Trends in the global housing market

A few takeaways from a very good survey of housing in the Economist. The overarching message is that there is nothing inherently superior to owner-occupation over renting of houses.

On the importance of housing in causing economic recessions,

From the 1960s to the 2000s a quarter of recessions in the rich world were associated with steep declines in house prices. Recessions associated with credit crunches and house-price busts were deeper and lasted longer than other recessions did.

And even populism,

Housing markets and populism are closely linked. Britons living in areas where house prices are stagnant were more likely to vote for Brexit in 2016, and French people for the far-right National Front in the presidential elections of 2017, according to research from Ben Ansell of Oxford University and David Adler of the European University Institute.

The report blames three factors and points to the way forward,

Since the second world war, governments across the rich world have made three big mistakes. They have made it too difficult to build the accommodation that their populations require; they have created unwise economic incentives for households to funnel more money into the housing market; and they have failed to design a regulatory infrastructure to constrain housing bubbles... flexible planning systems, appropriate taxation and financial regulation can turn housing into a force for social and economic stability. Singapore’s public-housing system helps improve social inclusion; mortgage finance in Germany helped the country avoid the worst of the 2008-10 crisis; Switzerland’s planning system goes a long way to explaining why populism has so far not taken off there.

Post-war public policy has helped fuel the home-ownership boom, 

In a research paper Òscar Jordà, Alan Taylor and Moritz Schularick describe the second half of the 20th century as “the great mortgaging”. In 1940-2000 mortgage credit as a share of GDP across the rich world more than doubled. More people clambered onto the “housing ladder”. America’s home-ownership rate rose from around 45% to 70%; Britain’s went from 30% to 70%... In the 1950s and 1960s governments constructed large amounts of public housing, in part to rebuild their cities after the devastation of the second world war. Yet at the same time many of them tightened land regulation, gradually constraining private builders... According to calculations by The Economist, the rate of housing construction in the rich world is half what it was in the 1960s. It has become particularly hard to build in high-demand areas. Manhattan saw permission given to 13,000 new housing units in 1960 alone, whereas for the whole of the 1990s only 21,000 new units were approved.

As ownership has surged and regulations have started to bind, prices have risen, making housing the largest global asset class,

Regulations have been driven by public incentives,

In 2001 William Fischel of Dartmouth College proposed his “homevoter hypothesis”. The thinking runs that owner-occupiers have an incentive to resist development in their local area, since doing so helps preserve the value of their property. As home ownership rises, therefore, housing construction might be expected to fall.

This and other public incentives have driven distortionary regulations,

To get a sense of why London has such expensive housing, visit Tottenham Hale. You might expect that, next to an Underground station where central London is accessible within 15 minutes, there would be plenty of houses. In fact, there is a car wash. The land on which the car wash sits is officially classified as “green belt” land, which means that building houses on it is almost impossible. Across just five big cities in England there are over 47,000 hectares (about 116,000 acres) of similar land, which is not particularly green, is close to train stations with a good service to their centres, and yet cannot be built on. That is enough space for over 2.5m new homes at average densities. For decades the green belt was sacred. The British public imagine it, wrongly, as idyllic pasture where horses drink from streams. Politicians dared not talk about it.

The contrasting stories of Singapore and HongKong, and different parts of America, illustrate the point about regulations,

Singapore has a fairly elastic planning system. The government owns most of the land. When house-price growth is too strong or the population is rising quickly, the state can release extra land faster than a barman at the Raffles hotel can mix a Singapore sling. In Hong Kong, by contrast, the supply of developable land is controlled by a small clique of oligarchs. What will buy you a cramped bedsit in Hong Kong will buy you a decent-sized pad in Singapore. It is a similar story in America. The part of the country with the most elastic housing supply, Pine Bluff, a midsized city in Arkansas, has an average house price of $90,000. The cost of a house in one of the most restrictive parts, San Luis Obispo in California, is $725,000, even though building costs across America do not vary much.

The evidence in this regard is rich,

Academic research supports the circumstantial evidence. Christian Hilber of the London School of Economics and Wouter Vermuelen of cpbNetherlands Bureau for Economic Policy Analysis found that if south-east England (the wealthiest and most regulated region) had been as open to new construction as the north-east (the least regulated), house prices in the south-east would have been 25% lower in 2008. Edward Glaeser of Harvard University finds similar results for parts of America... The loosening in global financial conditions since 2000 has certainly pushed up house prices—as have low unemployment, high immigration and the rise of platforms such as Airbnb, which divert home ownership away from ordinary people. Prices have not risen because building has suddenly became vastly more difficult. At the same time, however, the long-term rise in house prices is largely down to constrained supply. And if builders struggle to erect new dwellings quickly, a given increase in demand is largely channelled into price rises. Giovanni Favara of the Federal Reserve Board and Jean Imbs of the Paris School of Economics find that, though looser finance has led to higher house prices, that was true “to a lesser extent in areas with elastic housing supply, where the housing stock increases instead”.

