There's a bit more on this Matthew Rognlie who presented a paper that says Pikeyty's discourse on inequality is only correct if you include property prices. Here's a new article in the SMH about it:
A central thesis of Capital is that the share of income of those who own capital or are already wealthy is increasing. Those who have to work for their money by selling their labour aren't as lucky: their share is decreasing.
This observation made Piketty's tome a cause celebre amongst leftist economists and sparked a great debate in the wider profession.
But Rognlie reckons Piketty is only right if you count housing. See the stunning graph below that has set economists' tongues wagging.
Source: The Brookings Institution and Matthew Rognlie
What the chart shows is that net capital income (income made from already-owned assets) has not increased as a share of total income if you don't include housing.
In other words, housing is playing a much more important role in income, wealth generation, and inequality than it once did.
Yes. Which, in a roundabout way suggests the Federal Government, the State Government and the RBA all ought to be more concerned about the property bubble and not less. I imagine this is not welcome news to Baby Boomers.
Source: Barclays Australia and New Zealand Economics Weekly
The takeout from Rognlie's paper is that more expensive housing is a far bigger driver of income inequality than just about any other factor.
As the above chart above shows, since the 1970s - and particularly the early 2000s - the proportion of income households must spend on their main method of saving, their home, has increased dramatically.
The Brookings paper has some valid policy implications. As BusinessDay's Michael Pascoe recently argued there are too many self-interested NIMBYs (Not In My Back Yard) and BANANAs (Build Absolutely Nothing Anywhere Near Anyone) in Australia.
People who are older and own houses use current planning systems to block development which would allow cheaper housing for those who are younger and without equity.
"Given the important role of housing, observers concerned about the distribution of income should keep an eye on housing costs—many urban economists ... have documented how restrictions on land use and residential construction inflate the cost of housing," Rognlie explains.
That chart looks pretty precarious. I doubt people feel they're sitting on over-priced property but they do feel like their mortgage is pretty heavy. The central message is still policy makers who are concerned with inequality should be looking at polices to do with the housing sector. It seems ever more true than at any time in the last quarter of a century.
Of course, with things headed for ZIRP - the RBA is tipped to cut rates again on Tuesday - the RBA isn't exactly helping. It's busily pouring oil on the fire of inequality. If they had any fortitude,they'd give us the property bubble bust we had to have, and get on with cleaning up the mess from this bubble. But no, the best guess seems like it's 70% likely they'll be cutting on Tuesday.
Who Benefited?
I was of course pointing out that under-reporting the inflation through manipulating the CPI led to a historic bias towards easy lending which manifested itself in this property bubble, only a couple of days ago. But when you look at Rognlie's graphs, it's pretty clear that since 2000AD, we've had to pay much more for property than at previous moments in history.
But if inflation was underreported, then anything indexed would have had an effect. Like HECS repayments would have been easier as a result of under-reporting inflation. But then the dole sure took a hit. So being unemployed and on the dole now would be much worse than it used to be, an therefore worse than it should be. Pensioners of course don't get their pensions indexed to CPI but to average wages, so they did much better than the unemployed.
People paying off a mortgage certainly did much better than they should have - and that's before we take into account the capital gains in housing prices. People who took out business loans did well too. The bigger the loan, the better in a sense because there's a certain percentage that's being won back by under-reporting inflation in the CPI. The absolute value would be larger, the more money you borrow; which would sort of explain the emergence of moguls like Clive Palmer, Andrew Twiggy Forrest and even Nathan Tinkler . And of course the people with car loans and leases made out very well indeed.
Oh, and banks. They made out like bandits.
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