The New Class War: Can Our Society Be Made More Equal?

New Class War

Amidst all the various news during this ongoing pandemic, reports that American billionaires are getting richer, particularly those focused in tech, is unlikely to bring anyone much comfort. Though much is often made of income inequality, I tend to believe that inequality in of itself is not a pressing concern for most people. What does stick in the minds of your average citizen is that no matter what tragedy seems to befall the world, the richest keep getting richer, while their own situation continues to erode.

There are two interconnected factors at play here. One is how billionaires continue to do so well. The other is related to declining fortunes and mobility for a middle class that is less middle, but increasingly more class orientated.

The rise of a super-rich has a great deal more to do the dominance of the stock market in an age of globalization than any other single factor. You’ve probably heard some statistic like this before, that in the past a CEO would only have made 20x more than their lowest paid employee, only to find now that the ratio is 278x more than the average worker. Much of this shift has been a result of moving compensation for CEOs and C-level executives into stock options, a move aimed at improving governance, but has instead hyper charged the importance of stock returns in an increasingly globalized world.

Land of Promise

In his book Land of Promise by Michael Lind, he has this to say about globalization and global trade: “Between the end of the Cold War and the crash of 2008, globalization resulted in the organization of one global industry after another as an oligopoly, with most of the transnational enterprises headquartered in the United States, Europe, or Japan…Two companies, US-based Boeing and Europe’s Airbus, had 100 percent of the global market share in large jet airliners. Among their suppliers, the global market for jet engines was divided among three firms: GE, Pratt and Whitney, and Rolls-Royce. Microsoft enjoyed 90 percent of the global market share for PC operating systems. Four firms divided 55 percent of the PC market among themselves, while three companies shared 65 percent of the mobile handset phones. Three firms dominated the world market in agricultural equipment (69 percent) and ten companies dominated the global pharmaceutical market (69 percent). Ninety-five percent of microprocessors (chips) were made by four companies – Intel, Advanced Micro Devices, NEC, and Motorola. Four automobile companies – Gm, Ford, Toyota-Daihatsu, and DaimlerChrysler – manufactured 50% of all cars, while three firms – Bridgestone, Goodyear, and Michelin – made 60% of the tires. Owens-Illinois and Saint Gobin made two-thirds of all glass bottles in the world. Concentration in global finance was accelerated by US deregulation, which allowed the emergence of a small number of US megabanks, some of which grew even more during the Great Recession when, with the support of the US government, they absorbed failing banks, as Bank of America took over Merrill Lynch and JP Morgan Chase acquired Washington Mutual.”

However you may wish to slice it the system of globalization has been a huge boon to the wealthiest globally, consolidating wealth amongst an increasingly narrow group of companies and the people who own the bulk of the shares within those companies. And the more importance share holder returns have taken on, the more consolidated those companies have become.

The second problem I’ve mentioned is that of a middle class that is increasingly stratified. While the wealthiest keep getting wealthy, the middle class has followed suit, locking in wealth and reducing income mobility. While we may not consider life in the 1950s or 1960s particularly egalitarian, aspects about that more sexist and racist time in our past better facilitated economic mobility. For instance, a world where women did not hold many corporate positions of authority and didn’t work after marriage was also a world where women were more capable of “marrying up”. In contrast, today educated professionals marry other educated professionals. A surgeon is less likely to be married to a secretary and more likely to be married to another surgeon. The economist Tyler Cowen has called this “matching” in his book The Complacent Class, with people better able to “match” to those with similar interests and backgrounds. The effect of this “matching” has been to stratify wealth and decrease social mobility within the middle class.

the-class-sketchEducation represents another significant change that is stultifying the middle class. Education, particularly secondary education took on increasing importance in the 1980s, as those with university degrees started to out earn those with just high school, and those with professional designations (like lawyers and doctors) out paced those with just an undergraduate degree. Would more education fix this? Not really. As the cost of education continues to rise and new technologies filter into even white-collar jobs, young lawyers and accountants struggle to find work, while the management of major companies hangs in longer. The return on education continues to decline even as the costs go up, leaving those who come from wealthier educated families financially better off and better socially connected than those coming from lower income families trying leverage education into higher tax brackets.

Similarly, costs of living continue to climb in essentials. In Toronto, where housing prices have climbed steadily for the last two decades, it has given birth to an intransient NIMBYism. Homeowners, having taken on large amounts of debt to get into the housing market are generally protective of their neighborhoods and tend to push back hard on attempts to increase density for fear it pulls down housing value. Poorer neighborhoods in cities like Toronto find themselves pushed out by gentrification, an ironic blend of resistance to development that increases the price of living while denying the development that could keep prices lower for a more diverse group of residents to live together. The effect is one where neighborhoods may indeed be racially diverse, but not income diverse. The effect to a middle class is to be both more precarious and less open.

