Tuesday, October 28, 2014

An Interview With Adair Turner On The New Economy That We Created

This link is to a post and a video interview in which Adair Turner describes the four broad changes that he sees in the economy.  It is referred to as "money manager capitalism".  The four broad changes in the economy are: growth in inequality, increase in wealth to income ratio, increase in debt to GDP ratio, and historically low interest rates.

Ben Bernanke argued that low interest rates are the result of a "savings glut".  Turner believes that there has been decline in investment demand which keeps interest rates low.  He uses Facebook as an example of the high tech industry that we have today which is very different from what we had in the past.  Facebook has a market capitalization of around $180 billion.  It required around 5,000 man years of software engineer labor to build its enterprise.  Henry Ford required a much larger capital investment to develop the Ford motor company.  (He also needed a very large workforce to manufacture his product).  The low demand for capital investment has enabled investors to borrow money at low interest rates to leverage their investment in financial products and in real estate. 

Turner also explains why real estate has returned as a major source of wealth.  In the past real estate derived its value from producing food, or as a source of natural resources.  We are experiencing a boom in commercial and residential real estate in places like London, NY, Vancouver, Paris etc.  That is because real estate is a positional good.  Wealthy individuals want to live in high prestige locations.  Moreover, the demand for property in high prestige areas is international.  There is a finite supply of high prestige locations and an infinite supply of money which is created when banks issue loans.  Much of the investment in real estate is used to generate rent income.  Rent income has been increasing as a percent of income in the US, England, France and Canada.  We are experiencing a return of the rentier society in which real estate is a major source of income and asset appreciation.

Turner was asked about the situation in Europe and he compared the EZ to Japan in the 1990's.  There is a huge private and public debt overhang and the politics of the EZ are much more complicated than that of Japan.  It has been difficult for Japan to deal with its debt overhang but it is much more difficult for the EZ to respond to its economic problems.  He sees immigration as one of the major political issues in Europe.  Immigrants want to find jobs and they compete with low skill labor for low wage jobs.  Much of the anti-EU sentiment comes from those who compete for jobs with immigrants.  The free movement of labor is one of the basic features of the EU and that is why there is so much populist opposition to the EU in England.

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