown.
The numbers are staggering: China spent $40 billion to host the 2008 Summer Olympic Games in Beijing and Russia spent $50 billion for the 2014 Sochi Winter Games. Brazil’s total expenditures are thought to have been as much as $20 billion for the World Cup this summer and Qatar, which will be the site of the 2022 World Cup, is estimating that it will spend $200 billion. How did we get here? And is it worth it? Both the Olympics and the World Cup are touted as major economic boons for the countries that host them, and the competition is fierce to win hosting rights. Developing countries especially see the events as a chance to stand in the world’s spotlight. This book is also reviewed here by Michael Cameron on his blog Sex, Drugs and Economics.
This is a scholarly book about global inequality, that is, ‘income inequality among citizens of the world’. It is, as Milanovic explains, ‘the sum of all national inequalities plus the sum of all gaps in mean incomes among countries’.
In his study, Milanovic focusses on the Kuznets hypothesis – that in industrialized countries, inequality will initially increase and then decrease, resulting in an inverted U-shaped curve. In recent times, inequality seems to be rising when all the factors indicate that it should have followed the Kuznets curve. Milanovic explains why the projected pattern did not materialise. One can point to ‘the hollowing of the middle class and the rising political importance of the rich’, but there are other factors. Milanovic explains the phenomenon through the historical data of the Kuznets curve in countries across the world.
This is a learned, but dry and technical treatise on a subject that seems to evade comprehension even by renowned economists and political scientists. That is not to say that Milanovic is a boring writer. This book will be appealing to economic and political science students, but the general reader may find Milanovic’s 2011 book, ‘The Haves and the Have-nots’ more interesting and palatable.
I recently read another piece from the New York Review of Books – a review by Thomas Piketty (‘Capital in the Twenty-first Century’ fame) of the new book ‘Inequality: What can be done?’ by Anthony Atkinson. He is innovative in his ideas and shows that alternatives still exist. He proposes the following:
- Universal family benefits by progressive taxation policies
- Guaranteed public sector jobs as a minimum wage for the unemployed
- Democratisation of access to property via an innovative national savings system with guaranteed returns for depositors
- Inheritance for all with a capital endowment at age18 financed by an estate tax
1908’s – UK and US income tax rate reductions
Atkinson does mention the reduction in income tax rates that were instigated by the Thatcher government. The top marginal rate was reduced to 40% – the rate was 83% when Thatcher’s conservative government first came to power in 1979. A conservative MP got quite excited by this and is reported to have said ‘he did not have enough zeroes on his calculator’ to measure the size of his tax cut that he helped to endorse. This break with a half-century of progressive tax policy in the UK was Thatcherism’s distinctive accomplishment. Across the Atlantic US President Ronald Reagan was also in a tax cutting mood and reduced the top marginal tax rate to 28%. Succeeding governments in the UK under Tony Blair (Labour) and in the US under Bill Clinton (Democrats) didn’t change the tax policy that was left by both the Conservatives and the Republicans respectively. This lowering of the top marginal income tax rates contributed to the increase in inequality since the 1980’s.
A more progressive tax rate
Atkinson proposes top rates of income tax in the UK of 55% for annual income above 100,000 and 65% for annual income above £200,000, as well as a hike in the cap on contributions to national insurance. This will allow for a significant expansion of the UK social security and income redistribution system – family benefits and unemployment benefits. According to Atkinson if these taxes were implemented the level of inequality would be reduced significantly.
New rights for those with fewest rights
Atkinson proposes include guaranteed minimum-wage public jobs for the unemployed, new rights for organized labour, public regulation of technological change, and democratisation of access to capital. Piketty alludes to two of Atkinson’s innovative suggestions:
- The establishment of a national savings program allowing each depositor to receive a guaranteed return on her capital. Given the drastic inequality of access to fair financial returns, particularly as a consequence of the scale of the investment with which one begins (a situation that has in all likelihood been aggravated by the financial deregulation of the last few decades), this proposal is particularly sound
- The establishment an “inheritance for all” program. This would take the form of a capital endowment assigned to each young citizen as he or she reached adulthood, at the age of eighteen. All such endowments would be financed by estate taxes and a more progressive tax structure. He calls for a far-reaching reform of the system of inheritance taxation, and especially for greater progressivity with regard to the larger estates. (He proposes an upper rate of 65 percent, as with the income tax.) These reforms would make it possible to finance a capital endowment on the order of £10,000 per young adult.
