Why people prefer unequal societies

Some readers might be interested in this post/article just published in Nature – Human Behaviour. The title is “Why People Prefer Unequal Societies” (a slightly misleading title), and the main findings are:

Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality.

 

Figure 1: Income inequality in Europe and the United States, 1900–2010.

Income shares

 
Figure 2: The actual US wealth distribution plotted against the estimated and ideal distributions across all respondents:

Ideal and actual distirbution

 

Figure 3: Percentage of children earning more than their parents, by birth year.

Parental earnings

Radical economics, rethought, an episode from Financial Times on Spotify

Some readers might be interested in this podcast with FT writer Martin Sandbu and Cardiff Garcia. They discuss economic ideas that would have been considered unthinkably radical a few years ago, but which are now generating serious discussion. Well worth a listen!

https://open.spotify.com/episode/09DY5Q3AwBtk9ZwKnBupmP

 

Central Bank – Revisiting the 26% Growth Debate

Readers might be interested in the first quarterly central bank bulletin of 2017.

Unsurprisingly (and importantly) the bulletin focuses on the downside risks to the economy associated with Brexit, which are well worth reading.

But something else caught my attention whilst reading the piece. They briefly return to the 26% growth rate and conclude:

the large and increasing share of intangible assets, mainly held by multinational firms, and the assets of Irish based aircraft leasing firms can use headline investment figures to diverge from underlying investment trends.

This would imply, officially at least, that the role played by contract manufacturing, intangible assets and aircraft leasing are recognised as the core determinants behind the 26% growth rate, and leprechaun economics?

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Launch of World Wealth and Income Database

Readers might be interested in the new World Wealth and Income Database, which was just launched at the American Economic Association (AEA) annual meeting in Chicago.

It is coordinated by a small core team located at the World Inequality Lab at the Paris School of Economics.

The presentation slides from the AEA are available here and the corresponding explanatory paper is visible here.

The database aims to offer open access to the most extensive available database on the historical evolution of the global distribution of income and wealth, both within and between countries.

From an Irish perspective, what’s most notable is the paucity of data on the distribution of income and wealth, something that Patrick Honohon commented upon as governor of the central bank in 2014.

However, there does seem to be updated data (most likely from Brian Nolan), on the top 1% income share from 1938-2009.

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Celtic Phoenix or Leprechaun Economics?

Readers might be interested in this UCD Geary working paper, which was featured in the Sunday Business Post yesterday. The title of the paper is “Celtic Phoenix or Leprechaun Economics: the Political Economy of an FDI-led Growth Model in Europe”.

Our core argument is that Ireland’s post-crisis economic recovery was driven by foreign direct investment (FDI) from Silicon Valley, and whilst this growth model was made possible by Ireland’s low corporate tax rates, it was also a result of inward migration, with these firms using Ireland to directly access the European labour market.

We also demonstrate that Irish fiscal and wage policies have not redistributed gains from the FDI recovery to the broader population. As a result, the economic recovery has been most actively felt by those in the FDI sectors, including foreign-national workers from the EU and beyond.

We suggest that this experience indicates that Ireland’s FDI-led growth model has created clear winners and losers. The FDI growth regime been made possible by inward migration and European integration, but given the unequal distribution of the economic benefits that this generates, it is unlikely to be politically, or electorally, sustainable.

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Trade Surpluses and German Economic Nationalism

Sone readers might be interested in this excellent blog post by Thomas Piketty on the alleged asymmetry between Germany and France.

The core takeaway is that both countries have similar levels of productivity – measured in terms of GDP per hour worked.

The difference between Germany and France is that they use their high-levels of productivity in very different ways. France consumes and invests what it produces. Germany sells it abroad.

The excessive and persistent trade surpluses in Germany (outside small oil producing states and tax havens) “are unprecedented in economic history”. Europe has a German problem.

Labour productivity (GDP per hour worked) 1970-2015

Domestic consumption and investment in % of GDP (1970-2015)

 

The Political Economy of Brexit; London Will Adapt.

Everyone is trying to second guess the negotiating strategy of Theresa May, and how the EU will respond. No country should be more concerned about this than Ireland, the only EU country to share a border with the UK. Next week, the Irish government will host an all Ireland civic dialogue.  Political economy considerations have never been more important.

In hindsight Brexit might be conceived as a long-term inevitability, which can be traced back to the structural fault-lines of EU enlargement, and the free movement of peoples into Europe’s largest ‘open’ labour market. Helen Thompson, a professor at Cambridge has suggested as such:

  1. The euro crisis politicized the city of London, which became the default offshore finance centre for euro clearing.
  2. EU enlargement, and then the euro crisis, turned Britain into Europe’s employer of last resort, turning it into an offshore labour market.
  3. This spurred and politicised a latent immigration concern within large swathes of public opinion, and the electorate.
  4. Very quickly, the euro crisis, and the response to it, not least the Fiscal Compact Treaty, exposed the future of Europe as a two tier Union: between the Euro area, and the rest of the EU.
  5. The balance of power (i.e. the rise of Germany) changed and weakened Britain, who were increasingly “outside” the EU process, despite being the employer of last resort for the euro area.

In terms of the political economy of Brexit, the biggest risks don’t really pertain to the city of London (who’s core priority will be to allow some sort of system for the free movement of workers within their sector). The city’s strengths, paradoxically, make it a source of weakness. The Conservative government are confident London’s financial service based economy will adapt. This is much less the case with medium-tech trade and manufacturing (think Nissan and car manufacturing).

For all sectors of Britain’s political economy, a Norway style deal is probably preferable (European Economic Area). Theresa May, and political elites, are not likely to push for this, as it implies complete free movement, and won’t wash electorally. However, Theresa May will want access to tariff free trade, primarily to ensure that the North of England is not badly effected, and that firms such as Nissan in Sunderland don’t pull out and move to Spain. Manufacturing has more to lose than Finance.

This implies that Theresa May will push for a customs union – tariff free – allowing imports for British based manufacturing supply chains. The question then is whether it is a customs union for everything? Theresa May could opt out of agriculture, and then use this as a bargaining card in negotiating other international trade deals, outside the EU.

The question of free movement will be determined by how Teresa May considers Ireland. If she gives priority to maintaining free movement within Ireland (north and south), which I think she will, then this implies there will be no visa controls at the British borders. Hence, it is probable that Theresa May will aim to get a series of sectoral deals – and allow for the free movement of people within sectors, particularly ICT and Finance. This is what ultimately matters for the city of London.

Those most affected within the City of London will be legal services. British lawyers, who predominately rent off the finance sector, will no longer have a hearing on mergers and acquisitions within EU law. But I can’t see Theresa May negotiating a strategy to ensure British lawyers have access to EU courts. What she will want to ensure, on behalf of business and finance elites, is that the city remains a magnet for high-skilled talent. This could be achieved with sectoral deals.

Britain’s main bargaining card is that their consumption-oriented economy, and open labour market, in addition to a high-tech cluster in London, has carried the employment burden of the Eurozone’s labour market woes, in addition to absorbing so much labour from central and eastern Europe. Germany has done little, if anything, to increase domestic demand, to compensate this. So it’s worth asking, absent the liberal-oriented British economy, where will unemployed EU workers go?