Treating houses as a financial instrument leads to an undiversified investment portfolio, with a large proportion of wealth concentrated in a single asset
Satyajit Das in The Independent
According to English writer Virginia Woolf, a woman in Victorian England needed money and a room of her own in order to write. In the modern world, housing itself has become a work of fiction.
A house provides shelter and a dwelling place. But increasingly this simple consumption good has been converted into a financial asset or investment as well as instrument of policy.
Governments subsidise home ownership in different ways. They may provide tax benefits such as tax deductions for mortgage-interest payments or lower taxes on capital gains from the sale of a residence. Common concessions include lower property taxes or stamp duty of property transfers as well as direct assistance for the purchase of homes. It also includes housing finance on preferential terms.
The subsidies mean that where they can, people buy multiple homes. The affluent own holiday homes which stay empty for much of the year, while less well-off are made to make do with sub-standard accommodation or, in the case of the poor, no homes at all.
Houses become larger. Virginia Woolf would have recognised these MacMansions: “Those comfortably padded lunatic asylums which are known, euphemistically, as the stately homes of England.”
Over-investment in housing is economically inefficient. Unlike businesses, houses once constructed generate limited income, profits, employment or investment.
Excessive housing investment also creates an inflexible labour force, reducing the mobility of workers. The ability to follow employment opportunities is restricted by fluctuations in house prices, the lack of liquidity of the housing market and high transaction costs (buying and selling can cost 5-10 per cent of the value of the house). It also limits wage flexibility, as workers are constrained by their mortgage commitments.
The replacement of company or government-funded retirement with self-funded arrangements means that houses have become a means for wealth creation. As homeowners pay off their mortgages, their home becomes a major financial asset. But residential property produces no income even where they increase in value. Maintenance costs, utility bills and property taxes mean that houses require rather than provide cash.
Homeowners must generate income by borrowing against their home to finance consumption and eventually finance retirement. The strategy requires realising the home equity (the difference between the value of the house and the mortgage debt outstanding) by either borrowing or selling the property, moving into a smaller house or a rental.
Treating houses as a financial instrument leads to an undiversified investment portfolio, with a large proportion of wealth concentrated in a single asset – the home, which does not produce income.
Investors also buy houses and apartments with borrowed money to rent out. The income from property is rarely higher than that on other income-producing investments. Where borrowed money is used, the rent may not fully cover interest and other outgoings. There is speculative reliance on ever-increasing property prices to boost returns or repay the debt used to finance the property leaving a profit for the buyer.
Reliance on houses creates exposure to volatile house prices. As the global financial crisis illustrated, prices can be affected by a confluence of adverse events – economic cycles, the availability of credit and demographics where large cohorts may retire at the same time. Price fluctuations are exacerbated by the illiquidity of the asset.
Many economies now rely excessively on the housing market. Housing investment sustains economic growth. Unlike many industries, it is largely domestic, driving employment, income and economic activity. In The Age of Turbulence, Alan Greenspan approvingly quotes economics columnist Robert Samuelson’s assessment of his policies in the early 2000s: “The housing boom saved the economy… Americans went on a real estate orgy. [Americans] traded up, tore down and added on.”
Governments continue to promote housing and home ownership using rising wealth from home ownership to mask lack of growth or declines in real income levels and uncertain employment for the population. But the policy is paradoxical.
Current policy, lower interest rates and increased availability of housing finance, boosts the price of existing housing stock rather than increasing housing construction. If it succeeds, then higher house prices ironically make housing unaffordable for large portions of the population.
Where the policy fails, an unwinding housing bubble is difficult to manage, as evidenced by events in the US, Ireland and Spain.
Economic activity slows as individuals and investors suffer large falls in wealth. Governments suffer revenue losses from lower property taxes. At the same time, government expenditures may rise as savers are forced to turn to available social services due to falling income and wealth.
Banks can find their solvency affected quickly by a fall in houses prices because of their high exposure to mortgage loans or property as security, requiring government support.
A considered debate about housing is needed to improve the structure of economies. It may also have an unexpected collateral benefit, improving TV entertainment beyond shows about the property or housing ladders and lift the standard of dinner table conversation above the level of: “Do you know how much they got for the house down the street?”
Monday, 14 November 2016
Neoliberalism: the deep story that lies beneath Donald Trump’s triumph
George Monbiot in The Guardian
The events that led to Donald Trump’s election started in England in 1975. At a meeting a few months after Margaret Thatcher became leader of the Conservative party, one of her colleagues, or so the story goes, was explaining what he saw as the core beliefs of conservatism. She snapped open her handbag, pulled out a dog-eared book, and slammed it on the table. “This is what we believe,” she said. A political revolution that would sweep the world had begun.