On the regulatory systems,

Broadly speaking, three types of planning systems exist across the rich world: discretion-based; autocratic; and rules-based. The first type is commonly found in Commonwealth countries. Local residents have plenty of power to stop development plans, and they frequently do. It may be no coincidence that those countries have in recent decades seen the fastest growth in house prices... Autocratic planning systems do a better job of boosting housing supply. Russia has raised its annual rate of housebuilding from 400,000 a year in the early 2000s to over 1m... The third group—rules-based planning systems—are commonly found in European countries such as France and Germany. If developers tick all the boxes then construction is permitted, even if local residents object. These systems have generally done a better job of delivering housing. Since the 1950s Germany has built twice the number of houses as Britain, despite having only a slightly higher population.

And taxation, specifically the Swiss system,

In countries such as Britain, though many taxes are levied at the local level, the proceeds are redistributed across the country. Local governments therefore see little economic benefit from allowing home construction, even as they must cope with the disruption. As a result they are unlikely to try too hard to override the NIMBYs. By contrast, in Switzerland local taxes stay where they are levied, so local governments have a fiscal incentive to allow development. The process for acquiring planning permission can be slow... But it is predictable. In the past century Swiss house prices have risen by less than those in any other rich country.

Highlighting the challenges of financial market regulation, the tightening mortgage lending standards on banks has led to regulatory arbitrage and the rise of shadow banks, whose share of mortgage lending has risen from just over a quarter in 2010 to nearly 65%!

In pure financial terms, given the ultra-low interest rates, there is a strong case that renting is cheaper than owning a house.

Public housing programs have been on the decline as governments have sought to replace housing provision with cash transfers so that poor people can rent the house of their choice from the market, a shift that may have had its unintended effects, 

In the early 1970s Britain started to wind down its programme of social-housing construction, but in its place gave money to poor tenants. France did something similar in the latter part of the decade. In Germany from the late 1980s, housing assets owned by municipalities were transferred to for-profit owners. In America between 1977 and 1997, the number of households receiving housing vouchers increased from 162,000 to over 1.4m. Though economists generally prefer cash benefits over the in-kind sort, a growing number are starting to argue that providing cash assistance for housing has not proven to be as effective as expected. Giving people money increases their purchasing power. In a normal market, the increase in effective demand leads suppliers to respond accordingly. Yet the supply of housing in many cities is inelastic: when demand for housing rises, extra supply does not necessarily follow. Instead, the price of housing—which, for most poor people, is rent—goes up.

In many cases, therefore, housing benefits help landlords as much as the poor. Some research in England has found that half of the gains from housing benefits accrue to landlords. A paper from 2006 looking at France concludes that a one-euro rise in housing benefits raises rents by 80 cents. If governments respond to rising rents by increasing housing benefits, costs can quickly spiral. Over the long run, cash payments for housing can even cost the government more than providing housing directly (though this is difficult to calculate reliably). Meanwhile, it is not clear whether the private sector is able to fill the gap when the state stops building houses itself. If not, then overall new housing supply falls, making it more expensive for everyone.

So, public housing seems to be making a comeback,

In 2018 Britain built more public housing than in any year since 1992. The South Korean government aims to increase the share of public-rental housing from 7% of the total stock to 9% by 2022. In Germany in 2018-19 the government set aside some €5bn ($5.6bn) to promote the construction of public housing.

This is one more example of how the general equilibrium effects of the so-called orthodox policies can turn out to be less than desirable. 

The survey makes three suggestions on limiting housing price increases,

The first is better regulation of housing finance. Switzerland comes close to treating home-ownership and renting equivalently in its tax system, meaning that people are not encouraged to funnel capital into the housing market... German mortgage-lenders embrace an unusual appraisal technique. When assessing the value of a house, they rarely refer to market price; instead they consider “mortgage-lending value”, an assessment of the probable price of a house over the economic cycle. A report from the Bank for International Settlements, a club of central banks, suggests that by discounting short-term price fluctuations, this valuation technique can stop bubbles from forming...

