Why Americans are F***-ed in the head over race

The history of the US has generated persistent racial derangement. It has been far more of a case of structures generating racism than of racism generating structures.

Source.

People have a pretty good understanding of their own continental ancestry. People are also relatively accurate at picking out other people’s continental ancestry.

This is not surprising. There was not much mixing of lineages across continents until relatively recently, at least outside continental border regions. This was due to the limitations of technology: specifically very limited transport capacitie. Moreover, thousands of years of separate genetic lineages, with genetic bottlenecks creating relatively small founder populations for various continents, meant that there are fuzzy-boundary, but relatively clear, patterns of physical markers of continental ancestry.

So, a folk concept of race based on continental ancestry has some, relatively straightforward, patterns of physical-markers to work off. Hence the history of skin-tone descriptors of race. With race becoming to be understood as being continental, or some significant sub-continental region, ancestry. (Medieval Europeans had a rather different concept of race, one much more language based — so it made sense for a C14th commentator to talk of Scotland being one nation with two races: highlanders and lowlanders as thy spoke different languages.)

The US in particular has a long history of obsessing over race because continental origin coincided with fundamentally different roles in colonial society (the settlers, the dispossessed and the enslaved). Different roles that persisted into the country created by the American Revolution.

Slavery, settlement and racism

As continents produce neither single cultures per continent nor single breeding populations per continent, analytically, remarkably little follows from physical markers of continental ancestry being relatively clear. But as physical markers of continental ancestry are collectively visually relatively clear, they can, very easily, have social meanings attached to them. Which, of course, has happened repeatedly. Especially when one region has systematically enslaved people from region(s) with different general patterns of physical markers. Or when folk from one continent have populated another. We can call these the slavery effect and the settlement effect.

Both have proved to be powerful generators of racism: attaching normative ranking to continental (or region thereof) origin. That is, positive social meaning to one’s own group and (especially) pejorative social meaning to those with a different continental origin (and so a different social role).

A third generator of racism has been imperialism: domination of a state created by one continental origin group over folk with differing continental origins. This has been a rather stronger generator of elite or theoretical racism than more general racism, as imperialism is mostly an elite activity. (A 2018 study found that the UK and Portugal, the two surveyed countries with the longest histories of colonialism, had generally the lowest levels of racism among the surveyed European countries.) Though all racism, and race talk, starts off as an elite discourse.

The fourth generator of racism has been ethnicised religion. The classic version of this being racialised Jew-hatred.

None of these factors are sufficient in themselves to generate racism. The Romans were mass-enslaving imperialists who settled new areas and tended to dislike Jews. Racism was not a feature of their culture.

For the Romans were not a xenophobic culture regarding descent. Folk of any origin could become Roman citizens, including ex-slaves. Their slaves could be of any origin. Their society and their thought did not structurally differentiate by continental origin.

Moreover, Romans traditionally were not moral universalists. So, they did not have to generate some generalised story about why some folk were slaves. Slaves were simply losers and if they were freed, and became Roman citizens, then they became winners. Folk would put that they were freedmen (i.e., ex-slaves) on their tombstones, as that showed how much of a winner they had become.

Islam and racism

The first significant discourse grading people as cognitively deficient, based on physical markers of continental origin, came out of Islam. Islam being an imperial, evangelising monotheist (so morally universalist) religious civilisation that systematically enslaved people to their north (including Europeans, notably Slavs) and people to their south (Sub-Saharan Africans).

Folk of such origins were repeatedly characterised by Islamic writers as being cognitively deficient. Often either due to too little sun (Northern Europeans) or too much sun (Sub-Saharan Africans). So, in Chapter Three of his Tabaqāt al-ʼUmam (Categories of Nations), geographer Sa’id al-Andalusi (1029–1070) wrote:

The rest of this category, which showed no interest in science, resembles animals more than human beings. Those among them who live in the extreme North, between the last of the seven regions and the end of the populated world to the north, suffered from being too far from the sun; their air is cold and their skies are cloudy. As a result, their temperament is cool and their behaviour is rude. Consequently, their bodies become enormous, their colour turned white, and their hair drooped down. They have lost keenness of understanding and sharpness of perception. They were overcome by ignorance, and laziness, and infested by fatigue and stupidity. Such are the Slavonians, Bulgarians and neighbouring peoples.

(The English word slave likely derives from Slav.)

The patterns of castrating male slaves, and of incorporating the children of Muslim fathers into the umma, the Muslim community, meant that centuries of mass slavery failed to generate an ex-slave underclass within Islamic lands. But there are still linguistic traces of these centuries of mass slaving: abd in Arabic can both refer to slave (as in Abdullah, slave of Allah) and to Sub-Saharan African.

Christianity and racism

The Americas were subject to imperialism and mass settlement from Christian Europe. Added to this imperialism and settlement, millions of slaves were imported from Africa. This made continental origins socially salient in the Americas and did so from within a morally universalising religious perspective Christianity). This was a situation made for racism to develop. Which it duly did.

Hence the confused interaction between Christianity and racism. On one hand, the Gospel of Love applies to everyone. Indeed, from the earliest days of Christian European settlement of the Americas, there were devout Christians who spoke and agitated on behalf of the moral status of the inhabitants of the Americas as children of God.

An early, and important, manifestation of this was the 1537 Papal Encyclical Sublimus Dei declaring that the inhabitants of the discovered lands, even if they did not know Christ, were children of God with natural rights and could not be enslaved. In the words of Pope Paul III:

… the said Indians and all other people who may later be discovered by Christians, are by no means to be deprived of their liberty or the possession of their property, even though they be outside the faith of Jesus Christ; and that they may and should, freely and legitimately, enjoy their liberty and the possession of their property; nor should they be in any way enslaved; should the contrary happen, it shall be null and have no effect.

This did not bar owning slaves someone else had enslaved. As African rulers were more than happy to take care of that stage of the process, Sublimus Dei had little effect on the Atlantic slave trade. 

The moral claims and reasoning of the Papal Encyclical were, however, in rather direct contrast with Sharia, which is entirely fine with enslaving non-Muslims who have not submitted to rule by Sharia (i.e. by Muslims), including sexually exploiting captured women. The last being endorsed no less than 15 times in the Quran and by the example (sira) and the acts and sayings (hadith) of the Prophet. A principle of Sharia is that the marriage of any woman captured by a Muslim man is automatically annulled by the act of capture.

The Anglosphere abolitionist movement in the C18th and C19th had strong Christian roots. As did the US civil rights movement of the mid C20th.

On the other hand, Christianity is a morally universalist religion. Like Islam, it required some justifying story about why you were systematically enslaving the children of God from Africa. It required some justifying story about why you were dispossessing the children of God in the Americas. 

