What's up with the labor income share?

The labor income share in national income has been generally decreasing across industrialized countries for about three decades now. The consequences of this can be large, as this means a major reallocation of economic surpluses towards capital income (and the fact that Cobb-Douglas production functions become less appropriate). This trend has been exacerbated with the last recession, much to the dismay of many who see the rich capitalists screwing the labor force.

According to Loukas Karabarbounis and Brent Neiman that is at least not the entire story. Rather they emphasize that this drop in the labor income share is due to an increase in capital accumulation as a consequence of the decline in the price of investment goods. The drop cannot be attributed to changes in industrial composition, as it is also happening within industries. Note that this decline in investment good prices is often taken a symptom of technological progress, which means that for the first time since the industrial revolution, technological progress is leading to a decrease in the share of the production surplus that workers can capture. It just so happens that technology nowadays is labor-decreasing, or at least less labor-augmenting that it is capital-augmenting, and I do not think there is much that we should do about it at the technology level. At the fiscal level, that may be another question, though.

Only in Hong Kong: Designer Handbags as Collateral

It's been such a long time since we've had a luxury goods feature, so here's one: Anyone who has been known to Asia knows the social pecking order here among cosmopolitan (small-c, that is) women has something to do with carrying designer handbags. Mainland China is becoming a large and lucrative market and Japan remains a steady customer for big-ticket items, but Hong Kong is still a prime destination--especially in designer-handbags-per-capita terms since the city is Asia's second largest market overall for these products. It does help that you can buy these items duty-free there. Some markets are built to retain their advantage for the long haul.

Therefore, it was only perhaps a matter of time that this global financial centre began offering to accept these designer handbags as collateral. Sure the mainland Chinese buy lots of those too, but those hordes of noveau riche do not have longstanding experience valuing such goods. Moreover, the kinds of financial services they offer are nowhere near as sophisticated as those of Hong Kong which are obviously on the cutting edge. So,without further ado, welcome the pawnbrokers accepting designer handbags:

Say hello to the handbag-backed loan, a unique Hong Kong phenomenon. While money lenders typically ask for cars and homes as collateral, Hong Kong's Yes Lady Finance Co. seeks its customers' beloved handbags. The four-year-old company accepts handbags on the spot, assesses them for their condition and authenticity and then procures loans within half an hour, as long as the bags are Gucci, Chanel, Hermès or Louis Vuitton. Occasionally, they'll consider a Prada.

Prada? It's so very gauche, dahling [I adopt a haughty pose and turn up my nose at its mere mention]. Questionable workmanship and excessive marketing hype aside for the latter brand, many residents actually prefer this kind of fast finance to avoid the red tape incurred while dealing with conventional consumer loans. Hence, many customers are not really hard up as you would assume in other settings, but whose cost-benefit analysis regard handbags-as-collateral favourably:

In a city driven by consumers' voracious appetite for the newest and latest luxury products, handbag-driven loans are a lucrative business. Yes Lady takes a purse and lends clients 80% of the bag's value. Customers get the bag back by repaying the same loan with 4% monthly interest, within four months. Classic purses and special-edition handbags often retain much of their retail price.

The company recently gave out a roughly US$20,600 loan in exchange for a Hermès Birkin. But Yes Lady's purse-backed loans come in all sizes and start at about US$190 with no upper ceiling. Yes Lady is carving out a niche for itself in a city with 200 licensed pawnbrokers and over 900 moneylenders. The pawn industry, one of the city's most traditional forms of lending, targets primarily poorer residents and foreign domestic helpers. Pawnbrokers typically only accept watches, jewelry and electronics as collateral.

But unlike pawnbrokers, Yes Lady, whose Cantonese name translates to "Rich Woman," has a different customer in mind: wealthy locals whose money is tied up—sometimes literally—in a luxury accessory [...] Angel Yam, a white-collar office worker, says she doesn't really care if she gets back the Chanel purse she recently traded in for a total of roughly US$1,550. "I have too many idle handbags at home," she said. "I don't feel any loss when I take some of them as collateral for loans."

