Thursday, October 29, 2009

Inequality and land values...

I have been following (with difficulty) a series of exchanges about income inequality starting with this by Will Wilkinson.  The arguments have been cogent and enlightening, but I still think the concept of shifting the focus to consumption inequality provides glib non-answers to some very real problems.

Nonetheless, in the midst of this thought, I ran across this view that really struck me as important for farmers and landowners.
So: as income inequality goes up, more money flows to the well-off, who use it to buy financial assets.  Conversely, less money flows to the poor and middle class, who respond by increasing their debt level.  Both of these mechanisms produce a higher demand for financial assets and therefore promote asset inflation.
Turn that around, of course, and you limit asset inflation but promote consumer inflation instead, which has to be held in check via periodic recessions.  So the question is, which would you rather have: periodic modest recessions or long periods of stability interrupted by occasional huge bubbles bursting?  The latter is typical of the "Great Moderation" of the post-1980 era, and Steve argues that it's been economically destructive in multiple ways:
First, in exchange for apparent stability, the central-bank-backstopped "great moderation" has rendered asset prices unreliable as guides to real investment. I think the United States has made terrible aggregate investment decisions over the last 30 years, and will continue to do so as long as a "ride the bubble then hide in banks" strategy pays off. Under the moderation dynamic, resource allocation is managed alternately by compromised capital markets and fiscal stimulators, neither of which make remotely good choices.
Second, by relying on credit rather than wages to fund middle-class consumption, the moderation dynamic causes great harm in the form of stress from unwanted financial risk, loss of freedom to pursue nonremunerative activities, and unnecessary catastrophes for isolated families.
Finally, maintaining the dynamic requires active use of policy instruments to sustain an inequitable distribution of wealth and income in a manner that I view as unjust. In "good times", central bankers actively suppress the median wage (while applauding increases in the mean wages driven by the upper tail). During the reset phase, policymakers bail out creditors. There is nothing "natural" or "efficient" about these choices.
Regular readers will be unsurprised that I generally agree with all this, although I might put it a little more pithily: rich people tend to do really stupid things when they have too much money lying around for too long.  So do poor people, of course, but in their case "too much money" is only enough to buy a bigger TV, not enough to blow up the world.  That's why I think getting a handle on rising income inequality is important.  To paraphrase William F. Buckley, if I had an extra million dollars to divvy up, I'd rather give it to the first thousand names in the New York City phone book than to the CEO of Goldman Sachs. [More]

While I do not currently think farmland is in the bubble category, I do think it will be one wealth-form of choice for those with lots. In the same light, commodities share a common linkage with top-heavy income distribution.

From a Bloomberg survey of economists:
Respondents see China, Brazil and India as the markets with the most potential, and commodities as the asset of choice, replacing stocks as the most desirable investment class in last quarter’s survey. Real estate and bonds are out of favor, with 40 percent saying bonds will have the worst returns over the next year. [More]

To tie it all up, as long as most  of any income gains continue to accrue to a tiny number of people at the top, assets like farmland (which is held separate from "real estate" in most investor eyes) seem to be golden.


Anonymous said...

John, I certainly agree with your last comment, "assets like farmland seem to be golden."

James Lee Adams said...

A great deal of the source of income inequality arises from personal choices--first--those who are educated naturally tend to have higher income--they also tend to marry those with more education. On the other hand, a single parent household will obviously have a lower income. In short, for the government to "attack" income inequality by forced redistribution of income (tax policy) may be short sighted and counter productive in the long run

Anonymous said...

Good point James Lee.

And you are correct John. Good farmland is in finite supply and unless the geneticists can keep crop yield on pace with human population (or human population takes a downturn) there will always be a demand for productive land. Basic economics: increasing demand + fixed supply = pretty safe investment.

But we must consider: as land rates continue to rise, who will benefit and who will suffer? Creditors (the rich) will certainly loan the money as, again, land is a safe bet and easy money off which to earn interest. The landowner will be able to charge market rate on rent. The producer will have to pay market rate so he will need to sell at a higher price to maintain a profit. The price of food will continue to track higher. Those individuals who dedicate a large percentage of their income toward food will lose (the poor). While land is a safe investment, it will likely lead to the same wealth disparities we have today. All signs point to the rich getting richer and the poor getting poorer.

We try so hard to “blame” someone or something for this phenomenon. This is free market capitalism. The folks who are smart and ambitious have identified ways to make their wealth work for them. The folks who are uneducated and unmotivated fail to take advantage of opportunities. Two catalysts have exacerbated these conditions: increased greed on the top end and increased reliance on entitlements on the bottom.

While I do not mean to sound like a pessimist, ultimately this is going to go one of two ways: either 1.) we will continue our slide into socialism, or 2.) a type of “civil war” between the wealthy and the poor. As our government adds more entitlement programs and more people to the government payroll, I would guess the former will exist before the latter. After all, a dependant voter is a dependable voter.