Christian moral universalism later also required some justifying story why you were systematically denying the descendants of slaves political and other civil rights. These were never going to be good stories about the dispossessed, the enslaved, and the excluded. There were plenty of people who were racist, not despite being Christian, but because they were Christian.

Enlightenment thought, which was also morally universalising, had much the same confused interaction with race and racism as Christianity. On one hand, the scientific impulse to categorise could be, and was, mobilised to propagate racist ideas. On the other hand, seeing the world as a shared globe inhabited by a single human species, along with a sense of expanding human capacities, made slavery morally problematic on a scale never seen before. Hence the rise of the abolitionist movements.

As for the settlement effect, so long as the Amerindians were being dispossessed (and feared) by the settlers from Europe, the structural reasons to be racist against them remained strong. After they were subjugated and shoved into reserves, the underlying structural motives to be racist against them lost strength. The effortless virtue, and pleasures of contempt, that bigotry provides may linger, but the general social retreat from, and anathematising, of racism has further weakened what was already a form of racism in structural retreat. As the eminent political career of Herbert Hoover’s Amerindian Vice President, Charles Curtis, demonstrated.

The intensities of slavery

Slavery and its aftermath proved to be a different matter to self-justifying antipathy to Amerindians, who always had a certain warrior vigour going for them. As sociologist Orlando Paterson has brilliantly analysed, slavery does much more then reduce people to property, it imposes on the slave a form of social death. They have no social standing, no family standing nor heritage to be acknowledged. Slavery is profoundly stigmatising and dishonouring, as it deprives the slave of the capacity to have honour or any status that casts doubt on being a slave.

The slave States of the US operated one of the most closed slave systems in history. It became legally hard to manumit a slave and the stigmatising dishonour of slavery was not excised by freedom. A process of stigmatisation greatly helped by the slaves being of a different continental origin than the settlers. The generalised theories that justified slavery could not allow space for some moral transformation from not being a slave anymore.

Roman slavery, not having that justificatory burden, and not being divided by continental ancestry, was far more open. Hence ex-slaves could become citizens and would even boast of how far they had come from their former slave status.

In much of the Americas, an intermediary mulatto or mixed race (i.e. mixed continental origins) identity grew up. Such folk served useful intermediary roles between a small settler elite and large slave or indigenous population. This did not happen in the slave South of the US, as the political importance of voting, and the scale of European settlement, worked against a mixed-race identity emerging.

There was no particularly useful social role that a mixed-race group could fulfil that was not already being filled by folk of European ancestry. Moreover, if ex-slaves and their descendants began voting in any numbers, they could begin to wield political power. Which was both politically threatening and an affront to the justifications for slavery. The result was the “one-drop” rule, whereby any African ancestry identified your slave origins, with all the associated stigmas and exclusions.

These structures served the divide-and-dominate politics of the plantation elite. Before the Civil War, the plantation elite used a range of mechanisms to repress poor “whites”, the masterless men, who had no stake in the slave system but who traded and socialised with the slaves. After the Civil War, and the failure of Reconstruction, the plantation elite used the same range of mechanisms to repress the ex-slaves and their descendants. They simply racialised the operation of exactly the same repressive mechanisms that had operated against the masterless men before the Civil War into what became known as Jim Crow. The former masterless men were now on the “right” side of the exclusions, and were thereby incorporated into the Southern system.

As African-Americans migrated to the industrialising cities, a version of such divide-and-dominate strategies turned out to be congenial to, and adaptable by, urban elites. Public policy was wielded to generate increasing residential segregation, as such segregation makes divide-and-dominate tactics far more effective.

A note in Richard Rothstein’s revelatory The Color of Law, sets out the path of residential segregation. Residential segregation that was driven by public policy. Including intensifying under FDR’s New Deal. In the ten largest US cities:

…in 1880, the neighborhood (block) on which the typical African-American lived was only 15 percent black; by 1910 it was 30 percent, and by 1930, even after the Great Migration, it was still only about 60 percent black. By 1940 the local neighborhood where the typical African-American lived was 75 percent black.

At all stages, such divide-and-dominate politics only worked because people bought into the political framings and discourses that legitimated them. Far more of our thinking and decision-making is unconscious than we realise. Social selection processes work on information and feedback: but not necessarily fully conscious, or sufficiently critically examined, information and feedback.

Weakening racism

The experience of the Second World War, both the mass mobilisation for a common purpose and the horrors of Nazi imperialism and racism, as well as the pressures of the Cold War, increased, both domestically and internationally, the embarrassment that American racism generated. At the same time, the continuing fail in transport and communication costs made it easier for marginal groups to organise, as did increased urbanisation and suburbanisation.

So, the structural supports for divide-and-dominate racism weakened. The civil rights movement, and particularly Martin Luther King, brilliantly played up the moral embarrassment of racial exclusion. Both the Christian moral embarrassment and the American-ideals moral embarrassment. With mass communications making it easier to reach people for persuasive effect.

Hence the successes of the civil rights movement and the retreat of racism from being pervasive within American society to being a moral shame. Though, as Glenn Loury makes clear in The Anatomy of Racial Inequality, complex patterns of stigma have been rather more stubbornly persistent.

From this history, we can see that structural racism (or analogues such as systemic racism) is generally not a useful term. For it has been far more the case that structures generate and mobilise racism than that racism generates structures. Nor are such structures a necessary part of the social system. They are more about bending the social system in a particular direction.

After the civil rights movement

Which brings us to the graph at the top of this post and its odd pattern whereby “white” (i.e. Euro-American) Democrats were very much more likely to say that they knew someone who was racist in 2015 than in 2006, but “black” (African-American) and Hispanic Democrats were apparently somewhat less likely to say they knew someone who was racist in 2015 than in 2006.

If someone knows more people they regard as racist than someone else, that can be because (1) they are more likely to meet racists; (2) they are better at identifying racism; (3) they are more expansive in their characterising of racism; or (4) some combination thereof.

So, taking the 2006 results in the graph above, it could be that Euro-American Democrats were more likely to meet racists than Hispanic Democrats or Euro-American Republicans. Or that they are better at identifying them than Hispanic Democrats and Euro-American Republicans. Or that they have a more expansive definition of racism than do Hispanic Democrats and Euro-American Republicans. Or some combination of the above.

If we move to the 2015 results, Euro-American Democrats were far more likely to believe they knew a racist than were African-American Democrats, Hispanic Democrats or Euro-American Republicans. They were also the only group who increased their likelihood of knowing a racist since 2006, and did so dramatically. By contrast, both African-American Democrats and Hispanic Democrats became, if anything, less likely to believe they knew a racist. (The shifts were not statistically significant but do accord with long term patterns of declining racism.)

The most plausible read of this data is that racism has declined somewhat in the US (in accordance with long-term trends) but Euro-American Democrats have acquired dramatically more expansive definition(s) of racism. (Unless they are registering dramatically increased anti-white racism — we can reasonably give that low probability.)

