News: Real Estate, Risk, Economics. Sept. 26, 2014

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Table of Contents
(Click to sections below.)

1) Irrational Exuberance Down Under – Bloomberg View

2) Calculated Risk: MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

3) Over 900,000 homes regain equity in second quarter – MarketWatch

4) Total Home Sales Are At or Above Trend | Beat the Press

5) Germany’s Economic Mirage by Philippe Legrain – Project Syndicate

6) Markus Brunnermeier: Connecting Policy with Frontier Research

7) On Getting Rid of the Monetary Triumvirate | Pragmatic Capitalism

8) Giving Corporate Executives a Free Pass on Their Value Extraction

9) Lawmakers Weigh Credit Score Changes | Realtor Magazine

10) Commercial Real Estate Markets | Transwestern

11) TLTRO effect is the ECB’s Waiting for Godot | MacroScope

12) VIDEO: Professor Steve Keen on why the recovery is doomed – Every Investor

13) Census data on poverty show results of economic policy gone wrong – LA Times

14) The Issues with New Unemployment Insurance Claims as a Labor Market Indicator | St. Louis Fed On the Economy

15) London tops Hong Kong as priciest place to live

16) UK’s mansion tax called a ‘political stunt’

17) New home sales power higher in August, soar by 18 percent

18) Detroit-area home sales hit by higher prices

19) People who lost their homes in foreclosure moved in next door – OC Housing News

20) Universities to revamp economics courses – FT com

21) No hard landing yet in China | Gavyn Davies

22) Now It’s Explicit: Fighting Inflation Is a War to Ensure That Real Wages for the Vast Majority Never Grow | Economic Policy Institute

23) Seattle OKs $1 fine for adding too much food to garbage bins | Local News | The Seattle Times

24) Rains bring big gains against California wildfire

25) Great Lakes Restoration Initiative Action Plan Released | MI News 26

26) UN vows to end deforestation by 2030: Here’s how : SCIENCE : Tech Times

27) Not that negative after all – YouTube

28) The Secret Goldman Sachs Tapes – Bloomberg View

29) The Great Decoupling [The robots are coming. Will we be freed of work? What sort of insurance should we develop for the transition?] | McKinsey & Company

  1.    Irrational Exuberance Down Under – Bloomberg View

    Arguably, no top-12 economy will be hit harder and faster if China falters than Australia’s. So feel free to focus on the good news in the so-called Lucky Country: an enviable 3.1 percent growth rate and 6.1 percent jobless rate in a nation that’s been recession-free for over 20 years. But as author David contends, it’s a “Disneyland” fantasy to think housing prices can’t crash in a place whose future is so linked to Beijing’s bubbles.

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  2.    Calculated Risk: MBA: Mortgage Applications Decrease in Latest MBA Weekly Survey

    Mortgage applications decreased 4.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 19, 2014. …

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  3.    Over 900,000 homes regain equity in second quarter – MarketWatch

    Rapidly rising home prices have enabled troubled homeowners to regain equity. Having positive equity can help owners to refinance or sell a home, further firming their pocketbooks.

    Financial stability will likely also provide some psychological relief to owners, and could support consumption. However, owners who have regained equity aren’t necessarily in the clear financially. CoreLogic reported that among properties with positive equity, 19% have a relatively slim level of equity and may have trouble refinancing or getting a new loan. Even worse, some could fall back into negative-equity territory if there’s a slip in home prices.

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  4.    Total Home Sales Are At or Above Trend | Beat the Press

    It also is not clear that all of the people being denied mortgages are being harmed. Because of the weak labor market, workers often have to move to find or keep jobs. There are large transactions costs associated with buying and selling a home. These average around 10 percent of the purchase price. If a person can’t expect to stay in a home for at least five years they will likely lose by buying rather than renting. it is especially likely they will lose in a context where higher future interest rates, which are almost universally predicted, will put downward pressure on house prices.

    Correct, except the predictions for higher mortgage-interest rates have been wildly premature. We see downward pressure on housing prices right now. Interest rates can’t go higher in the face of that for long.