The response from governments to both these changes hasn’t been encouraging. Playing around with the tax rates, trying to force people into expensive four-year degrees, potentially embracing a universal basic income (UBI) amounts to tinkering with the system, not fixing it. And while UBI has garnered a lot of interest, it smacks of an acceptance of the current situation. If you can’t get ahead, here is some money to make life more tolerable. A population of people dependent of a government stipend is not a population that is very free. But if politicians efforts are well meaning, distrust of them remains understandable, as the political class and billionaire class rub elbows at places like Davos, recommitting to strengthening the very system that seems to be the source of many of the present issues.

Over the past several years I have dedicated this blog to the issues I think that remain most pressing from a financial standpoint to our society, frequently touching on issues of housing prices, technology, anti-urbanization, populism and the middle class. All these issues seem to be accelerating, and if there is a thought that might bind these ideas together it is a sense of loss of imagination on how we deal with major issues. In addition to a consolidation of corporate power and wealth amongst a smaller group of people, we also see fewer companies with IPOs, and fewer companies listed on the stock market in general. There is also less imagination from our political class, which remain wedded to a narrow set of ideas about how to deal with new problems.

Essential Democracy

Successful societies like Canada can be handcuffed by their past achievements, limiting options to things already tried before. But problems that do not get fixed don’t go away. Instead they fester, presenting themselves in other more threatening ways. As I write this there are riots in Minneapolis, ostensibly about the death of a citizen in police custody (part of a long list of Black Americans killed at the hands of police for nonviolent offences) but that riot has swiftly turned towards an affordable housing project and local big box stores in addition to the police. In a 2016 poll, only 30% of Americans born in the 1980s believed that living in a democracy is essential, the lowest since such polling had begun. In Europe polling showed that the core countries of the EU; Spain, France and Italy, had largely negative views about their current economic situation a decade on from the Great Recession.

Postive Economic View Europe

Now, in the middle of this global pandemic, many of these fault lines are being exposed. There may be no better way to sum up our situation than to speak of Walmart, a store that exists and thrives because of the globalized order, importing products from China. According to Ian Bremmer, the largest employer among Fortune 500 companies is Walmart, employing 2.2 million people, easily out pacing any other single company. In 2003 the CEO of Walmart, H. Lee Scott, earned 1500 times as much as a full time Walmart employee.

This trend is not confined to Canada or the United States. It is global, and affects China and India as much as it does the West. But the effect on populations of an economic story that increasingly benefits the wealthiest, while making middle classes more precarious and defensive is to undermine the legitimacy of democracies. The backsliding of democratic countries, and the erosion of the international order is connected to these domestic economic challenges. The pandemic is speeding up this inequality effect, and how we rise to meet it will play a large roll in deciding who calls the shots in the 21st Century.

Miniature people standing on piles of different heights of coins. The concepts of person and wealth.

Author’s Note – In addition to the normally sourced articles I’ve relied on several books for this article, they include:

  • Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else by Chrystia Freeland
  • The Retreat of Western Liberalism by Edward Luce
  • The Complacent Class by Tyler Cowen
  • Income Inequality, The Canadian Story (Volume 5), Edited by David A. Green, W. Craig Riddell and France St. Hilaire
  • Land of Promise by Michael Lind

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

Will COVID-19 Make Real Estate Sick?

TSX Friday march 27

Markets have been bullish the last few days, moving off the most recent lows and easing the strain on investors who have watched their savings tumble by up to 35% since the beginning of the year. Any enthusiasm that this will be a sustained recovery should be tempered by the sheer scope of the economic disruption that we are facing, how early into the problem we currently are, or the potential for a pandemic disaster in the United States, which now has officially more cases than China ever did.

FT Capture

While I remain grateful for the respite we’ve seen, however fleeting, the problem that sticks out in my mind is that of the tangled web of Canadian debt, growing insolvencies, and hundreds of empty condos in downtown Toronto.

Problems rarely exist in isolation, and a problem’s ability to fester, grow and become malignant to the health of the wider body requires an interconnected set of resources to allow its most pernicious aspects to be deferred. In Canada the problem has been long known about, a high level of personal debt that has grown unabated since we missed the worst of 2008. What has allowed this problem to become wide ranging is a banking system more than happy to continue to finance home ownership, a real estate industry convinced that real estate can not fail, and a political class that has been prepared to look the other way on multiple issues including short term rental accommodation, in favour of rising property values to offset stagnant wages.

G&M Canada's Household Debt Burden

Recently I was at a round table event on Toronto real estate shortly after the COVID-19 situation started to gain real traction in late February. Benjamin Tal, Deputy Chief Economist for CIBC Capital Markets, described the Canadian real estate scene as “having 9 lives”, every time it seems like house prices can go no higher, something happens to prop up the market. At that moment it was the likely cut in interest rates and an easing of the stress test for mortgages which might breathe more life into the over heated housing market. But that was before international travel dropped off, before national states of emergency, before social distancing, before borders were closed, before essential services, before #lockdowns and #quarantinelife. Tal may not have been wrong conceptually, he simply hadn’t considered that the world might close for business.

Economist Cover

Canadian debt has been kept afloat because nothing could conceivably undermine it. And now, in downtown Toronto, condos sit empty. Airbnb hosts have no customers. Costs are mounting and there is no immediate end in sight to the pandemic, no end date that people can bank on. This week 3.3 million Americans filed for EI. In Canada the number was around 1 million. Even the most generous stimulus packages are unlikely to fix a debt problem as big as Canada’s.