So, by 2015, Euro-American Democrats apparently lived in a US of significantly more racists among the people they interacted with, while African-American Democrats and Hispanic Democrats did not.

If fluctuations in racism are largely driven by changes in structural factors, as history strongly suggests, that suggests a change in structural factors that is particularly affecting Euro-American Democrats, but not other folk. Something that is making race much more salient to them.

An obvious factor is the massive increase, since around 2010, in the use of racial terms by US elite media. As Democrats have far more confidence in elite media than do Republicans (a long-term tendency that increased dramatically from 2015), the dramatic upsurge in the media’s use of racial terms could be accounting for much of the “more people know a racist” effect.

Especially as there clearly has been an expansion of what counts, within elite race talk, as racism. Partly because our concept of a phenomena tends to expand as the prevalence of that phenomena shrinks. There has been, for example, a creeping expansion of what is labelled as harm in Psychology. But there has also been an expansion of the concept of racism due to the expanding influence of intersectionality and critical race theory. Especially in the education of increasing numbers of younger journalists.

Is there a structural reason for this increased focus on race? One is fairly obvious: the value of anti-racism as a status play. The more intense one’s opposition to racism, the greater the moral prestige in being ostentatiously anti-racist and, conversely, the greater the moral shame from failing to appropriately oppose racism. So, a status-play purity spiral gets set up. One that can be used to lever folk out of jobs. The bottom-up (but still elite) prestige play then becomes a dominance play. In a situation of elite over-production, such status-plays are a very useful weapon in struggles over opportunities and resources.

Ostentatious anti-racism can make one reluctant to admit that racism has declined or to give credence to other factors in explaining social dynamics. One becomes invested in continuing to ascribe social meanings to race. The surge in hate crime hoaxes fits in with this.

Function does not require intent

Unconscious psychological processes outstrip conscious reasoning, both in time and in scope, which makes many psychological phenomena possible… 

Andrew M. Lobaczewski, Political Ponerolology: A Science on the Nature of Evil Adjusted for Political Purposes, p.163.

The other reason for increased focus on race is less obvious, but has a longer historical pedigree. Overt racism might have become embarrassing, but the advantages to urban elites of divide-and-dominate politics has never gone away, so social selection pressures will continue to favour such politics. The more divided residents, workers and citizens are on racial grounds, the less elites have to deal with competing (against them) claims on resources. Symbolic race-identity politics are way cheaper for elites than politics that delivers good government. That is as true today in urban US as it was in the Antebellum or Jim Crow South. Hence racially-divided US cities are (by developed democracy standards) comparatively ill-governed, just as the Antebellum and Jim Crow South were in their time.

If anti-racism can be turned into a racialised divide-and-dominate strategy, as clearly it can, then all the better for opportunity-hoarding elites. Especially for elites facing intensified internal competition for resources and opportunities.

Intersectionality and critical race theory are very much elite products, coming out of places such as Harvard Law School. Nor do they have to be originally developed as divide-and-dominate mechanisms for social selection pressures to adapt them into divide-and-dominate mechanisms.

Moral concern easily becomes status plays. Status plays are naturally divisive. Moral dominion easily becomes social dominion. Such feedback loops provide much for social selection processes to work on.

Such outlooks and patterns of action do not have appear to their active proponents to be divide-and-dominate politics in order to function as such. Remembering that such framings and discourses work much better if folk can be convinced to go along with them, while social selection processes do not have to be entirely conscious. Especially as the prime mechanisms for self-deception are by manipulating salience. Particularly moral salience.

One cannot force oneself to believe what one doesn’t believe. We can, however, use focus on, for example, image-self-protection, to block paying attention to awkward facts or considerations. This is especially easy to do with highly moralised concerns and self-images. Both because of their emotional power and because it is inherent in moral claims that they be normative trumps. That one has an ostentatious image of oneself as being not-oppressive does not guarantee that one is not buying into politics that are, in fact, oppressive or self-serving.

Coverage by elite media of deaths in police custody, or at the hands of police, is particularly revealing. There is a general problem of police training and accountability in the US. One that varies far more by jurisdiction than it does by race (whether of police or civilian protagonist). If media had reported these things accurately, then a broad coalition could have been built up to improve police training and accountability.

Instead, by intensely and selectively racialising their coverage, the “racist cops” narrative was firmly established by elite media. Turning this into a specifically African-American-and-police problem rather than a general accountability-to-the-citizenry problem and allowing those propagating, and those accepting, the narrative to thereby parade their ostentatious anti-racism. A way easier, and more immediate, social and cognitive reward than doing the hard work of increasing police training and accountability. Hence “defund the police”: a simplistic but convenient symbolic politics that was way easier to pander to than improved police training and accountability.

Revitalising divide-and-dominate

Even better, one of the key mechanisms for divide-and-dominate has been to fail to provide effective policing in African-American urban communities (as measured by homicide clearance rates), thereby generating much higher homicide rates in those communities. (In rural US, Euro-Americans and African-Americans have identical homicide rates.) These differential levels of violence do more to racially divide US cities than any other factor.

The “racist cops” media narrative, and activism, so congenial to moralised self-image, and their associated status plays, has increased the level of violence in those localities and so increased the most racially divisive element in US cities. If one was seeking to revitalise divide-and-dominate politics, it would be hard to do better.

A recent study found that the more educated you were, the more politically progressive you were, and the more you trusted the media, the less well informed you were on police shootings. (But the more conveniently you believed, as far as divide-and-dominate politics went.)

Social intent does not entail social function. Social function does not entail social intent.

Elite race talk is always a divide-and-dominate mechanism. Elite race talk has, historically, been racist. Indeed, racist discourses have always started off as elite theories. But anti-racist race talk works just as well as a divide-and-dominate mechanism, provided one continues to ascribe social meanings to race and do so in pejorative ways. Which, of course, is what all the talk about whiteness, white supremacy, white racism, etc. does.

It is still a case of structures generating the assigning of divisive social meanings to race, far more than the reverse, seeking to bend the social system to their benefit. Even doing so within ostentatiously anti-racist rhetoric and moral framings.

What is that French saying? plus ça change, plus c’est la même chose: The more it changes, the more it’s the same thing …

(An earlier version was posted on Medium.)

Firms, Cities, States: who has open borders and why?

This is based on a comment I made here.

Econblogger Robin Hanson notes that firms and cities have open borders and argues that:

So if nations act differently from firms and cities, that should be because either:
1) there are big important effects that are quite different at the national level, than at firm and city levels, or
2) nations are failing to adopt policies that competition would induce, if they faced more competition.
My bet is on the latter.

This comparison is more complicated than it at first appears, but still (it turns out) revealing, if you consider how state behaviour has changed over time.

