28/10/17: Income Inequality: Millennials vs Baby Boomers

OECD's recent report, "Preventing Ageing Unequally", has a wealth of data and analysis relating to old-age poverty and demographic dynamics in terms of poverty evolution. One striking chart from the report shows changes in income inequality across two key demographic cohorts: the Baby Boomers (born at the start of the second half of the 20th Century) and the Millennials (born in the last two decades of the 20th Century):

Source: http://www.oecd.org/employment/preventing-ageing-unequally-9789264279087-en.htm.

The differences between two generations, controlling for age, are striking. In my opinion, the dramatic increase in income inequality across two generations in the majority of OECD economies (caveats to Ireland and Greece dynamics, and a major outliers of Switzerland, France and the Netherlands aside) is one of the core drivers for changing perceptions of the legitimacy of the democratic ethics and values when it comes to public perceptions of democracy. 

You can read more on the latter set of issues in our recent paper, here: http://trueeconomics.blogspot.com/2017/09/7917-millennials-support-for-liberal.html.

The dynamics of income inequality for the Millennials do not appear to relate to unemployment, but rather to the job markets outcomes (which seemingly are becoming more polarized between high quality jobs/careers and low quality ones):

In other words, where as in the 1950s it was sufficient to have a job to gain a place on a social progression ladder, today younger workers need to have the job (at Google, or Goldman Sachs, or other 'star' employers) to achieve the same.

Thus, as low unemployment swept across the advanced economies in the post-Global Financial Crisis recovery, there has not been a symmetric amelioration of the youth poverty rates in a number of countries:

In 25 OECD countries out of 35, poverty rates for those aged 18-25 are today higher than for those of age 65-75. Across the OECD, statistically, poverty rates for the 18-25 year olds cohort are on par with those for of 76+ year olds cohort, and both are above 12 percent. 

There is a lot that is still missing in the above comparatives. For example, the above numbers do not adjust for differences between different age groups in terms of quality of health and education. Younger workers are also healthier, as a cohort, than older population groups. This means that their incomes should be expected to be higher than older workers, simply by virtue of better health.  Younger workers are also better educated than their older counterparts, especially if we consider the same age cohorts for current Millennials and the Baby Boomers. Which also implies that their incomes should be higher and their income inequality should be lower than that for the Baby Boomers.

In other words, simple comparatives under-estimate the extent of income inequality and poverty incidence and depth for the Millennials by excluding adjustments for health and education differences.

22/10/17: Italian North: another chip off Europe's Nirvana

Having just written about the Czech electoral pivot toward populism last night, today brings yet another  news headline from the politically-hit Europe.

In a non-binding referendums in two wealthiest Italian regions, Veneto and Lombardia, the voters have given local governments strong mandates to push for greater autonomy from Rome and the Federal Government. Both regions are dominated by the politics of Lega Nord, a conservative, autonomy-minded party with legacy of euro scepticism, strong anti-immigration sentiment and the past promotion of outright independence for the Northern Italy.

In both referendums, turnout was relatively strong by Italian standards (58% projected for Veneto and over 40% for Lombardia). And in both, exit polls suggest that some 95% of voters have opted for stronger regional autonomy.

The referendums were not about outright independence, but about wrestling more controls over fiscal and financial resources from Rome. Both regions are net contributors to the Italian State and are full of long run resentment over the alleged waste of these resources. Both regions want more money to stay local.

In reality, however, the vote is about a combination of factors, namely the EU policies toward Italy, the monetary conditions in the euro area, the long-term stagnation of the Italian economy and the centuries-old failure of Italian Federal State to reform the economy and the society of the Southern Italian regions. Italy today is saddled with stagnation, huge youth unemployment, lack of business dynamism, weak entrepreneurship, dysfunctional financial institutions, high taxes, failing and extremely heterogenous public services, collapsed demographics and centuries-old divisions. Some of these problems are european in nature. But majority are Italian.

Greater autonomy for wealthier regions, in my view, is a part of the solution to the long running problems, because it will create a set of new, stronger incentives for the Southern regions to reform. But in the end, it is hard to imagine the state like Italy sustaining its membership in the euro area without an outright federalization of the EU.

In the nutshell, within a span of few weeks, the dormant political volcano of the Europe has gone from stone cold to erupting. Spain, Austria, Czech, & Italy are in flames. Late-stage lava flows have been pouring across Poland, Hungary and the UK, Slovakia and parts of the Baltics for months and years. Tremors in Belgium, the Netherlands, Germany, (especially Eastern Germany) and Finland, as well as occasional flares of populist/extremist activity in other parts of the Paradise are ongoing. And, it is only a matter of time before populism resurges in France.