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  5.    Germany’s Economic Mirage by Philippe Legrain – Project Syndicate

    Wow, we have never seen such a thorough, scathing, and compact critique of the German economy. Philippe Legrain, a visiting senior fellow at the London School of Economics’ European Institute and a former economic adviser to the president of the European Commission:

    For 60 years, successive German governments sought a more European Germany. But now, Chancellor Angela Merkel’s administration wants to reshape Europe’s economies in Germany’s image. This is politically unwise and economically dangerous. Far from being Europe’s most successful economy — as German Finance Minister Wolfgang Schäuble and others boast — Germany’s economy is dysfunctional.

    We don’t have the wherewithal to fact check all of Philippe’s data; but if accurate, it will show up again and again and won’t be successfully refuted. We’ll keep an eye out.

    We certainly have been critical of Germany’s handling of the current European depression. We know that Germany’s insistence upon austerity anywhere in Europe has been a huge error not only for Europe as a whole but especially for Germany, which could have taken the lead in redesigning the system so that the depression would end quickly and without any inflationary pressure and certainly not hyper-inflation.

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  6.    Markus Brunnermeier: Connecting Policy with Frontier Research


    You speak as if this is a policy that the Federal Reserve of the United States or indeed in general central banks around the world might wish to undertake. But the idea of redistributing wealth in the economy is a politically sensitive issue when it comes to a central bank, especially the U.S. Federal Reserve. This sounds like it’s a job that at least in principle is ideally suited for the fiscal authority. There’s a body of elected representatives and then the fiscal authority redistributes wealth all the time. This is partly what their job is to do. The Fed, to the extent that it likes to maintain independence and be politically detached, refrains from overt acts of redistributing wealth. Is there some reason for why you believe realistically the Fed should be doing this job as opposed to, say, elected members of Congress?

    I would distinguish between actively redistributing wealth and stopping redistribution that arises from inaction. I don’t think the Fed should get into the business of actively redistributing wealth. However, the Fed should not repeat its mistakes from the Great Depression: By not doing enough, large redistribution occurred, which ultimately led to an overall wealth destruction. The aim is to switch off this redistribution rather than actively doing some redistribution. This reduces risk premia and endogenous risk and thereby stimulates the economy.

    The paper’s main takeaways,
    according to Brunnermeier:
    The key takeaway of the paper is essentially that before the crisis we have three stability concepts: financial stability, bank regulators should take care of it; price stability, central banks should take care of it; and fiscal debt sustainability, that it government can pay back its debt, the government should take care of this. And we thought we could treat them independently and in silos.
    This analysis shows that these three stability concepts are highly interconnected.<
    BR>Monetary policy can avoid wealth redistribution that is driven by amplification effects and thereby reduce overall risk premia in times of crises.
    Independence for central banks means to be protected from the other parts because there might be some financial dominance argument where the banking sector might make it hard for the Fed to control inflation.

    “…analysis shows that these three stability concepts are highly interconnected.” Of course.

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  7.    On Getting Rid of the Monetary Triumvirate | Pragmatic Capitalism

    The unit of account, medium of exchange, and store of value aren’t going away unless we get rid of money. Bank deposits are denominated and those units are the medium of exchange, which may be saved. Why bother? With all due respect, one can semantically split hairs all day and bear no fruit.

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  8.    Giving Corporate Executives a Free Pass on Their Value Extraction

    Yves Smith:

    Value Extraction and Share Buybacks

    William Lazonick’s article also emphasized how corporate leadership is now focused on extracting value from their companies for their own personal benefit, rather than promoting growth, innovation, better products and services, etc. In particular, large public for-profit companies now tend to use their surplus capital to buy back shares of their own stock, rather than invest in new facilities, equipment, employees, etc. Perhaps we should not be surprised that this was facilitated by changes in US government regulation, that is deregulation, in this case instituted during the Reagan administration:

    Companies have been allowed to repurchase their shares on the open market with virtually no regulatory limits since 1982, when the SEC instituted Rule 10b — 18 of the Securities Exchange Act.

    Note that

    The rule was a major departure from the agency’s original mandate, laid out in the Securities Exchange Act of 1934. The act was a reaction to a host of unscrupulous activities that had fueled speculation in the Roaring ’20’s, leading to the stock market crash of 1929 and the Great Depression.

    Given the context, and that the deregulation was implemented by an SEC chair who was “the first Wall Street insider to lead the commission,” this seems to be an example of regulatory capture in service of corporate insiders.