Firms (at least as employment entities) have highly controlled borders--they have to hire you, you can be fired. They also have expansionary tendencies and can operate across jurisdictions. That is not really open borders as such. Indeed, the harder it is to fire people, the more cautious they tend to be about who they hire (i.e. "let in"). You can buy your way in to a firm as a shareholder, but then you become a risk guarantor. It is a particular form of commercial exchange to which you commit capital.

Cities are ambiguous between jurisdictional entities, which are generally not allowed to control movement of people across their borders, or as some (territorially contiguous) level of density of population, in which case it is not clear exactly what one means by "borders" and who would "control" them.

Source.

City governments do tend to control land use, often in considerable detail, and that has sometimes been used to block the residence of certain groups (pdf). Politicians such as James Michael Curley and Coleman Young have used city policies to drive away folk in order to make their own ethnicity dominant, what economists Edward Glaeser and Andrei Shleifer called the Curley Effect (pdf). The returns to controlling land use are much higher than any returns to controlling population movement as such, so there seems no reason for cities to demand the right to their own border control from states that are not likely to grant it.

States are the only one of the three (firms, cities and states) with hard territorial borders. That is, borders that are policed, that separate entire legal systems, that have no overlapping political authority. (Obviously, some arrangements, such as the European Union, pool a certain amount of sovereignty, but they are exceptional to the normal pattern.)

Leaving aside labour bondage systems (serfdom, slavery, Communism) which, by their nature, have to control exit-movement, states have historically not sought to control inward movement. Indeed, attracting more people meant more tax payers. 

What states have had strong controls over is who gets to control the state. Historically, that has been bitterly defended. It is conspicuous that border controls over inward movement start happening when states start acquiring broad electorates. In particular, working class voters have tended to be strong supporters of various forms of border control. Indeed, generally they still are.

Ceuta border fence.

So, the question is not "why do states control borders?" in the sense of movement across borders, because historically many have not, but "why do working class voters support border control?". That is not a hard question to answer. Especially when the vote is their only significant political leverage and they are the group (unlike migrants and holders of land and capital) who do not gain significantly from migration, indeed, can be net losers from migration, and who are much more reliant than more educated voters on local networks for support and risk management that can easily be disrupted by migration.

So, once we have worked through the what do you mean by borders? question, yes it is about competition pressures and how much capacity working class voters have to push back. But it is the comparison with state behaviour over the long run that is the most revealing, not the comparison with firms and cities.


[Cross posted at Skepticlawyer.]

Globalisation, internationalisation and globalism

It has become something of an analytical commonplace to see the rise of populist nationalism (or national populism)--the development of nationalist parties in Europe, the Brexit vote in the UK and The Donald winning the Electoral College (and thus the US Presidency) in the US--as signifying "a revolt against globalisation".

That is not a useful way of looking at the phenomenon. Particularly not in the case of Brexit, given that prominent supporters of Brexit were pro free trade and, according to polling, the British electorate at large is very strongly pro-trade.

Three different phenomena have to be distinguished:

globalisation: the increasing range and density of cross-border transactions of all varieties, including (in some ways especially) the flow of information. Globalisation is driven by falling transport and communication costs.
internationalisation: increasing use of international organisations to make or adjudicate policy decisions. The EU is internationalisation par excellence, but there are many manifestations of it, including the WTO and the International Criminal Court.
globalism: advocacy of rising international flows of goods, services and finance, of internationalisation and high levels of migration. Globalism is a set of policy positions, amounting to something close to articles of faith: particularly supporting migration.

There is nothing about globalisation per se that requires internationalisation or globalism. One can be quite hostile to internationalisation and high levels of migration without, for example, being hostile to  international trade. (This the position of quite a strong majority of Britons, according to polling, for example, though controlling immigration apparently trumps trade.)

An obvious objection to internationalisation is that it undermines democratic accountability--people may elect those who appoint those who run the relevant organisations, but their decisions are only (at best) very weakly subject to democratic oversight. (And doing an end-run around domestic interest groups can be the point of such arrangements.)

This then also becomes an objection to globalism. The other clear point of contention with globalism is migration.

The migration sticking point
The standard line among "serious" folk is that migration is good for one's economy. Well, it can be, but it need not be. The migration of Palestinians into Lebanon was, for example, very bad for the Lebanese economy because it destabilised Lebanese politics leading directly to the Lebanese Civil War. The pressures, and political responses, to mass migration in the Antebellum US helped destabilise it, being part of the events that led to the American Civil War. Yes, both polities had serious internal fissures, but the notion that immigration cannot be de-stabilising is patent nonsense.

To take a milder example, the Nordic model of high levels of social provision and high levels of economic freedom relies quite crucially on strong connections and easy communication between officials and public based on shared expectations and values to permit relatively high efficiency in provisions of social services. The more diverse the spread of expectation and values are among the population, the more difficult such a high tax-spend social equilibrium becomes. Muslim migration to Sweden and other Nordic countries must tend to, over time, make that social equilibrium less stable--particularly as such a narrow range of migrants are being imported, making it much less likely that Nordic norms will be adopted by the newcomers and much more likely that Islamic norms will operate as a counter-identity. Migration may not de-stabilise the polity as such (though the rise of the Sverigedemokraterna or Sweden Democrats has upset the structures of Swedish politics) but it can certainly de-stabilise the existing policy regime.

Treating immigration as an unalloyed good, and migrants as an undifferentiated mass, is propagandistic nonsense. That does not stop folk being outraged when the costs of migration are raised, or when folk suggest that there might be reasons to differentiate between sources of migrants. For example, there is no benefit from Muslim migrants that are not available from other migrants. There are costs from Muslim migrants which are either specific to, or particularly intense among, Muslims. Of course lots of folk are sceptical about Muslim migration.

This is not opposition to globalisation. It is not even opposition to migration--a poll that found almost half of Australians thought Muslim migration had been bad for Australia also found that almost 70% were comfortable with more migration. Dismissing the hostility to Muslim migration as xenophobia, racism, anti-immigrant, anti-globalisation simply epitomises the way language taboos are used to discount popular concerns and (worse) do so by degrading the moral status of fellow citizens. The contrast with the po-faced pieties whereby Islamic jihadism is framed until it is not even Islamic screams the contempt for fellow citizens, and the moral mascot/sacred victim elevation of newcomers, involved in so much globalist self-congratulation.

Which is just the sort of smug hostility to citizen concerns that fuels opposition to globalism. Globalists have an interest in framing opposition to their preferred policies, and the ways in which they are pushed, as opposition to globalisation, because it redirects away from critical scrutiny of themselves and their preferred policy outcomes.

The economics of migration
Folk do better in Western countries. This is an obvious truth which fuels migration to those countries. Once, however, one begins to consider other issues, the issues regarding migration become much more complex.