A Wealth Tax
He also proposes a progressive tax system on real estate and eventually on net wealth. Stamp duty, which is a tax on real estate transactions, would be implemented as follows:
- 0% tax if property worth less than 125,000
- 1% tax if property worth between £125,000 and £250,000
- 3% tax if property between £250,000 and £500,000
- 5% tax between one and two million pounds (a new rate introduced in 2011)
- 7% tax on properties worth more than two million pounds (introduced in 2012)
Many have called into question the financing of the British welfare state (especially the National Health Service) through taxes. This was seen as an unacceptable form of competition by those countries where the cost of the welfare state rested on employers. A substantial proportion of the British left at the time saw in Europe and its obsession with “pure and perfect” competition a force that was hostile to social justice and the politics of equality.
Below is a link to an interview with Shamubeel Eaqub on National Radio’s Sunday Morning programme. NZ Institute of Economic Research principal economist on the the country’s evolving rental market, the basis of his new book ‘Generation Rent – Rethinking New Zealand’s Priorities’.
House prices may boom or bust but the long-term trend is clear: for more New Zealanders than ever, home ownership is out of reach. Incomes simply have not kept pace with skyrocketing property prices.‘Generation Rent’ calls into question priorities at the heart of New Zealand’s identity.
In this BWB Text, Shamubeel and Selena Eaqub investigate how we ended up here, and what can be done to ensure all New Zealanders – home owners and renters alike – live in affordable and secure housing.
James Surowiecki (writer in the New Yorker) wrote a very informative review (in the New York Review of Books) of Michael Lewis’ book ‘Flash Boys’ about the rise of high-frequency trading (HFT) on Wall Street. As the name suggests, high-frequency traders buy and sell in large volumes and at an extraordinary fast pace, trading thousands of times a second. The decisions of the trader are driven by complex algorithms which are designed to follow a defined set of instructions in order to generate profits at a speed and frequency that is impossible for a human trader. The defined sets of rules are based on timing, price, quantity or any mathematical model.
It is estimated that 70% of trading in US stocks is done using. Lewis notes that:
By the summer of 2013, the world’s financial markets were designed to maximize the number of collisions between ordinary investors and high-frequency traders – at the expense of ordinary investors, and for the benefit of high-frequency traders, exchanges, Wall Street banks, and online brokerage firms.
Advocates of HFT will tell you that HFT provides liquidity and this means that the market has a lot of buyers and sellers which suggests that you can make trades without moving the price too much. A liquid market means that people will be more likely to invest. However there are those that worry about the liquidity of HFT as it could be illusory as it could disappear very quickly if stock prices collapse. Andrew Haldane of the Bank of England put it – the fear about this liquidity is that ‘in wartime, it disappears’. Furthermore, HFT has also produced huge swings in stock prices. On 6th May 2010 – know as the ‘Flash Crash of 2.45pm’ – the DJIA fell 9% in 5 minutes but then recovered most of that loss in the subsequent few minutes. But what is most worrying is that nobody can agree what happened because nobody had any control over it. It seems that we are writing things (algorithms) that we can no longer read. We should be worried about HFT as it reduces the amount of the quantity of real and valuable information in the stock market system. It make the system as a whole less stable and more risky. And it devotes an enormous amount of resources to an arms race that is of dubious value.
HFT and the real economy
A recent study of the commodity market found that up to 70% of all price movements in those markets didn’t correlate to events in the global economy. The price movements were driven by algorithms reacting to internal action in the market. This not only makes the market dumber but also a lot more unstable as humans find it impossible to oversee it – e.g Flash Crash of 2.45pm. If HFT traders add liquidity to the market then when the market crashed on 6th May they should have stepped in by buying falling prices of stocks. Turmoil in the markets is nothing new but the speed that it happens today makes trading harder to control raising systemic risk. Some companies will go to get great lengths to improve the speed of trades. In July 2010 a one-inch cable was completed to send a signal from Chicago to New Jersey at a cost of US$300 million. The improvements brought down the estimated roundtrip time of the signal from 13.1 milliseconds to 12.98 milliseconds. But when you are an algorithm 0.3 milliseconds is a long time. The billions of dollars that have been put into HFT over the last 6 years have only had a small impact on the ordinary investor. HFT looks like an arms race as it consumes an enormous amount of resource but generates very little social value and damages the market in the process.