The book was The Constitution of Liberty by Frederick Hayek. Its publication, in 1960, marked the transition from an honest, if extreme, philosophy to an outright racket. The philosophy was called neoliberalism. It saw competition as the defining characteristic of human relations. The market would discover a natural hierarchy of winners and losers, creating a more efficient system than could ever be devised through planning or by design. Anything that impeded this process, such as significant tax, regulation, trade union activity or state provision, was counter-productive. Unrestricted entrepreneurs would create the wealth that would trickle down to everyone.
This, at any rate, is how it was originally conceived. But by the time Hayek came to write The Constitution of Liberty, the network of lobbyists and thinkers he had founded was being lavishly funded by multimillionaires who saw the doctrine as a means of defending themselves against democracy. Not every aspect of the neoliberal programme advanced their interests. Hayek, it seems, set out to close the gap.
He begins the book by advancing the narrowest possible conception of liberty: an absence of coercion. He rejects such notions as political freedom, universal rights, human equality and the distribution of wealth, all of which, by restricting the behaviour of the wealthy and powerful, intrude on the absolute freedom from coercion he demands.
Democracy, by contrast, “is not an ultimate or absolute value”. In fact, liberty depends on preventing the majority from exercising choice over the direction that politics and society might take.
He justifies this position by creating a heroic narrative of extreme wealth. He conflates the economic elite, spending their money in new ways, with philosophical and scientific pioneers. Just as the political philosopher should be free to think the unthinkable, so the very rich should be free to do the undoable, without constraint by public interest or public opinion.
The ultra rich are “scouts”, “experimenting with new styles of living”, who blaze the trails that the rest of society will follow. The progress of society depends on the liberty of these “independents” to gain as much money as they want and spend it how they wish. All that is good and useful, therefore, arises from inequality. There should be no connection between merit and reward, no distinction made between earned and unearned income, and no limit to the rents they can charge.
Inherited wealth is more socially useful than earned wealth: “the idle rich”, who don’t have to work for their money, can devote themselves to influencing “fields of thought and opinion, of tastes and beliefs.” Even when they seem to be spending money on nothing but “aimless display”, they are in fact acting as society’s vanguard.
Hayek softened his opposition to monopolies and hardened his opposition to trade unions. He lambasted progressive taxation and attempts by the state to raise the general welfare of citizens. He insisted that there is “an overwhelming case against a free health service for all” and dismissed the conservation of natural resources.It should come as no surprise to those who follow such matters that he was awarded the Nobel prize for economics.
By the time Mrs Thatcher slammed his book on the table, a lively network of thinktanks, lobbyists and academics promoting Hayek’s doctrines had been established on both sides of the Atlantic, abundantly financed by some of the world’s richest people and businesses, including DuPont, General Electric, the Coors brewing company, Charles Koch, Richard Mellon Scaife, Lawrence Fertig, the William Volker Fund and the Earhart Foundation. Using psychology and linguistics to brilliant effect, the thinkers these people sponsored found the words and arguments required to turn Hayek’s anthem to the elite into a plausible political programme.
The ideologies Margaret Thatcher and Ronald Reagan espoused were just two facets of neoliberalism. Photograph: Bettmann/Bettmann Archive
Thatcherism and Reaganism were not ideologies in their own right: they were just two faces of neoliberalism. Their massive tax cuts for the rich, crushing of trade unions, reduction in public housing, deregulation, privatisation, outsourcing and competition in public services were all proposed by Hayek and his disciples. But the real triumph of this network was not its capture of the right, but its colonisation of parties that once stood for everything Hayek detested.
Bill Clinton and Tony Blair did not possess a narrative of their own. Rather than develop a new political story, they thought it was sufficient to triangulate. In other words, they extracted a few elements of what their parties had once believed, mixed them with elements of what their opponents believed, and developed from this unlikely combination a “third way”.
It was inevitable that the blazing, insurrectionary confidence of neoliberalism would exert a stronger gravitational pull than the dying star of social democracy. Hayek’s triumph could be witnessed everywhere from Blair’s expansion of the private finance initiative to Clinton’s repeal of the Glass-Steagal Act, which had regulated the financial sector. For all his grace and touch, Barack Obama, who didn’t possess a narrative either (except “hope”), was slowly reeled in by those who owned the means of persuasion.