    Once again, this was also enabled by the dergulation that started with during the Reagan administration, and continues this day (although the specific relevant deregulatory change occurred during the Clinton administration),

    In 1991 the SEC began allowing top executives to keep the gains from immediately selling stock acquired from options. Previously, they had to hold the stock for six months or give up any ‘short-swi ng’ gains. That decision has only served to reinforce top executives’ overriding personal interest in boosting stock prices. And because corporations aren’t required to disclose daily buyback activity, it gives executives the opportunity to trade, undetected, on inside information about when buybacks are being done.

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  9.    Lawmakers Weigh Credit Score Changes | Realtor Magazine

    “It doesn’t seem right to us coming out of the Great Recession that we would erase predictive data” that lenders now use to underwrite applications for mortgages and other credit, says Stuart K. Pratt, president and chief executive of the Consumer Data Industry Association.

    Also during the Congressional committee meeting, legislators weighed the feasibility of adding consumers’ monthly payments to utility companies, cable services, and rent to the credit score calculus. The national credit bureaus are in general favor of supplementing their own information with alternative credit data such as rental payment histories, but some consumer groups don’t agree with such a move.

    We think reducing the number of years is not a good idea but that the additional information of rental payments, and the like, is.

    Reducing the number of years that defaults and bankruptcies remain on credit reports strikes us as introducing moral hazard. Some people might be willing to live way beyond their means off credit for as long as possible only to fall for a mere four years. They might find it well worth it.

    Forgiveness is a good thing, and we don’t advocate the removal of such jubilee-type laws (clearing bad marks from credit reports after a set number of years); however, if we are to have a functioning, mixed economy where credit is so central, we must be sure to do a good job of not introducing additional moral hazard.

    As for utility payments being foregone by people who face tight finances, well, what about all those people who pay like clockwork who get no credit for their good budget-handling? Which is the larger group, and whom and what does society want to encourage?

    Of course, we need to have strong safety nets for the whole of society, stronger than we have now; but extending credit isn’t the best way to go about that in our view.

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  10.    Commercial Real Estate Markets | Transwestern

    Manhattan is the most expensive market for commercial real estate, both in sales price per square foot and volume, according to a new second-quarter 2014 report and graphic from Real Capital Analytics and Transwestern.

    What’s new? But some of the other data may surprise you.

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  11.    TLTRO effect is the ECB’s Waiting for Godot | MacroScope

    So why won’t banks take free money in the meantime?

    Komileva explains it this way:

    The big difference between bank activities in financial markets and in real economies is the financial incentives and risk aversion. Lenders manage their cost of credit and capital more efficiently by selling securities to other investors and by borrowing from the ECB, whereas when a loan is made in the real economy it stays on the bank’s books until it matures. This is an expensive diet for capital-constrained banks.

    If a central bank offered hundreds of billions of euros worth of cheap cash directly to individuals, there wouldn’t be much humming and hawing over whether or not they’d take it.

    And the sudden explosive demand for goods and services that would most certainly follow from such a massive infusion of cash in a climate where saving it pays you less than nothing would almost certainly spawn a powerful rush of inflation.

    For now, we wait for the lending to pick up.

    Exactly: Helicopter money.

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  12.    VIDEO: Professor Steve Keen on why the recovery is doomed – Every Investor

    In the first in a series of exclusive interviews with Chris Menon Professor Steve Keen talks about why the current economic recovery is doomed to end much sooner than before. He also explains what has caused the current housing bubble.

    He also argues that bank reform is essential if the economy is move away from an unhealthy dependence upon asset speculation.

    The only major issue we have with Steve Keen’s analysis here is that he’s mixed the UK and US banking reserve-ratios as if they are the same. They aren’t. The Fed requires 10% reserves. The Bank of England does not. So while the BoE allows some of its employees to issue papers and videos explaining in their view, the employees’ view (not official BoE statements), how the UK creates money, it doesn’t necessarily apply to the US.

    That said, we agree with the Modern Money Theory (MMT) that Steve expressed, which says that banks do not have to have reserves before making loans. The banks simply need to have a source of borrowing the necessary reserves after the fact, which they do if they are solvent.

    However, that is not to say that deposits are not turned into loans, which is the Money Multiplier. They are, when the economy is humming and businesses and consumers are borrowing with an eye to good times ahead and the ability to repay.