All of this with a background of stronger economic growth and booming markets. So wait till the next crisis/recession/market correction hits...

21/10/17: Prague Pages Brussels... Following Vienna

Just after Austria, the Czech Republic too has swung decisively in the direction of embracing populism as Populist billionaire's Eurosceptic party wins big in Czech Republic.

As Radio Praha describes it: "The Czech Donald Trump or Silvio Berlusconi, maverick millionaire, political populist, mould breaker; these are all labels that have been tagged on to ANO leader Andrej Babiš".

Jakub Patocka for the Guardian: "Open racism has become a normal part of public discourse. Trust in democratic institutions and the European Union has been crumbling before our eyes. It is shocking how easily and quickly this has happened. Many Czechs are going to the polls with grim fears for the future. A broad coalition of democratic parties is not likely to have enough votes to control parliament. Apart from the far right, communists and a peculiar Czech version of the Pirate party are expected to do well."

The headlines from Prague are sounding more like something the 'Kremlin-backed' news outlets would produce. Except, they are printed by the mainstream international media this time around.

But things are much worse than Babis and ANO victory and 29.8 percent of the vote implies. Four out of top five parties by voting results are now parties with populist leanings, far removed from the traditional Czech elites. The mainstream opposition conservative party, the Civic Democrats, are now a distant second with only 11.2 percent of the vote. Czech Republic's "most radical anti-migration, anti-Islam and anti-EU party, Freedom and Direct Democracy", came in the third place with 10.8 percent of the vote, statistically indistinguishable from the Civic Democrats. Another populist party - the Pirate party - is on 10.6 percent with a Parliamentary representation for the first time in its history. And the Communists got 7.9 percent. In simple terms, more than 59 percent of the voters have gone either extreme Left or extreme Right of the Centre, and backed populist politics.

Credit: Petr David Josek/Associated Press

In a recent paper, we explain how the trends amongst younger voters around the world are shifting away from support for liberal democratic values. These shifts are now starting to translate into votes.
Corbet, Shaen and Gurdgiev, Constantin, Millennials’ Support for Liberal Democracy Is Failing: A Deep Uncertainty Perspective (August 7, 2017): https://ssrn.com/abstract=3033949

15/10/17: Calling Brussels from Austria: Change Is Badly Needed in Europe

Austria just became a *new* flashpoint of European politics that can be best described as a slow steady slide into reappraisal of the decades-long love affair with liberalism.

In summary: the People's Party (OVP) has 31.4 percent of the vote, a gain of more than 7 percentage points from the 2013 election; the Freedom Party had 27.4 percent (a jump on 20.51 percent in 2013), and the Social Democratic Party, which governed in coalition with People's Party until today, had 26.7 percent (virtually unchanged on 26.82 percent in 2013).

The People's Party is best described as Centre-Right with a leaning Right when it comes to issues of immigration. Current Foreign Minister Sebastian Kurz, the leader of the People's Party is a charismatic 31-year old populist. He has driven his party further toward the Right position in recent months, as elections neared, and away from his post-2013 governing coalition partners, the Social Democrats. Kurz is, broadly-speaking a pro-EU candidate, with strong preference for more autonomy to member states. He is clearly not a Brussels-style Federalist.

The Freedom Party (FPO) was close to its record vote of 26.9 percent, achieved back in 1999, and now has a good chance of entering the government as a coalition partner to People's Party, for the first time in some 10 years. The FPO was in Government last in 2000-2007 and prior to that in 1983-1987.  It's last stint in Government earned Austria condemnation from the EU. Following the previous coalition, the OVP and the Social Democrats are not exactly best friends, which means that FPO is now in the position of playing a king-maker to the Government. That said, the coalition between OVP and FPO is still an uncertain: FPO leader Heinz-Christian Strache has accused Kurz and OVP of stealing his party's ideas during the election.

All in, almost 60 percent of Austrian voters opted to support anti-immigrant, Right-of-Centre positions. However, in recent years, Austrian Right has shifted away from anti-EU positioning, at least in public, and attempted to shed neo-Nazi tint to its support base.

Turnout in this election was impressive 79.3 percent, up on the 74.9 percent turnout last time around.