So there is a shallow, materialistic culture at work here among status-seeking handbag collectors and the cottage industry dedicated to serving them, but I'm rather more impressed by the financial innovation it has spawned in one of the world's most cutthroat of capitalist societies.

The One Percent

The JEP Symposium on The Top One Percent is now available online.

When to borrow from friends

When should I borrow from friends or from banks? With friends, I would typically get a lower interest rate, but I could risk losing a dear friendship. With banks, I pay more in interest and have to bring collateral, but I can walk away with relatively little damage. There are some situations where one should be preferred to the other.

Alexander Karaivanov and Anke Kessler study this question in the context of a world where borrowers can default strategically and there is limited enforcement of loan contracts. First they show that the optimal informal loan (from friends or relatives) features zero interest rate and zero collateral. This is because friendship is an efficient enforcement mechanism. That would typically happen with smaller, less risky loans. Then Karaivanov and Kessler show that if there is sufficient risk in the loan, one should go for a formal loan. The reason is that the collateral is divisible. In an informal loan, you either keep or lose the friendship. With a formal loan, you may still keep part of the collateral if things go bad. Using household data from Thailand, they find that their model lines up nicely with the data.

House Demolitions or the Detroitification of Spain

A chair is still a chair
Even when there's no one sittin' there
But a chair is not a house
And a house is not a home
When there's no one there to hold you tight
And no one there you can kiss goodnight...

As the late Luther Vandross explained, a house is not a home. Unoccupied houses--whether deserted or incompletely finished--blight the developed world. In the benighted American wasteland of Detroit, they have been bulldozing more and more unoccupied homes, and this phenomenon now stretches to parts of Japan. Meanwhile, we have a related occurrence in Spain. Alike the US, Spain experienced a housing boom in mid- to late-2000s, fuelled by expectations of ever-rising prices and easy credit (especially from German banks plunking their euros in these "investments"). Years and years of stagnation have left Spain with--you guessed it--thousands ofnd thousands of unoccupied houses.

How do you correct this oversupply of partially built, unoccupied houses that will probably never be completed that are dragging down market prices? It's the same solution the world over, whether in Detroit or Daisen. Namely, demolish those houses: 

Sareb, the unit holding soured real estate assets from Spain’s nationalized banks, orders work to stop on about 160 of the 650 partially-completed building projects on its books and decides which ones are worth completing. A small number of them may be demolished, said two people with knowledge of the matter, who asked not to be identified by name because it isn’t public.

“We expect the bad bank will start to seek bids for some demolition projects starting this summer,” said Anka, chairman of Madrid-based Anka Demoliciones and vice-chairman of the Spanish Association of Demolition Businesses.

Spain is counting the cost of the collapse of a decade-long property boom that’s sent home prices falling about 30 percent since the start of 2008, driven unemployment to 26 percent and burdened banks with mounting bad loans that have made them wary of extending new credit. A decision by Sareb to raze unfinished properties would demonstrate it makes more sense to knock down homes than try to sell them as an economic slump drags into a sixth year, said Fernando Rodriguez de Acuna, a project manager at Madrid-based real estate consultant RR de Acuna & Asociados.

It's going to be game over in a short while, too. They're just houses, not homes.

Wisdom from Raghu Rajan

"For economists who actively engage the public, it is hard to influence hearts and minds by qualifying one’s analysis and hedging one’s prescriptions. Better to assert one’s knowledge unequivocally, especially if past academic honors certify one’s claims of expertise. This is not an entirely bad approach if it results in sharper public debate.

"The dark side of such certitude, however, is the way it influences how these economists engage contrary opinions. How do you convince your passionate followers if other, equally credentialed, economists take the opposite view? All too often, the path to easy influence is to impugn the other side’s motives and methods, rather than recognizing and challenging an opposing argument’s points. Instead of fostering public dialogue and educating the public, the public is often left in the dark. And it discourages younger, less credentialed economists from entering the public discourse."

Read more at http://www.project-syndicate.org/commentary/the-declining-quality-of-public-economic-debate-by-raghuram-rajan#Xlo2wzGUe2FcbYDZ.99

A Debate over Obamacare

Casey Mulligan versus David Cutler