    Therefore, the MMT Theory and the Money Multiplier work at the same time.

    The issue that MMT has had with the Multiplier is that the Multiplier has been presented as the one and only way money gets created.

    Please note that the general supporters of MMT do not yet agree with our analysis of the terminology. Most so far have insisted upon maintaining the old definition of the Multiplier so that they don’t have to alter their critique or their view on how money is created.

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  13.    Census data on poverty show results of economic policy gone wrong – LA Times

    Michael Hiltzik:blockquote>The headline number in last week’s release of Census Bureau data on poverty was pretty good. It was widely noted that the rate dropped significantly for the first time since 2006, with especially sharp declines among children and Latino families.

    A peek under the hood, however, reveals the dismal realities of the modern U.S. economy. Other than the population over 65 and under 18, wages and economic mobility are frozen solid. The national safety net is barely keeping up with need. And years of austerity politics — cutoffs of unemployment benefits, premature termination of low-income assistance programs, resistance in some regions to bringing healthcare coverage to low-income residents via Medicaid — have kept millions of Americans mired in near-poverty or in economic stagnation.

    The rest of the article is packed.

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  14.    The Issues with New Unemployment Insurance Claims as a Labor Market Indicator | St. Louis Fed On the Economy

    During the Great Recession, the rate of separations fell along with the rate of hires, so there were fewer people to initiate UI claims. Wiczer noted that despite the intuition that fewer job separations indicate a healthy labor market, a low level of separations also corresponds to a low level of hires. He wrote, “In fact, the rates of worker separations and hires slowed drastically during the Great Recession and are still about 10 percent lower than their prerecession levels, even though unemployment has recovered more quickly.”

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  15.    London tops Hong Kong as priciest place to live

    Londoners have been hit by resurging property prices—unlike in Hong Kong, where residential rents have fallen. On Monday, the U.K.’s Office for National Statistics reported that house prices in London and other areas of England and Scotland had rebounded to the levels seen before the 2007/08 global financial crisis.

    Why? Does it really pay to own in London to be near the City of London, which is the financial district (an enclaved)? Is London really that great in terms of amenities and culture, etc.? Are pluses really offsetting the negatives of congestion and pollution, crime, and the rest?

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  16.    UK’s mansion tax called a ‘political stunt’

    In today’s hyperpriced London real estate market, £2 million is hardly a mansion, some analysts and real estate agents said. And many families who are house rich and cash poor (and owned their property for years) will be hard-pressed to pay.

    Liam Bailey, global head of research at real estate firm Knight Frank, said 1 in 10 of the homes that would fall under the tax are one- or two-bedroom flats in London. Another 17 percent are three-bedroom homes….

    So raise the amount to cover only a certain square footage and value that would rule out the middle class and only impact the truly wealthy by the relative standards of London. Also make it income dependent.

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  17.    New home sales power higher in August, soar by 18 percent

    Sales of new U.S. single-family homes surged in August and hit their highest level in more than six years, offering confirmation that the housing recovery remains on course.

    The Commerce Department said on Wednesday sales jumped 18.0 percent to a seasonally adjusted annual rate of 504,000 units. That was the highest level since May 2008 and marked the second straight month of gains.

    These are high-end houses. What are we doing, further increasing the economic-class divide? What do we want, a violent revolution?

    We need to restore some balance. The lower classes, which now includes much of what was the middle class, need direct attention to raise wages and hours so there will be a more sustainable recovery.

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  18.    Detroit-area home sales hit by higher prices

    Many of the newly built homes, however, are at very high price points. While interest rates are still attractive, prices continue to be a thorn in the side of sales.

    This is about Detroit, which suffered the worst downturn in the nation. It’s building high-end housing. Rents aren’t cheap either. We need to do better for the poor.

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  19.    People who lost their homes in foreclosure moved in next door – OC Housing News

    Larry Roberts:

    One of the houses my fund bought at auction in Las Vegas is still occupied by the former owners. Before they quit making payments, their obligation was for $2,200 per month, and it was due to increase. I bought their house, fixed up the problems from deferred maintenance while they were squatting, and I signed a lease with them for $1,050 per month. That was early 2011, and the former owners are still there. They didn’t have to move, and their cost of housing was cut in half. If they hadn’t defaulted, they would still be paying $2,200 per month in an underwater house, unless they obtained temporary relief from a “permanent” loan modification. I think they are better off as renters.