We can dismiss immediately the fact that more people buying and selling makes an economy bigger. That is true, but not the key issue for existing citizens. What are the per capita effects, and how are they distributed, is what matters for domestic politics and democratic accountability. Citing the benefits to non-citizens as reasons to over-rule the concerns of actual citizens is fundamentally opposed to any serious concept of democratic accountability. That sort of globalism is more-or-less guaranteed to generate popular hostility, as an obvious response to its hostility to the populace.

Once we start looking at the per capita effects, the economics of migration becomes much more complicated. If one's analytical model is unable to usefully differentiate between people in the economy, then it is unable to provide analysis in anyway useful for understanding the implications of migration. Hence, all (single) representative agent models can be dismissed.

If the net benefits of migration accrue to the newcomers and top income quintile, for example, then the general public is being told to accept a policy which is not in their interests. Suggesting they are not allowed to object is again hostile to democratic accountability while citing economic studies which do not usefully differentiate the effects of migration between various groups in the society is propaganda parading as argument. (Even more so, if said models do not differentiate between various types of migrants either.)

Effects on housing, for example, provide a good example of the analytical difficulties. Bringing in migrants will, in sufficiently supply-constrained housing markets, drive up house prices and rents. That is increased economic activity (of a sort) but clearly one that benefits folk owning housing and not folk who rent. Unless one's economic model quantifies the effects of driving up shelter costs on non-homeowners, and assigns that cost to the relevant groups (and the benefit to others) then it will register the effect of migration as a net benefit, even though significant groups of citizens are being directly disadvantaged by that effect from migration. Especially as having lots of non-citizens (and so non-voters) among entrants to housing markets makes it easier to politically discount the interests of such entrants and so set up regulatory supply constraints on land for housing.

Then there are the dynamic and social interaction costs of migration. Economics still lacks a robust model of long-term economic growth able to explain the wildly disparate performance of economies--the wildly disparate performance which drives so much migration towards Western countries in the first place. Unless an economic model can incorporate the dynamic effects of different groups of migrants on the functioning of the society, it cannot make useful analysis of the long term effects of migration. Which, in the absence of said robust model, economic models currently cannot. What economic model can, for example, incorporate having to add security guards to swimming pools, and the shift in ordinary social expectations and experience that entails, in the net effects of migration? The effects of systematically lowering the level of trust in a receiving society are very much part of the potential implications of migration.

Consider the effect of substantial migration on the scarce good of policy and political attention. Bringing in lots of migrants, particularly under the rubric of multiculturalism, which lowers the cost of migration to the newcomers but raises it for the residents, has meant that policy and political attention gets directed towards the newcomers. Especially when they live where the policy makers live, and where those commanding the "cultural commanding heights" live. Which means less policy and political attention gets applied to areas where that is not so. If you think folk do not notice, you are not paying attention.  That support for Brexit was stronger in areas with less migration has been commented on as if this shows how "stupid" Brexit voters were. On the contrary, it showed that voters in such areas noticed the attention they weren't getting: which was precisely the point.

Add in the tendency to speak as if migration somehow "redeems" the society, and the wider tendency to disparage the culture and history of Western societies (treating then as Haan history repositories of sin rather than Whig history repositories of achievement) and the cost of migration mounts further. Resident citizens are not only being downgraded in terms of policy and political attention, they are, in a signifiant and serious sense, being systematically culturally disrespected and downgraded in status. Costs which are again not incorporated into economic models.

Finally, mass migration has genuine potential to go horribly wrong. Sufficiently misconstrued migration policy can significantly destabilise societies and/or undermine what makes societies attractive destinations in the first place. Refusal to even admit this possibility actually makes it more likely, not less.

In the US, the failure of median incomes to increase suggests that, whatever benefits migration and trade are generating to the US economy, those benefits are either not reaching a significant number of folk or are being overwhelmed by other factors. If significant political and policy attention is not paid to, or analysts fail to provide and propagate effectively good explanations, for those outcomes, then folk can hardly be blamed for reaching for easy explanations.

There is a great deal of not-noticing arrogance in globalism, and a significant strain of hostility to democratic accountability. The self-serving appeal for globalists in parading popular hostility that their failings (and smug arrogances) generate as "hostility to globalisation" is obvious. It is not, however, a parading which should be accepted. The actual story is rather more complicated and, until folk notice those complications, more popular revolts can be expected.

[Cross-posted at Skepticlawyer.]

ADDENDA: The working class resentment of professional folk who "order them around every day" noted in this insightful piece is also relevant. Globalist politics are the politics of the professional class in particular and globalist politics all too often epitomise the "the dorky arrogance and smugness of the professional elite". Expertise is not wisdom; even more as experts are prone to over-estimate how much they actually know and then confuse that over-estimation with wisdom. Add in sermonising (and the motivated reasoning such naturally entails) and they can be deeply blind to what they do not see and even more blind to how they seem.

Fancy maths and data series are no reason to ignore supply and demand

Came across a 2014 NBER paper Betting The House (pdf) by Òscar Jordà, Moritz H.P. Schularick & Alan M. Taylor. I was wildly unimpressed. I am not quite sure whether I am willing to use the tag line of "numbers make smart people stupid"--as per this wonderful post on the adoption of farming, criticising an attempted cliometric study of said transition from foraging--but still, wildly unimpressed.

Judging monetary policy fail
First of all, the paper associates low interest rates with "loose monetary conditions". For example:

The long-run historical evidence uncovered in this study clearly suggests that central banks have reasons to worry about the side-effects of loose monetary conditions. During the 20th century, real estate lending became the dominant business model of banks. As a result, the effects that low interest rates have on mortgage borrowing, house prices and ultimately financial instability risks have become considerably stronger... these historical insights suggest that the potentially destabilizing byproducts of easy money must be taken seriously (p.3).

Or, later:

Using short-term interest rates as a proxy for monetary conditions ... (p.14).

The paper also refers to "easy low interest rates" (p.35).

The paper is centred around an equation based on the monetary policy trilemma (that monetary policy cannot have a stable exchange rate, free flow of capital and autonomous monetary policy all at the same time) where interest rates "measure" the stance of monetary policy (p.15), leading to the central conclusion (p.37) that (italics in original):

Loose monetary conditions are causal for mortgage and house price booms, and this effect has become much more dramatic since WW2.

Judging the stance of monetary policy from interest rates is deeply problematic. In Milton Friedman's words:

Initially, higher monetary growth would reduce short-term interest rates even further. As the economy revives, however, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

This is hardly surprising, as nominal interest rates include inflationary expectations, so will be higher if inflationary expectations are higher. During the Great Moderation, inflation and interest rates were low: in what world is low inflation a sign of "loose monetary conditions"? To quote Milton Friedman again:

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

Apparently, they don't.