All in, Austrian election 2017 confirms the points established in our recent paper Corbet, Shaen and Gurdgiev, Constantin, Millennials’ Support for Liberal Democracy Is Failing: A Deep Uncertainty Perspective (August 7, 2017). Available for free at SSRN: https://ssrn.com/abstract=3033949. Together with Brexit, renewed uncertainty around Italian political shifts, Catalan Referendum, resilience of the Dutch euroscepticism, instability in core political strata in Germany, Polish and Hungarian populism, and so on - the developing trend across the EU is for a political / voter support drifting further to the extremes (Left and Right) of the ideological divide. In countries where this drift is coincident with rising power of populism, the results are starting to look more and more like validation of the far-Right (and with some time, the far-Left) as the leaders of the official opposition to the increasingly hollowed-out status quo parties.

26/7/17: Panic... Not... Yet: U.S. Student Debt is Cancerous

Reuters came up with a series of data visualisations and brief analytics pieces on the issue of student loans in the U.S. These are ‘must read’ materials for anyone concerned with both the issues of debt overhang (impact of real economic debt, defined as household, non-financial corporate and government debts, on economic activity), demographic and socio-political trends (e.g. see my analysis linking - in part - debt overhang to current de-democratization trends in the Western electorates https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2993535), as well as issues of social equity.

The first piece presents a set student loans debt crisis charts and data summaries: http://fingfx.thomsonreuters.com/gfx/rngs/USA-STUDENTLOANS-MORTGAGES/0100504C09N/index.html. Key takeaway here is that although the size of the student loans debt market is about 1/10th of the pre-GFC mortgages debt overhang, the default rates on student loans are currently well above the GFC peak default rates for mortgages:

The impact - from economic point of view includes decline in home ownership amongst the younger demographic.

But, less noted, the impact of student debt overhang also includes behavioural and longer-term cross-generational implications:

1. Younger cohorts of workers are saddled with higher starting debt positions that cannot be resolved via insolvency/bankruptcy, which makes student loans more disruptive to the future life cycle incomes, savings and investments of the households;
2. Behaviourally, early-stage debt overhang is likely to alter substantially life cycle investment and consumption patterns, just as early age unemployment and longer-term unemployment do with future career outcomes and choices;
3. Generational transmission of wealth is also likely to suffer from the student debt overhang: as older generations trade down in the property markets, the values of their properties are likely to be lower than expected due to younger generation of buyers having lower borrowing and funding capacity to purchase retiring generations' homes;
4. The direct nature of student loans collections (capture of wages and social security benefits for borrowers and co-signers on the loans) implies unprecedented degree of contagion from debt overhang to household financial positions, with politically and socially unknown impact; and
5. The nature of interest rate penalties, combined with severe lack of regulation of the market and a direct tie in between Federally-guaranteed student loans and the fiscal authorities implies higher degree of uncertainty about the cost of future debt service for households.

On the two latter matters, another posting by Reuters worth reading: https://www.reuters.com/investigates/special-report/usa-studentloans/.  Student loans debt is now turning the U.S. into an expropriating state, with the Government-sanctioned coercive, and socially and economically disruptive capture of household incomes.

One thing neither article mentions is that student loans are a form of investment - investment in human capital. And as all forms of investment, these loans are set against the expected future returns. These returns, in the case of student loans, are generated by increases in life cycle labor income - wages and other associated forms of income - which is, currently, on a downward trend. In other words, just as cost of student loans rises and uncertainty about the future costs of legacy loans is rising too, returns on student loans are falling, and the coercive power of lenders to claim recovery of the loans is beyond any other form of debt.

We are in a crisis territory, even if from traditional systemic risk metrics point of view, the market for student loans might be smaller.

27/11/15: The Welfare State Going Broke, and You Know It...

Bruegel’s  Pa Huttl and Guntram Wolff have recently posted on Capx.co results of their study, under a handy title “Lack of confidence in the welfare state in the year 2050” (link here).

One chart sums up key evidence:

Thus, across eight European countries,

• Majority of those polled felt that by 2050 public welfare systems will provide inadequate supports for pensions (59.5% of those polled) and for the unemployed (52.4%). 
• Roughly half of those polled thought that care for the elderly (49.5%) will be inadequately supplied by the public welfare systems, and 
• Over 45% thought that healthcare supply will fall short of their expected standards (45.4%). 

Darn scary numbers these are, even though, in my opinion, these are still too optimistic. The levels of implied state debt relating to what we call 'unfunded obligations' - contractually specified future commitments across pensions and healthcare benefits (excluding statutory, but non-contractual obligations) implies much lower probabilities of the modern welfare states being able to sustain current levels of funding.