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  20.    Universities to revamp economics courses –

    Louison Cahen-Fourot, a doctoral student at Paris XIII university who has also been involved with PEPS, a French group advocating more pluralism in economics, said: “The problem is [CORE] is not really pluralism,” Mr Cahen-Fourot, said. “It’s very much mainstream and it does not meet what we would like to see at PEPS, such as more alternative voices or methodologies. We also would like to see more openness to [methods from] other social sciences,” he said.

    We like the more-openness idea. We learned economics starting with Political Economy.

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  21.    No hard landing yet in China | Gavyn Davies

    Gavyn Davies:

    It has taken a lot of fine tuning by policymakers to ensure that growth can attain this figure as the property sector adjusts. It is still very possible that they will eventually lose control of the situation, and suffer a much harder landing than they currently envisage. But that does not seem to be happening yet.

    We suspect a masking effect due to a lack of sufficient transparency.

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  22.    Now It’s Explicit: Fighting Inflation Is a War to Ensure That Real Wages for the Vast Majority Never Grow | Economic Policy Institute

    Fisher’s recommendations are pretty extraordinary—we have somebody who votes on monetary policy arguing that we should pull back on support for lowering unemployment even before we’ve reached levels that will keep real wages for the majority of the wage distribution from outright falling. He actually identifies improved wages as the problem we must confront.

    And he wasn’t alone in his last dissent. It’s definitely time to fill the two open slots on the Fed’s Board of Governors with evidence-minded economists who don’t think real wage growth that is greater than zero is threat to the economy.

    There’s more to it than that, though that’s bad enough. High systemic unemployment is a method of keeping top-executive incomes astronomically high.

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  23.    Seattle OKs $1 fine for adding too much food to garbage bins | Local News | The Seattle Times

    Apartment buildings must have compost bins available, but residents of apartment buildings aren’t required to use them.

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  24.    Rains bring big gains against California wildfire

    The blaze was 55 percent contained — up from 43 percent at the beginning of the day — and showed no growth after burning almost 150 square miles and destroying a dozen homes near the town of Pollock Pines.

    “The rain is definitely allowing the firefighters to make progress on containment,” said Dana Welsh, a spokeswoman for the U.S. Forest Service.

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  25.    Great Lakes Restoration Initiative Action Plan Released | MI News 26

    …the U.S. Environmental Protection Agency has released a new Great Lakes Restoration Initiative Action Plan.

    The plan lays out steps that federal agencies will take during the next five years to protect water quality, control invasive species and restore habitat in the largest fresh water system in the world.

    We’re all for it.

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  26.    UN vows to end deforestation by 2030: Here’s how : SCIENCE : Tech Times

    The United Nations vowed to end the deforestation of the Earth by the year 2030, as part of the climate summit in New York City.

    Not all environmentalists are happy with the new agreement, including Greenpeace, which refused to sign the resolution.

    “We need strong laws to protect forests and people, as well as better enforcement of existing laws. The New York Declaration is missing ambitious targets and tangible actions… While we are celebrating announcements on paper today, forests and forest peoples are facing imminent threats that must be averted if we want the Declaration to become reality,” Kumi Naidoo, executive director of Greenpeace International, said.

    We’re all for ending deforestation.

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  27.    Not that negative after all – YouTube

    This represents some vindication for our open position calling for this negative-interest-rate policy long before it was adopted.

    Eurozone interest rates turned negative in June, but fears markets would seize up have been confounded. JPMorgan strategist Nikolaos Panigirtzoglou tells Ralph Atkins how the plunge below zero has been working and where the limits of such a stimulus lies.

    We’d like to add that we’ve called for strings to be attached to prevent the bank-hoarding issue raised in the video. Therefore, rates could be driven further into negative territory if needs be.

    We wonder how this issue will be handled now by those who called the idea crazy.

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  28.    The Secret Goldman Sachs Tapes – Bloomberg View

    Where are the federal prosecutors on this? This is actually huge, but will it be swept under the rug the way so many things have been since 2008 and before? We say before because what happened in 2008 was the direct result of illegal and unethical, fraudulent activities rampant within the commercial-banking sector and that includes all the major US banks (investment and otherwise).