Money has two uses--the demand to hold money as an asset and the use of money in transactions. (Or, if you like, the demand to keep money for use in future transactions and its use in current transactions.)  If inflation is low, that means that the use of money in (current) transactions is roughly keeping pace with the growth of goods and services. So, not loose monetary conditions, with (nominal) interest rates to match. (Which, by the way, is the only way the quantity theory of money makes sense--i.e. if the demand to hold money is not included: money held has no effect on the price level because it is not being used to buy things.)

As long as one separates out the demand to hold money as an asset/for use in future transactions, then monetary conditions are a matter of supply and demand (of money in circulation and goods and services on offer). A simple way of thinking of the price of money is that it is what you can buy with it, so 1/NGDP (the inverse of total money spent on goods and services). Thinking of it that way, the price of money moves inversely to the price level (since NGDP = Py, where P is the price level and y is output of goods and services) holding y constant: as the price level goes up, the price of money in goods and services falls (and inflation is when that keeps happening); as the price level goes down, the price of money in goods and services rises (and deflation is when that keeps happening).

Conversely, if the demand to hold money shoots up, as happened in 2008, but the central bank does not adjust monetary policy accordingly (as also happened in 2008) then the effect is a serious (if passive) tightening of monetary policy. Which can lead to things such as the steepest fall in spending on goods and services in the postwar period. All that without any significant shift in interest rates.

Exchange rates are also prices of money. But they are the price of one money in terms of another money.

What is NOT the price of money are interest rates. (The price to borrow something is not the same as the price to buy it.) Interest rates are the price of credit (aka, the price of delayed obligation). Low interest rates (which normally implies low real interest rates) are a sign that credit is cheap, so we can expect, in such circumstances, more purchasing of goods and assets on credit. Such as, for example, housing.

To put it another way, easy credit is not the same as easy money. Though changes in a monetary regime can certainly shift risks. For example, when unification into a common monetary area lowers nominal interest rates in previously inflation-and-exchange-rate-depreciation prone economies that are no longer subject to differentiated money risk (since they are now using a single currency) nor to exchange rate risk (ditto). But that is not really "easy" money; it is a shift in expected risks favourable to more use of credit. One, indeed, based on the expectation that the common money will be "harder" (more resilient in value) than the local money that preceded it.

Time preference

Interest rates are typically divided into money risk, asset/agent risk and the “risk-free cost of capital” (plus other transaction costs, which we can ignore). The “risk-free cost of capital” is better conceived of as pure time preference; what people are concerned about in any delay in use of income, which can differ across time and space. If people’s concern about delay is dominated by fears that they won’t have income later, time preference may even be positive—i.e. people become willing to pay to have access to their capital in the future.

In other words, interest rates should be treated as entirely an across-time price: thus if there was no delay risk or fears about future income, people would be indifferent to which time period they had access to their income (capital which was genuinely “risk free”--so no agent risk--would have no cost across time, apart from money risk). Though risk of death does, of course, give us a reason to be concerned about delay.

A nice short discussion of shifts in general risk since the medieval period is at William J Bernstein, The Societal Risk Premium. For a discussion of situation where pure time preference is positive (i.e. there is willingness accept negative returns in order to have future access to capital) see John Hempton's essay, The Chinese Kleptocracy Is Like Nothing In Human History.

As an aside, time preference should not be regarded as a single number, but as a continuum for agents across which the supply and demand for credit is matched--thus, if demand for credit sharply increases compared to supply, interest rates can be expected to rise, likely attracting new credit from people whose time preferences are now being covered and so are more willing to offer credit. (This can be understood as movement along a supply curve.) Conversely, if the demand for credit sharply decreases compared to supply, then interest rates can be expected to fall, reducing the number of people whose time preferences are covered and so are willing to offer credit. (This is also movement along a supply curve.)

If people increasingly judge that general delay risks are falling, their time preferences will shift, affecting their willingness to offer credit. (This can be understood as a shifting supply curve.) If such tendencies become entrenched, major effects can follow. Such as changing the arrangements of farming fields. Most peasant societies handle farming risk by dispersal across space (using scattered fields, thereby accepting reduced average production in order to reduce production variability from year to year). If interest rates fall, allowing much cheaper smoothing of income across time (either by increased use of less costly/risky storage or by use of--now significantly cheaper--credit), farmers tend to shift to concentrating fields, thereby increasing average production while accepting increased variability in production from year to year. That is, they move to managing variability across time rather than across space. Hence falling interest rates led to the enclosure movement (pdf).

So, the market for credit is not the market for money and interest rates are not a good basis for judging the stance of monetary policy.

Housing market fail
Then there is the Jordà, Schularick & Taylor paper's treatment of housing markets as if they are generic. A particularly egregious example is given at p.14:

Viewed as a natural experiment, the question is whether these differences in monetary policy treatment led to different outcomes in Ireland and Spain using Germany as control.

Paul Krugman famously divided US housing markets into the Zoned Zone and Flatland. Germany is Flatland, so it cannot be used as a control for any housing markets where the supply of land-for-housing is rationed (such as Ireland: by rationed I mean restricted in a way which significantly reduces the responsiveness of supply to increased demand, typically by various regulations).

Just as with money, where we need to distinguish between demand for money-as-asset and use of money to purchase goods and services, so we have to distinguish between demand for house-as-asset and use of housing--i.e. the demand for shelter. (Actually, as Matt Yglesias has pointed out, houses are large decaying structures, it is the land the housing is on which is the enduring asset.) The demand for shelter can be satisfied by buying or renting, a choice which will depend on the circumstances of particular people and the structure of a given housing market. The demand for house(land)-as-asset can only be satisfied by purchase.

So, if people think that land is a particularly good asset--because, for example, land-approved-for-housing is rationed, so has an entrenched tendency to increase in value faster than inflation--then the demand for house(land)-as-asset will be greater. A choice that will be definitely affected by interest rates, as low interest rates imply lower borrowing costs, so encourage more people to take out mortgages to enter the market for house(land)-as-asset, driving the price of houses even higher; if regulation or other constraints continues to inhibit supply responsiveness. So, easy credit can certainly be expected to have an upward effect on house(land)-as-asset prices in land rationed housing markets (or other housing markets with strong feedback effects). But, as discussed above, the price of credit and the price of money is not the same thing. Hence monetary policy having very little correlation with house price rises, but capital inflows having quite a strong correlation, as then Fed Chair Ben Bernanke pointed out in a 2010 speech.

What do we know about markets for assets in restricted supply? They tend to be more unstable (pdf). Hardly surprising, since there tends to be a positive feedback effect, where rising prices expected to continue of themselves encourage more demand for the asset. Particularly as there is experimental and empirical evidence that lack of experience in investors increases feedback effects; with house-buyers largely being inexperienced (or, at least narrow-experienced) investors, in that they rarely have experience of investing with other major assets, or engage in many house purchases; factors especially important when various housing markets had prolonged price-build ups.