As I warned in April, the result is first disempowerment then disenfranchisement. If the dominant ideology stops governments from changing social outcomes, they can no longer respond to the needs of the electorate. Politics becomes irrelevant to people’s lives; debate is reduced to the jabber of a remote elite. The disenfranchised turn instead to a virulent anti-politics in which facts and arguments are replaced by slogans, symbols and sensation. The man who sank Hillary Clinton’s bid for the presidency was not Donald Trump. It was her husband.
The paradoxical result is that the backlash against neoliberalism’s crushing of political choice has elevated just the kind of man that Hayek worshipped. Trump, who has no coherent politics, is not a classic neoliberal. But he is the perfect representation of Hayek’s “independent”; the beneficiary of inherited wealth, unconstrained by common morality, whose gross predilections strike a new path that others may follow. The neoliberal thinktankers are now swarming round this hollow man, this empty vessel waiting to be filled by those who know what they want. The likely result is the demolition of our remaining decencies, beginning with the agreement to limit global warming.
Those who tell the stories run the world. Politics has failed through a lack of competing narratives. The key task now is to tell a new story of what it is to be a human in the 21st century. It must be as appealing to some who have voted for Trump and Ukip as it is to the supporters of Clinton, Bernie Sanders or Jeremy Corbyn.
A few of us have been working on this, and can discern what may be the beginning of a story. It’s too early to say much yet, but at its core is the recognition that – as modern psychology and neuroscience make abundantly clear – human beings, by comparison with any other animals, are both remarkably social and remarkably unselfish. The atomisation and self-interested behaviour neoliberalism promotes run counter to much of what comprises human nature.
Hayek told us who we are, and he was wrong. Our first step is to reclaim our humanity.
The events that led to Donald Trump’s election started in England in 1975. At a meeting a few months after Margaret Thatcher became leader of the Conservative party, one of her colleagues, or so the story goes, was explaining what he saw as the core beliefs of conservatism. She snapped open her handbag, pulled out a dog-eared book, and slammed it on the table. “This is what we believe,” she said. A political revolution that would sweep the world had begun.
The book was The Constitution of Liberty by Frederick Hayek. Its publication, in 1960, marked the transition from an honest, if extreme, philosophy to an outright racket. The philosophy was called neoliberalism. It saw competition as the defining characteristic of human relations. The market would discover a natural hierarchy of winners and losers, creating a more efficient system than could ever be devised through planning or by design. Anything that impeded this process, such as significant tax, regulation, trade union activity or state provision, was counter-productive. Unrestricted entrepreneurs would create the wealth that would trickle down to everyone.
This, at any rate, is how it was originally conceived. But by the time Hayek came to write The Constitution of Liberty, the network of lobbyists and thinkers he had founded was being lavishly funded by multimillionaires who saw the doctrine as a means of defending themselves against democracy. Not every aspect of the neoliberal programme advanced their interests. Hayek, it seems, set out to close the gap.
He begins the book by advancing the narrowest possible conception of liberty: an absence of coercion. He rejects such notions as political freedom, universal rights, human equality and the distribution of wealth, all of which, by restricting the behaviour of the wealthy and powerful, intrude on the absolute freedom from coercion he demands.
Democracy, by contrast, “is not an ultimate or absolute value”. In fact, liberty depends on preventing the majority from exercising choice over the direction that politics and society might take.
He justifies this position by creating a heroic narrative of extreme wealth. He conflates the economic elite, spending their money in new ways, with philosophical and scientific pioneers. Just as the political philosopher should be free to think the unthinkable, so the very rich should be free to do the undoable, without constraint by public interest or public opinion.
The ultra rich are “scouts”, “experimenting with new styles of living”, who blaze the trails that the rest of society will follow. The progress of society depends on the liberty of these “independents” to gain as much money as they want and spend it how they wish. All that is good and useful, therefore, arises from inequality. There should be no connection between merit and reward, no distinction made between earned and unearned income, and no limit to the rents they can charge.
Inherited wealth is more socially useful than earned wealth: “the idle rich”, who don’t have to work for their money, can devote themselves to influencing “fields of thought and opinion, of tastes and beliefs.” Even when they seem to be spending money on nothing but “aimless display”, they are in fact acting as society’s vanguard.
Hayek softened his opposition to monopolies and hardened his opposition to trade unions. He lambasted progressive taxation and attempts by the state to raise the general welfare of citizens. He insisted that there is “an overwhelming case against a free health service for all” and dismissed the conservation of natural resources.It should come as no surprise to those who follow such matters that he was awarded the Nobel prize for economics.