    I don’t want to spoil the revelations of “This American Life”: It’s far better to hear the actual sounds on the radio, as so much of the meaning of the piece is in the tones of the voices — and, especially, in the breathtaking wussiness of the people at the Fed charged with regulating Goldman Sachs. But once you have listened to it — as when you were faced with the newly unignorable truth of what actually happened to that NFL running back’s fiancee in that elevator — consider the following:

    1. You sort of knew that the regulators were more or less controlled by the banks. Now you know.

    Well, no, we didn’t sort of know. We knew. We knew because they bailed them out rather than seeing to it that they were all nationalized, as AIG was rightly nationalized.

    Had the insolvent US commercial banks been nationalized rather than bailed out, the US would not have suffered what is called the Great Recession, which has turned out to be the Lesser Depression, as coined by Brad DeLong.

    This revelation will inform you why the Federal Reserve has not attached strings to QE. The Fed acted to benefit the banks and the banking executives, not the American people.

    It will be extremely interesting to see how Janet Yellen reacts to all of this. Will she trip up and attempt to whitewash the Fed’s manner of handling the banks with kid gloves, or will she denounce what the Fed did and start forcing the Fed to be a real regulator a la the New Deal bank regulators?

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  29.    The Great Decoupling [The robots are coming. Will we be freed of work? What sort of insurance should we develop for the transition?] | McKinsey & Company

    The rapid advance of machine learning presents an economic paradox: productivity is rising, but employment may not. A McKinsey Quarterly article.

    The Quarterly: How would that work? Are you referring to some sort of wage insurance?

    Robert Shiller: Insurance is a fundamentally important concept. Whether it’s provided by the private sector or the government, it’s an organized response to uncertainty that affects individuals. Wage insurance is one form that has been experimented with by the US government, in fact, in an effort to deal with the problem that globalization is taking jobs out of the country. But it hasn’t been experimented with very much yet. I think we could have a much more comprehensive system of wage insurance. And we can do it without moral hazard if we manage it right.

    The moral hazard is that people will stop improving themselves thinking they can collect insurance rather than work hard. But there are ways to design a program to minimize this.

    But wage insurance is not exactly the right name for this. I call it livelihood insurance. By using that name we’re not talking just about wage earners, we’re talking about the earning potential an individual has. It may or may not be wage income.

    It also, to me, helps convey the lifetime nature of the problem. People go through a life cycle. Early in the life cycle they train themselves into some particular occupation. Later in life, they very rarely undertake retraining. And they rise and fall with that occupation.

    What I thought the most important to do would be to develop measures of occupational risk and to write insurance policies against risks to the occupation, and that eliminates moral hazard because a person can’t do anything about the rise and fall of the occupation.

    So in order to make that happen we have to develop a rathe r different kind of insurance industry. This has never been done, and it requires better measurement of occupational incomes. We have to measure risks before we can insure them. And we need to develop historical indexes of occupational incomes that are done properly so that we have some sense of history about how these things evolve. That will help us design insurance policies.

    It’s going to be much harder to deal with these problems if we wait until 70 percent of the population is out of a job. Then it might be very difficult to get a consensus on what to do about the problem. This is really the insurance principle. You want to insure a house against fire before it catches fire. After it catches fire, it’s too late.

    We like Robert Shiller’s thinking. Though we think it should only be for a transition phase and become a permanent fixture: working for compensation.

    We’ve written about this several times in brief.

    There’s no doubt that if technology continues advancing apace, it could relieve humanity of having to work for money. The question is really whether power-hungry, controlling types will allow that to happen. They’ll allow the technology advancements, but will they allow everyone to benefit regardless of the amount of financial capital they control going in?

    We are optimistic but believe it will not be the walk in the park that it should. There are just too many people with deep-seated problems that compel them to not feel satisfied until they’ve pushed others down or held them down or climbed on top of them or what have you.

    We actually think technology will help fix some of that, as computers, once programmed properly, will be extremely logical and non-hypocritical. When coupled with the huge dataset that will be available, the computers will be able to predict vastly better paths than will those sociopathic types who tend to rise to the so-called top right now.

    The computers will be disarming, provided they aren’t forced to comply by the sociopaths, as computers advance based often upon financial capital to spend on their development.

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