So, using Germany--where supply of land-for-housing is responsive to demand--as a control for Ireland, where it was not, is a basic failure of analysis: an apples-with-oranges comparison. (In the case of Ireland, access to some areas was highly rationed, driving up prices, and to other areas was much less so, encouraging misallocation.) Supply and demand, they matter, really they do. Thus, the structure of particular markets matter, really they do.

What we appear to have here is data disease--"we have assembled all this lovely data, and it is much more pliable for our analysis if we just abstract across housing markets". But that is precisely what one cannot do--at least, not across housing markets with very different supply dynamics, for example.  The paper's failure to consider the difference between demand for shelter and the demand for house(land)-as-asset is quite clear:

The house is a bundle of the structure and the land used in its construction. An ideal index would capture the appreciation of the price of a standard, unchanging house which is hard to identify (p.5).

Monetary policy general: assets specific
Then there is the general versus particular problem. Monetary policy is a general phenomenon while "bubbles" (i.e. asset price surges and collapses) occur in specific asset markets. It is always a pertinent question, why did a surge-and-collapse occur in this asset market and not another? The US, for example, does not have a single housing market, it has hundreds, with wide diversity in levels of boom or bust.

Monetary policy also has a poor record when applied to asset "bubbles", including housing asset "bubbles". (Which, btw, is not a helpful way to think about housing price dynamics.) Lars Svensson noted that such "leaning against" policy can actually make debt-to-gdp ratios worse (pdf), by depressing income needed to service past debt more than it discourages future debt. Folk such as Richard Koo in Japan and Steve Keen in Australia typically apply Irving Fisher's Debt-Deflation Theory (pdf) of depressions in this unbalanced way--too focused on debt, not enough on income expectations (the deflation bit). There is no more effective way to produce disastrous debt dynamics than tight monetary policy driving down income expectations, thus spending, thus income, thus ability to service debt. Which is what happened in both the Great Depression and the Great Recession and continues to operate in much of the Eurozone.

The Jordà, Schularick & Taylor paper argues that the unified monetary policy of the Eurozone provides a situation for countries where the unified monetary policy was "too loose" to have credit booms through the "credit channel" of monetary policy (Pp11ff). First, as previously noted, it is surely more a matter of a unified monetary realm changing expected risks in various economies. Second, if it is a "monetary policy via credit channel" issue, one might expect that a similar process could operate in the US, since it is about as large as the Eurozone and also has a common monetary policy. Which then raises the issue of the paper's different treatment of the US versus the Eurozone--either treat the various US housing markets separately or treat the Eurozone as one big housing market, as the paper treats the US. Treating the US as one housing market and the Eurozone as a collection of them is worshipping far too much at the altar of national statistics rather than market dynamics.

Extending the former point, what the creation of the Eurozone did do was to eliminate money risk differentiations between economies as well as exchange rate risk: the consequent drop in nominal interest rates would be expected to increase demand for credit and the elimination of exchange rate risk increase the supply thereof in countries where both factors acted most strongly (i.e. the Mediterranean economies). But, as the paper points out, the effects on housing markets were not consistent--which again points to need to examine the structure of specific housing markets. A paper such as this (pdf) which provides a simple model for explaining housing price bubbles also (very sensibly) confines itself to policy recommendation which are specific to housing markets.

The Jordà, Schularick & Taylor paper holds that long-term interest rates are a good proxy for mortgage rates (p.21). Well yes, since mortgages are classic long-term financing and even more since mortgages have become such a large part of banking business (p.5). But, to invoke Milton Friedman once again, interest rates are set in a whole range of linked asset markets, so the question of why credit is drawn to a particular asset class still remains very relevant. Yes, monetary policy fundamentally affects general income expectations which will have a general tendency to push up (or down, depending on what income expectations it is generating) asset prices, but that is not even close to saying that monetary policy drives asset prices in anything close to a uniform way.

The failure to examine land use regulation in any systematic way also shows up in this paper bv Sebastian Dellepiane, Niamh Hardiman & Jon Las Heras on the housing boom-and-bust in Ireland and Spain. The paper notes that Portugal, Greece and Germany had very different experiences, but does not engage in any systematic examination of differences in land use regulation. (There is a passing reference to zoning in Ireland, and some hand-waving about de-regulation in Spain, but that is about it.)  The Dellepiane, Hardiman & Las Heras paper also engages in the unfortunate usage of "easy money" when they mean easy credit. On the other hand, the paper is clear that encouragement of "housing(land)-as-asset" was very much central to the difficulties in Spain and Ireland.

Either way, nice data and fancy maths do not warrant ignoring basic dynamics of supply and demand.

About history
If you are going to study the effect of monetary policy and monetary conditions on asset prices, then one really must familiarise oneself with C19th economic history. There you will find some truly spectacular asset booms and busts under a gold standard monetary regime: not generally regarded as conducive to "loose" monetary conditions. Yet one marked by generally low interest rates.

In particular, technological uncertainty (of which there was a great deal in the C19th) is more than enough on its own (pdf) to create asset booms and busts. But so will the supply of capital increasing in a way that it is "pushing on" investment opportunities; as per Andy Harless's analysis here.

Speaking of whom, he made an apposite comment about low discount rates and asset price volatility:

Low discount rates (which may not be quite the same thing as low market interest rates) do make assets hard to value (which may not be quite the same thing as causing bubbles), because they make asset values more sensitive to flows in the more distant future, which are harder to estimate. For example, if you assume a constant growth rate, as asset value is V = d/(r-g), where d is the current flow (“dividend”), g is the growth rate, and r is the discount rate. If r is only slightly higher than g, then a slight change in g will have a dramatic effect on V. So suppose r is low, and people happen to get a little too optimistic about g. It’s debatable whether this fits the definition of a bubble, but in any case it’s going to cause the price of the asset to skyrocket, and when the overoptimism fades, the asset price will collapse. (Of course the situation is symmetric. Maybe people rightly became optimistic about g, the asset price rightly skyrocketed, and then people happened, wrongly, to get just a little bit less optimistic, and the asset price collapsed. In this case there wasn’t a bubble per se, but the same volatility problem exists.)

To which monetary economist Scott Sumner responded:

Yes, asset prices might be more volatile, but that would not be because of monetary policy in any case. At least not for any extended period of time. Suppose rates were low, but inflation was below target. The Fed could raise rates, but that would drive inflation even lower. In that case either rates would fall again, or we’d go into deflation, and rates would fall a bit later. 

In any case, I see asset price volatility as being very different from asset price bubbles. Japanese stock prices have been very volatile over the past 20 years, but there has been no Japanese stock bubbles over the last 20 years. So it’s not clear that this sort of asset price volatility is a problem.

