The Unassuming Economist

• The Newsletter has an interview with Lars Svensson on when and how to deal with housing booms. Svensson lays out the policy options with his characteristic clarity. Read the full interview and the newsletter here.

• The Quarterly Update shows why averages can sometimes be misleading—the Global House Price Index shown on the first page continues a slow and boring uptick, but turn the page and you see it’s a story of two very different halves. Read the full note here. 

WSJ’s Ian Talley reports on an IMF working paper. According to Talley: ” A widening gap between China’s rich and poor makes “one of the most unequal countries in the world,” according to a new working paper published by the International Monetary Fund.

Authors Serhan Cevik and Carolina Correa-Caro write that the rich are gleaning most of the fruits of the transition from a system of centrally-planned socialism to a market-oriented economy.

Although per-capita income has grown and the number of people living on less than a $1.25 a day has plummeted, income inequality has skyrocketed, the economists said. The top quintile of earners now pull in nearly half of total income while the poorest quintile of earners account for under 5%.

“China’s widening income inequality is largely a reflection of faster income growth among the rich, rather than stagnant living standards among the poor,” the two economists said.

With an estimated 2.4 million millionaire households, China now has more than any country but the U.S.

China’s credit-fueled investment and export-led development model are likely the primary drivers of the sharp increase in income inequality over the last three decades, they said.

Beijing’s economic strategy has aimed at higher growth rates. Although that effort may have lifted many Chinese out of poverty, the two economists said there’s mounting evidence that the widening income gap could weigh on future growth. That, they said, could come “with significant social consequences, especially in a country like China aiming to move beyond the ‘middle income’ status.”

To relieve those potential pressures, the two economists recommend ramping up taxes to pay for a redistribution of income: raising taxes on higher earners, broadening the personal tax and imposing a value-added tax on services. At the same time, Beijing could lower labor taxes that hit low- and middle-income earners, they said.”

The latest IMF report for Ireland says: “Property markets are bouncing back rapidly. Commercial real estate values are up 30.7 percent y/y in 2014, though they still remain about 30 percent below pre-boom levels. Values were bolstered by record transaction volumes with over one-third reflecting foreign investment inflows. At the same time, house prices rose 16.3 percent y/y, as fast as the increases during the boom period, though they are still 38 percent below peak.”

Matt Rognlie concludes: “Housing has a pivotal role in the modern story of income distribution. Since housing has relatively broad ownership, it does not conform to the traditional story of labor versus capital, nor can its growth be easily explained with many of the stories commonly proposed for the income split elsewhere in the economy—the bargaining power of labor, the growing role of technology, and so on.

Beyond housing, the results in this paper suggest that concern about inequality should be shifted away from the split between capital and labor, and toward other aspects of distribution, such as the within-labor distribution of income. Although the net capital share has at times seen dramatic shifts both up and down, away from housing its long-term movement has been quite small, and there is not strong reason to suspect that this pattern will change going forward.”

“Higher borrowing costs and macro prudential measures have helped moderate growth in property prices,” notes the IMF’s latest annual economic report on Indonesia.