by Adair Turner
| LONDON – A recent report revealed that the five richest families in Britain are worth more than the country’s poorest 20% combined. Some of the wealth comes from new business ventures; but two of the five are a duke and an earl whose ancestors owned the fields across which London expanded in the nineteenth century. Urban land wealth is not just a London phenomenon. As Thomas Piketty’s recent book Capital in the Twenty-First Century shows, accumulated wealth has grown rapidly relative to income across the advanced economies over the last 40 years. In many countries, the majority of that wealth – and the lion’s share of the increase – is accounted for by housing and commercial real estate, and most of that wealth resides not in the value of the buildings, but in the value of the urban land on which it sits. That might seem odd. Though we live in the hi-tech virtual world of the Internet, the value of the most physical thing – land – is rising relentlessly. But there is no contradiction: The price of land is rising because of rapid technological progress. In an age of information and communication technology (ICT), it is inevitable that we value what an ICT-intensive economy cannot create. ICT has already delivered remarkable new products and services; but, as MIT’s Erik Brynjolfsson and Andrew McAfee argue persuasively in their recent book The Second Machine Age, the really dramatic changes are yet to come, with robots and software bound to automate out of existence a huge number of jobs. One consequence is the striking phenomenon of huge wealth creation with very little labor input. Facebook has an equity valuation of $170 billion but employs only around 6,000 people. The investment that went into building the software that runs it entailed no more than around 5,000 software engineer man-years. This remarkable technology has helped to deliver increasing average incomes and will continue to do so. But the distribution of that bounty has been very unequal. The lion’s share of the growth has gone to the top half, the top 10%, or even the top 1% of the population. As the better off become richer, however, much of their rising income will not be spent on ICT-intensive goods and services. There is a limit to how many iPads and smart phones one can need, and their price continues to plummet. Instead, an increasing share of consumer expenditure is devoted to buying goods and services that are rich in fashion, design, and subjective brand values, and to competing for ownership of location-specific real estate. But if the land on which the desired houses and apartments sit is in limited supply, the inevitable consequence is rising prices. Urban land is therefore rising in value – in London, New York, Shanghai, and many other cities – partly because of consumer demand. But its rising value also makes it an attractive asset class for investors, because further price increases are expected. Moreover, returns on real estate have been swollen by the dramatic fall in interest rates over the last 25 years, a decline that was far advanced even before the 2008 financial crisis. The cause of those low interest rates is debated; but one probable factor is the reduced cost of business investment in hardware and software-based “machines.” If you can build a $170 billion company with just 5,000 software engineer man-years, you don’t need to borrow much money. The fact that technology is so powerful not only makes physical land more valuable; it also means that future employment growth will be concentrated among the jobs that cannot be automated, particularly in services, which have to be delivered physically. The US Bureau of Labor Statistics estimates that among the most rapidly growing occupational categories over the next ten years will be “healthcare support occupations” (nursing aides, orderlies, and attendants) and “food preparation and serving workers” – that is, overwhelmingly low-wage jobs. In short, ICT creates an economy that is both “hi-tech” and “hi-touch” – a world of robots and apps, but also of fashion, design, land, and face-to-face services. This economy is the result of our remarkable ability to solve the problem of production and automate away the need for continual labor. But it is an economy that is likely to suffer two adverse side effects. First, it may be inherently unstable, because the more that wealth resides in real estate, the more the financial system will provide leverage to support real-estate speculation, which has been at the heart of all of the world’s worst financial crises. Major changes in financial and monetary policy, going far beyond those introduced in response to the 2008 crisis, are required to contain this danger. Second, unless we deliberately design policies that encourage and sustain inclusive growth, a highly unequal society is virtually inevitable, with rising land values and wealth magnifying the effects of the unequal income distribution that ICT produces directly. Indeed, the modern economy may resemble that of the eighteenth century, when the land owned by the Duke of Westminster and the Earl of Cadogan was still just fields to the west of London, more than the middle-class societies in which most developed countries’ citizens’ grew up. |
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