So, we are not talking about simple asset price volatility and housing prices were not notably affected by technological change (except, perhaps, changes in financing technology).

Comments I also made on the same post are apposite.  If there is a prolonged period of rising incomes are not asset prices going to rise? Not merely from expectations of future incomes but such further magnified by (rising) savings pushing on investment. And if expectations of increased income increased asset prices why would not also positive expectations about an asset as a store of value? Whether for gold or approved-for-housing land.

Moreover, in a market economy with multiple interest rates and multiple assets, with assets being various bundles of income-expectation, store-of-value-expectation, and expected risks, how can one measily central bank rate be more important than any of the aforementioned? And, in a market economy with multiple interest rates and multiple assets, with assets being various bundles of income-expectation, store-of-value-expectation, and expected risks, how can one interest rate be “the” rate that balances planned savings and planned investment?

To which the response is, it can't. (A weakness of Austrian analysis is that, on one hand, it insists that the heterogeneity of capital is crucial, yet it also gives a single interest rate amazing pivotal power.) One has to look at the dynamics of different asset markets. (Another problem with Austrian business cycle analysis is that an implication is that downturns should hit industries in a sequence according to their different average investment cycles, rather than all at once, as actually happens.) And housing markets are not asset markets in an all-the-same-really sense, as specific housing markets are not equally driven by the demand for shelter; in large part because they are not subject to the same supply dynamics.

And no amount of data assembly and fancy mathematics gets around that. Just as it cannot get around interest rates not being good indicators of monetary policy: in particular, low interest rates are very much not a reliable indicator that monetary policy is "loose" or "easy".

Scott Sumner famously keeps reminding folk to never reason from a price change. Another way to put that is: always attend to supply AND demand (even if no one understands that no one understands supply and demand). And so attend regardless of much data you have assembled and how much fancy maths you can apply to it.

[Cross-posted at Skepticlawyer.]

"Over-valued" is the wrong metric about "bubbles"--housing or otherwise.

Thinking about asset price stability is pervaded by incorrect framings. Particularly if folk start throwing around the term "bubble".

Not the fault of the central banks
One incorrect framing is "the central banks did it"; with the finger usually pointed at low interest rates and clams of "easy money" fuelling "bubbles".  Low interest rates are not a sign of "loose money". Judging the stance of monetary policy from interest rates is deeply problematic. In Milton Friedman's words:

Initially, higher monetary growth would reduce short-term interest rates even further. As the economy revives, however, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

This is hardly surprising, as nominal interest rates include inflationary expectations, so will be higher if inflationary expectations are higher. During the Great Moderation, inflation and interest rates were low: in what world is low inflation a sign of "loose monetary conditions"? To quote Milton Friedman again:

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

Apparently, they don't. Yes, low real interest rates  combined with strong income expectations will lead to more use of credit, particularly to purchase assets. But central banks have no influence over real interest rates and maintaining strong (or at least stable) income expectations is what they are supposed to do. Failure to do the latter is what led to the Great Depression and the Great Recession.

So, low real interest rates (not the fault of central banks) + strong income expectation (what we want them to do) => more use of credit to purchase assets.

Does that mean we get surges in asset prices?  No, because there is the little thing called the supply side. Prices are a matter of supply AND demand.  If the supply of assets responds to the surges in demand, there are no price effects.

If the assets are slow to construct, you might get some price surges, but they are unlikely to persist once supply catches up with demand. If, however, supply permanently lags demand, then the price surges can persist (as demand is continually outpacing supply). Such as, for example, from land rationing in housing markets blocking supply from catching up to demand. (Remembering that houses are large decaying structures, the enduring asset is the land the house is on.)

About housing and "bubbles"
We live in an age of low real interest rates. The Reserve Bank of Australia (RBA) has been doing an excellent job in maintaining income expectations. (No recession since the early 1990s). All our State and Territory Governments, aided and abetted by many of our local governments, land-ration. We are relatively high immigration country (and we are good at cherry-picking our migrants). Of course our housing prices have surged, and surged, and surged.

So, is it a "housing bubble", allegedly one of the worst seen? The problem is the word "bubble".  By "bubble" people typically mean that (asset) prices surge upwards, then collapse pretty quickly. The problem is that the term bubble has no useful predictive value. If we could reliably predict turning points (of prices) there would be no such "bubbles", because people would generally not purchase at a price that were reliably expected to collapse. So, the entire notion depends on unknown turning points.

The same goes with notions of "overvalued" assets. If that means anything, it means that future prices are expected to be lower. But, if that is a general expectation, they will not reach that price in the first place.

Expectations matter a lot to asset prices, because assets are things which are expected to provide enduring benefits--either as a store of value, or a producer of income, or both--over more than one time period. And we have no information from future time periods, only expectations about them based on already existing information.

Asking the right question
The question which people are fumbling towards asking is the one they should focus on directly: how stable are these prices? How vulnerable are they to new information? That is an excellent question.

In the case of new technology, very vulnerable: because, well, it is new, and thus has large amount of uncertainty (in the Knightian sense of unable to be reliably calculated). Hence new technology is a great generator of asset price instability (pdf), of asset boom and busts. One of the features of the Global Financial Crisis (GFC) was new technology in the finance industry.

If the asset prices are built on strong income expectations, they will be very vulnerable to any sudden fall in income expectations. That is, the central bank screwing up. They will be particularly vulnerable to that if the asset purchasing is highly leveraged.

If the asset prices are built on supply constraints, they will be vulnerable to any sudden removal of said supply constraints.

They will also be vulnerable to any sudden shift in specific demand for that asset not covered above.  For example, in the case of housing, a drop in immigration.

So, does Australia have various housing bubbles? That is the wrong question, focusing on unknowable turning points based on not yet existing information. The correct question is: are Australian house prices vulnerable to sudden downward shifts?

Absolutely: if the RBA screws up income expectations, if there is a major drop in immigration, if State and Territory governments suddenly abolish land rationing--from which they garner a lot of tax revenue plus grateful home-owning and -buying voters while political parties get a lot of funding from developers who (in a land rationing policy regime) simply have to have access to officials to operate their businesses and are willing to pay for it. (Ironically, that it is such a universal practice among our State and Territory governments actually makes its price effects more resilient, as there is unlikely to be negative signalling across markets.)

So, how likely do you think any of them are? Not very I would have thought. Ironically, the most likely is the RBA screwing up; and the most likely scenario for that is that it makes the mistake of paying attention to (via) the "it's your fault!" bubble-manics and does what no central bank should ever do--get into the "bubble-popping" game. Especially as the most likely effect thereof is to make the leveraging problem worse (pdf); potentially much, much worse.

So, do Australian housing prices make much more sense now? Isn't to useful to frame the questions in the right way? Bubble-mania, it will rot your analysis.


[Cross-posted at Skepticlawyer.]