True, there is some hope in mortgage deferrals, but scuttlebutt is that banks aren’t very liberal on this matter, telling many that they don’t qualify regardless of political pronouncements. This problem isn’t limited to Toronto. In Dublin rental accommodation jumped by 64% as COVID-19 became a crisis and people began looking for long term tenants to replace the short term ones. Short term thinking by investors, banks, and politicians has facilitated a serious economic problem. But to its enablers it seemed unlikely that there was a scenario that could conceivably expose its flaws.

It is becoming ever clearer that the focus for citizens in the 21st century should be on resilience. Expedience and an assumption that the stability of the recent past is prologue is now a dangerous and toxic combination, creating risks and magnifying bad decisions. Whether the coronavirus ushers in a fiscal reckoning for Canadians, or somehow we sidestep the worst of the crisis through quick action and nimble minds remains to be seen. But how much easier would life be for all had politicians adopted a more hostile stance to Airbnb pushing into the traditional rental markets? Had investors not eagerly dumped savings into condo developments, and had banks been more willing to question the wisdom of lending into what most acknowledged was a real estate bubble.

In December I wrote that the Canadian insolvency rate was the highest it had been in a decade. The city of Toronto recently took action to curb the growth of payday advance loan businesses, as though the problem was the businesses and not people in general need of credit to make ends meet. Whatever is coming in the wake of the COVID-19 shutdown, the issue long predates it. And if insolvencies go up and, for the first time in a long time, a portion of the Canadian real estate sector comes under real pressure there will be a lot of finger pointing at the individuals who have over extended themselves with an illiquid pool of investments. But the truth will be that this problem will have had many facilitators; enablers that were happy to ignore the problem, even help grow it, because they didn’t want to believe that things could go wrong or didn’t see it was their responsibility curb its malignancy.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

Toronto’s Unbelievably Fragile Condo Market

img_7318Did you know that Toronto was in a market “lull” when it came to condos? No? Neither did I. I also wasn’t aware that Toronto was sitting on a vast precipice of economic gloom when it came to our condo market. And that is precisely the take away from both the Globe and Mail and Global News about a recent economic statistic about Toronto’s condo market.

My headline is misleading. Deliberately so. But I thought I would try my hand at provocative titles to spur readership. But I have a bee in my bonnet about this kind of reporting which peddles controversial titles while failing to offer insight to investors or potential buyers interested in the market. And while that kind of reporting is common, it’s rare for such significantly differing accounts about the same market pronouncement. For instance, this is the Globe and Mail’s title and opening line to their article:

 Toronto Condo Market Booming Again –

After years of slow growth Toronto’s condo market has come roaring back to life.

Meanwhile this is what Global News had to say:

Unsold condo’s pile up in Toronto, hit 21 year high –

As far as statistical outliers on charts go, the Bank of Montreal produced a dandy on Tuesday that should get some attention from condo market watchers in Toronto.

Both of these articles start with the same source material, a brief report from BMO Capital Markets from late February, but come to different conclusions, spinning stories about either the health or weakness of the same market. The report is frustratingly short, offering little more than the statistic that a record number of condo units came on the market in January. Far from being a new normal, the record number was the result of three things, including delayed projects being finished, regular projects reaching completion and the result of strong sales from 2011.

toronto-condo-boomHowever both these articles are technically accurate, Toronto did have a record number of units come into the market, an amount eight times greater than the monthly average over the last decade. And it is true that the amount of unsold units is at a 21 year high. But to make sense of which article was correct I thought it best to reach out to BMO Capital Markets’ Director and Senior Economist Sal Guatieri, the author of the document. Sal was kind enough to make some time for me over the phone and had some useful insight about each media outlet’s take on the one-off statistic.

“They’re both right,” in answer to my question, “but one is really about the broad health of the market, which Toronto’s market really is. Last year was a very strong year for sales. But in a few years, as nearly 50,000 units are completed and when rates eventually go up, there could be some weakness in the pricing on those units.” Sal had a few other points but they largely revolved around this dynamic, that future challenges to the market are laid in the foundations of our current success.

For journalists this kind of nuanced take on the markets isn’t helpful. It isn’t provocative, and I suspect that there is a fair amount of confirmation bias for those journalists who feel strongly about the market’s relative health. Regardless, there simply isn’t enough information in the document released to promote one view over the other, and yet that is exactly what writers at the Globe and Global News pursued, versions of the story that were both more provocative and definitive than accurate. It might help with readership, but it does nothing for informing investors.

That’s the real story, and the underlying problem of reporting business news. It isn’t advice so much as a view point. Most readers will not search for the original source, nor have an opportunity to corner the economist and author to find out more. And yet depending on which story you came across you might be forgiven for thinking you had gained some real insight into the nature of Toronto’s Real Estate Market.

On the other hand, I’m highly mistrustful of the news anyhow, which is my own confirmation bias. As the author Jon Ronson once said, “After I learned about confirmation bias I started seeing it everywhere.”