By the time Mrs Thatcher slammed his book on the table, a lively network of thinktanks, lobbyists and academics promoting Hayek’s doctrines had been established on both sides of the Atlantic, abundantly financed by some of the world’s richest people and businesses, including DuPont, General Electric, the Coors brewing company, Charles Koch, Richard Mellon Scaife, Lawrence Fertig, the William Volker Fund and the Earhart Foundation. Using psychology and linguistics to brilliant effect, the thinkers these people sponsored found the words and arguments required to turn Hayek’s anthem to the elite into a plausible political programme.
The ideologies Margaret Thatcher and Ronald Reagan espoused were just two facets of neoliberalism. Photograph: Bettmann/Bettmann Archive
Thatcherism and Reaganism were not ideologies in their own right: they were just two faces of neoliberalism. Their massive tax cuts for the rich, crushing of trade unions, reduction in public housing, deregulation, privatisation, outsourcing and competition in public services were all proposed by Hayek and his disciples. But the real triumph of this network was not its capture of the right, but its colonisation of parties that once stood for everything Hayek detested.
Bill Clinton and Tony Blair did not possess a narrative of their own. Rather than develop a new political story, they thought it was sufficient to triangulate. In other words, they extracted a few elements of what their parties had once believed, mixed them with elements of what their opponents believed, and developed from this unlikely combination a “third way”.
It was inevitable that the blazing, insurrectionary confidence of neoliberalism would exert a stronger gravitational pull than the dying star of social democracy. Hayek’s triumph could be witnessed everywhere from Blair’s expansion of the private finance initiative to Clinton’s repeal of the Glass-Steagal Act, which had regulated the financial sector. For all his grace and touch, Barack Obama, who didn’t possess a narrative either (except “hope”), was slowly reeled in by those who owned the means of persuasion.
As I warned in April, the result is first disempowerment then disenfranchisement. If the dominant ideology stops governments from changing social outcomes, they can no longer respond to the needs of the electorate. Politics becomes irrelevant to people’s lives; debate is reduced to the jabber of a remote elite. The disenfranchised turn instead to a virulent anti-politics in which facts and arguments are replaced by slogans, symbols and sensation. The man who sank Hillary Clinton’s bid for the presidency was not Donald Trump. It was her husband.
The paradoxical result is that the backlash against neoliberalism’s crushing of political choice has elevated just the kind of man that Hayek worshipped. Trump, who has no coherent politics, is not a classic neoliberal. But he is the perfect representation of Hayek’s “independent”; the beneficiary of inherited wealth, unconstrained by common morality, whose gross predilections strike a new path that others may follow. The neoliberal thinktankers are now swarming round this hollow man, this empty vessel waiting to be filled by those who know what they want. The likely result is the demolition of our remaining decencies, beginning with the agreement to limit global warming.
Those who tell the stories run the world. Politics has failed through a lack of competing narratives. The key task now is to tell a new story of what it is to be a human in the 21st century. It must be as appealing to some who have voted for Trump and Ukip as it is to the supporters of Clinton, Bernie Sanders or Jeremy Corbyn.
A few of us have been working on this, and can discern what may be the beginning of a story. It’s too early to say much yet, but at its core is the recognition that – as modern psychology and neuroscience make abundantly clear – human beings, by comparison with any other animals, are both remarkably social and remarkably unselfish. The atomisation and self-interested behaviour neoliberalism promotes run counter to much of what comprises human nature.
Hayek told us who we are, and he was wrong. Our first step is to reclaim our humanity.
Sunday, 13 November 2016
Does Trump’s win mean that progress is history?
David Mitchell in The Guardian
A fortnight ago, when the clocks went back, a joke was doing the rounds in various forms. They all went something like: “Don’t forget to turn the clocks back this weekend. Unless you voted for Brexit, in which case you’ve already turned them back 30 years.”
These obviously weren’t pro-Brexit jokes. The notion of turning the clock back is not supposed to connote a return to the good old days or a restoration of youth: it signifies regression, progress reversed, a deliberate worsening. So an obvious implication is that their writers think, and think that most people think, that in general things get better over time.
Well, milk doesn’t. And look at the natural world: things age and die and rot. Or grow and infest and destroy. And sometimes they germinate and bloom. They don’t necessarily get worse, I’m not saying that; but they don’t always improve, either.