Good example is the U.S. where current official debt stands at around USD18.5 trillion, whilst unfunded civilian and military pensions, plus Social Security and Medicare, inclusive of other contractually set Federal commitments and contingencies add another USD46-47 trillion to that (you can read more on this here)

11/7/15: Harder Default for Greece, Less Democracy for All

My article on the Greek crisis for Irish Independent: impossible mathematics of debt and the political trilemma of sacrificed democracies: http://www.independent.ie/opinion/comment/expect-a-harder-default-for-greeks-and-less-democracy-for-the-rest-of-us-31368677.html

8/3/2014: Democracy and Inequality: A Link of Surprising Direction?

Everything written or co-authored by Daron Acemoglu is worth reading. Everything. And here is an example why. The man does not shy away from big questions in life.

"DEMOCRACY, REDISTRIBUTION AND INEQUALITY" by Daron Acemoglu, Suresh Naidu, Pascual Restrepo and James A. Robinson (Working Paper 13-24, Massachusetts Institute of Technology, Department of Economics, October 30, 2013: http://ssrn.com/abstract=2367088) looks into the relationship between democracy, redistribution and inequality.

"We first explain the theoretical reasons why democracy is expected to increase redistribution and reduce inequality, and why this expectation may fail to be realized when democracy

• is captured by the richer segments of the population; when it caters to the preferences of the middle class; or 
• it opens up disequalizing opportunities to segments of the population previously excluded from such activities, thus exacerbating inequality among a large part of the population."

From theoretical reasons for differences in inequality and redistribution, the paper moves to empirical. The authors "survey the existing empirical literature, which is both voluminous and full of contradictory results. We provide new and systematic reduced-form evidence on the dynamic impact of democracy on various outcomes."

Core empirical findings are:

1. "…there is a significant and robust effect of democracy on tax revenues as a fraction of GDP, but no robust impact on inequality." So while democracy increases taxes, it does not reduce inequality. why? Because "policy outcomes and inequality depend not just on the de jure but also the de facto distribution of power", so "those who see their de jure power eroded by democratization may sufficiently increase their investments in de facto power (e.g., via control of local law enforcement, mobilization of non-state armed actors, lobbying, and other means of capturing the party system) in order to continue to control the political process". Furthermore, "democratization can result in “Inequality-Increasing Market Opportunities”. Nondemocracy may exclude a large fraction of the population from productive occupations (e.g., skilled occupations) and entrepreneurship (including lucrative contracts) as in Apartheid South Africa or the former Soviet block countries. To the extent that there is significant heterogeneity within this population, the freedom to take part in economic activities on a more level playing field with the previous elite may actually increase inequality within the excluded or repressed group and consequently the entire society".
2. "…we find a positive effect of democracy on secondary school enrollment and the extent of structural transformation (e.g., an impact on the nonagricultural share of employment and the nonagricultural share of output)".
3. Very interestingly, "The evidence …points to an inequality-increasing impact of democracy in societies with a high degree of land inequality, which we interpret as evidence of (partial) capture of democratic decision making by landed elites."
4. "We also find that inequality increases following a democratization in relatively nonagricultural societies, and also when the extent of disequalizing economic activities is greater in the global economy as measured by U.S. top income shares (though this effect is less robust)."
5. "We also find that democracy tends to increase inequality and taxation when the middle class are relatively richer compared to the rich and poor. These correlations are consistent with Director’s Law, which suggests that democracy allows the middle class to redistribute from both the rich and the poor to itself."

"All of these are broadly consistent with a view that is different from the traditional median voter model of democratic redistribution: democracy does not lead to a uniform decline in post-tax inequality, but can result in changes in fiscal redistribution and economic structure that have ambiguous effects on inequality."

15/1/2014: Simple, but entertaining... a democratic elites 'score card'

Recently, I cam across the following highly simplified, but rather amusing graphic highlighting some differences between the US and Italy

It is, as I noted, a highly stylised and simplified sort of information. Nonetheless, it does make a valid point: why are European democracies top-heavier than other democracies?

And then I checked Ireland:

• Population 4.589 million (2012)
• Senators: 60 (76,483 persons per senator)
• Dail Eireann: 166 TDs (27,645 persons per TD)
• Ministers: 14 Ministers and 15 Ministers of State (158,241 persons per Minister)

Just for your bemusement, not for some scientific or even economic argument sake...

Note: Auto Blu references state cars and Carburante references cost of petrol per litre.