I will be disappearing for a couple of weeks to the beach where there is no internet access. Therefore here are some books that might be worthwhile reading over the festive season – reviews are from Amazon.com. I will be back again on 5th Januray – have a great xmas and new year.
Flash Boys: A Wall Street Revolt
by Michael Lewis
Flash Boys is about a small group of Wall Street guys who figure out that the U.S. stock market has been rigged for the benefit of insiders and that, post–financial crisis, the markets have become not more free but less, and more controlled by the big Wall Street banks. Working at different firms, they come to this realization separately; but after they discover one another, the flash boys band together and set out to reform the financial markets. This they do by creating an exchange in which high-frequency trading—source of the most intractable problems—will have no advantage whatsoever.
GDP: A Brief but Affectionate History
by Diane Coyle
Why did the size of the U.S. economy increase by 3 percent on one day in mid-2013–or Ghana’s balloon by 60 percent overnight in 2010? Why did the U.K. financial industry show its fastest expansion ever at the end of 2008–just as the world’s financial system went into meltdown? And why was Greece’s chief statistician charged with treason in 2013 for apparently doing nothing more than trying to accurately report the size of his country’s economy? The answers to all these questions lie in the way we define and measure national economies around the world: Gross Domestic Product. This entertaining and informative book tells the story of GDP, making sense of a statistic that appears constantly in the news, business, and politics, and that seems to rule our lives–but that hardly anyone actually understands.
How to Speak Money: What the Money People Say–And What It Really Means
By John Lanchester
To those who don’t speak it, the language of money can seem impenetrable and its ideas too complex to grasp. In How to Speak Money, John Lanchester — author of the New York Times best-selling book on the financial crisis, I.O.U.—bridges the gap between the money people and the rest of us. With characteristic wit and candor, Lanchester reveals how the world of finance really works: from the terms and conditions of your personal checking account to the evasions of bankers appearing in front of Congress. As Lanchester writes, we need to understand what the money people are talking about so that those who speak the language don’t just write the rules for themselves.
Why Nudge?: The Politics of Libertarian Paternalism
by Cass R. Sunstein
Based on a series of pathbreaking lectures given at Yale University in 2012, this powerful, thought-provoking work by national best-selling author Cass R. Sunstein combines legal theory with behavioral economics to make a fresh argument about the legitimate scope of government, bearing on obesity, smoking, distracted driving, health care, food safety, and other highly volatile, high-profile public issues.
Will Self called John Lanchester’s previous book on money and banking – the bestselling ‘Whoops!’ – as ‘the routemap to the crazed world of contemporary finance we’ve all been waiting for’. If ‘Whoops!’ was the routemap, then his new book ‘How to Speak Money’ is the phrasebook. It shows you that it’s possible to learn to speak the language of money. Possible, desirable and perhaps even necessary if we’re to avoid feelings of complete helplessness and bafflement when confronted with the big financial forces that shape our lives.
Just attending the New Zealand Association of Economists 55th Annual Conference and it was great to hear Diane Coyle present as one of the Keynote speakers. I was originally alerted to her work by Geoff Riley – an economics teacher at Eton College and co-founder of the Tutor2u website – while I was on a Fellowship. He recommended her book ‘The Soulful Science’ back in 2007. The book aims to show how the discipline of economics has changed over the last decade and brings together economic growth and human behaviour.
Her talk was based on the research into her new book GDP: A Brief but Affectionate History. She goes right back to the Domesday Book which was a manuscript record of how much each landholder in England and Wales had in land and livestock, and what it was worth. This was completed in 1086 on orders of William the Conqueror. Further mentions of Adam Smith and Karl Marx and what they tended to focus on as an economic indicator. Interesting to note that Holland has included prostitution in its GDP calculations and that the Italian statistical body recently announced that it will include prostitution, drug trafficking, and alcohol-and-tobacco in its calculation of GDP. However Italy is just complying with international accounting standards and reporting illegal economically productive activity is required under European Union rules. But as it is part of the informal economy how do you actually measure drug deals, prostitution etc and therefore its contribution to a country’s GDP?
There is also the intangible economy – how do you measure the output of Vodafone v Skype? Also how are sustainability, variety and innovation measured? If her talk was anything to go by her book seems well worth it.