Technology confuses this, because that seems to be on a pretty steady upward graph, though it has its blips: in Europe, central heating had a chilly hiatus between the fourth and the 19th centuries. And this whole technological up-graph, from the discovery of fire onwards, may get retrospectively flipped into a huge down-blip in overall human fortunes if it transpires we were gradually making the planet uninhabitable. It’s possible that everything any of us has done since we first started scrabbling around for flint has been a mistake.
You may sense from the last sentence that I’m in a bad mood. When I recently expressed disquiet on Twitter at Donald Trump’s election victory, one respondent said: “You should have been afraid months ago, by now [you should be] slipping into misanthropic apathy.” It seemed like an excellent suggestion.
I’d been hoping Hillary Clinton would win, as you probably were, unless my evaluation of the Observer readership has descended to pollster levels of accuracy. Though, for me, it was mainly a hope that Donald Trump would lose. I didn’t have strong feelings about his opponent. She seemed OK, but then people would darkly say things beginning “Of course you realise…”, the end of which I never properly heard, focused as I was on avoiding the social embarrassment of looking like I didn’t realise whatever it was.
It’s like when I’m introduced to people – I never catch their name because I’m so anxious not to screw up the handshake. “Just look like you realise, for God’s sake!” my brain always hissed over the details. “Everyone else here seems to have realised. You’re an educated person who realises all the complicated stuff that needs to be realised. You can Google it later.”
I never Googled it later, which turns out to have been an efficient non-use of time. Nevertheless, I assembled a vague sense that Hillary wasn’t all that, but at least she hadn’t said that Mexicans are rapists. If there were terrible things about her, she had the grace to keep them secret rather than proclaim them from a podium. Which, under the circumstances, seemed to me a good enough reason to make her the most powerful person on earth. Then I went back to watching Trump.
Trump is so watchable – that’s surely something his supporters and detractors can agree on. It’s not the hair, it’s not the extremist rhetoric, it’s the sheer magnetism of his self-satisfaction. The density of his self-joy is so great it drags your eyes towards it like galactic debris to a black hole. When he puts on a statesmanlike face, you just know his inner monologue is delightedly singing “My amazing face looks so statesmanlike right now!” This is what Ed Miliband never grasped: it’s not about being convincing, it’s about relishing the role.
If politics were just a reality TV show (rather than mainly a reality TV show), Trump would never get voted out. So perhaps it’s surprising that he polled fewer votes than Clinton – though not quite as surprising as the fact that he will become president despite this.
Illustration by David Foldvari.
Trump’s win hit me in several ways. First, it denied me his defeat scene. I wanted to see that. His character seemed designed expressly for that sort of comeuppance, as surely as the diner redneck in Superman II. I was desperate to see him spun round on his bar stool, all scared. It really feels like a missed opportunity, for him as much as everyone else.
Second, it robbed me of a comforting certainty: he can’t win – he’s too awful. That’s the sentiment I’ve been vacuously exchanging with people for months: “Surely he can’t win,” one of us says. “I know,” says the other. I’ll miss that even though I now regret every time it happened. “It would be a disaster,” was the consensus among me and other out-of-touch liberals, even more so than over Brexit.
And third: I’ve started to look on the bright side and it makes me despise myself. Because, frankly, “It would be a disaster” is much easier to live with than “It willbe a disaster” or “This is a disaster”. So I fail to follow through on my certainty. A mixture of apathy and fear-avoidance extorts a sickly optimism from my brain.
Maybe he didn’t mean what he said; maybe the Republican party will restrain him; politicians never get much done anyway; maybe it’ll all be fine. This either makes me an overdramatising hypocrite a few days ago, or a reality-denying fool now. So I feel lazy, stupid and humiliated by the disturbance to my complacency, as if someone had burst in while I was eating a cream cake in the bath.
I am bewildered by everyone’s conviction that anyone who disagrees with them has been misinformed. Another response to my worried tweet mentioned an article I’d linked to about Trump in the New Yorker: “That’s like reading about Obama on the KKK newsletter,” they told me. Is it? I really don’t think it is. But they seemed so much surer that I’m wrong than I am that I’m right. I’m enough of a historian to understand the insecurity of the lines of communication between what I read has happened and what actually has, but not enough to know what to do. Should I go to that place in Kew?
Civilisations, like investments, can go down as well as up – that’s never been clearer. Trump has routed the Whig interpretation of history along with the metropolitan liberal elite. Things don’t always get better over time. But I’m grateful to have lived through an era when it was still widely assumed that they did.
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