The second group of reforms concerns transport. Until the mid-20th century, house prices were stable in part because the cost and ease with which people could get around improved roughly as quickly as economic growth. As getting from A to B became ever quicker, it increased the amount of developable land at an economy’s disposal. But after the second world war improvements in transport slowed, meaning that more and more people were fighting over the same amount of space. That caused house prices to rise. More recently, commuting times into the rich world’s biggest cities have, if anything, been lengthening, raising the premium of living near or in city centres. A better train and road network, then, would allow more people to live farther afield...

The third set of reforms concerns planning. This report has argued that governments are finally waking up to the fact that there is a structural undersupply of housing. They could learn from best practice internationally. Devolving taxes to the regional or local level, the norm in Switzerland, gives local governments a stronger incentive to allow development. France has followed the Swiss example in increasing pressure on local governments to raise revenue from property taxes, “which can in turn lead to efforts to stimulate land development”, according to the OECD. Abolishing single-family-home zoning, which prevents densification, is another good option—and something Minneapolis did last year. Boosting the construction of public housing is also welcome. Singapore, where 80% of residents live in government-built flats, is in some respects the model to copy. The state regularly renovates the buildings and, more controversially, promotes mixing of different sorts of people, to help prevent the emergence of ghettos.

Like with many things, Japan may be torch bearer for what can be done to make housing affordable,

In Japan a series of reforms in the early-to-mid-2000s loosened the planning system, allowing applications to be processed more quickly and giving residents more discretion over how to use their land. Tokyo’s rate of housing construction has risen by 30% since the reform; in 2013-17 Tokyo put up as many houses as the whole of England. Tokyo is a more jumbled city than most rich ones, but current zoning laws ensure that it is not quite as higgledy-piggledy as, say, Houston. In inflation-adjusted terms, house prices in the Japanese capital are 9% lower than they were in 2000, while in London they are 144% higher.

Some graphics on Indian economy

As India grapples with a slowdown, a few graphics analysing the trends in the contributors to economic growth.

The first covers the relative contributions of the various expenditure side drivers of growth to the percentage real GDP growth rates.

While the shares of private and public consumption has been relatively stable, that of fixed investment has fluctuated across a band of 25% to 35% shares.

The second covers the trends with the percentage points contribution to the GDP growth due to these various expenditures. 

This is widely acknowledged. But note the contrast in fixed investment between the 2003-08 period and the present times. Private consumption too has been declining. Also, the tapering off of inventory build-up points to lack of confidence about economic prospects.

This points to another important, but less discussed, anomaly. As a share of expenditure, the Indian government is very small, even compared to its peers.

It should therefore be borne in mind that while important, fiscal stimulus, has its limits in the Indian context.

Finally, for those worried about breaching some inviolable fiscal deficit rate or band, here is how the fiscal deficits in the US changed with the economic cycle?

Doesn't Econ 101 talk about counter-cyclical fiscal policy? Or do we have a different Econ 101 prescriptions for developing and developed countries when faced with an aggregate demand slump?

An urban transportation data platform for India?

A few years back I had written an oped with some ideas for addressing traffic problems. This blog post outlined the contours of a transportation management plan for cities.

While improvements in the quality of transport infrastructure and expanding the quality and coverage of public transport are central to any meaningful effort, they will take time and resources. In capacity and resource constrained as well as deeply politically polarised environments, the challenges are daunting and it is unrealistic to expect transformational changes.

But there is at least one area which is promising and in which immediate action is possible. An important cross-cutting requirement for most interventions is the availability of relevant and actionable transportation related data. This data includes spatial and temporal information about commute patterns of people stratified by their transport modes, their likely income and occupational categories, their origin and destinations and so on. This information is just as much important to trigger demand response among commuters as it is in urban planning. Consider these questions.

How to optimise the use of the existing road network? Can the existing road network be utilised more efficiently by re-routing traffic spatially and temporally? What should be the optimal directional configuration of roads, given the current traffic pattern? 

Which are the highest density bus routes at any point in time? Do the bus schedules reflect the current commute patterns of the the bus-taking population groups? Are the bus schedules at least reasonably synchronised with that of the other mass transit modes? Are metro and commuter railways adequately serviced by last-mile connects involving buses or other private bulk-transport modes? How to inform various last-mile connectors, including auto drivers and informal minivan operators, about demand conditions?

How can the transportation data serve as decision-support for urban planning decisions? How to make road widenings and new road proposals informed by such data? How to ensure that land-use conversions and large construction approvals are informed by the latest transportation data? How can land-use conversion decisions be informed by transportation constraints? How can such data inform and shape the expectations and decisions of investors and entrepreneurs, and existing businesses? How can such data be institutionally integrated into urban planning and infrastructure investment decisions of a city?

How do we make available all the information on the spatial and temporal traffic congestion levels to vehicle users so as to trigger demand response - which routes to take at any time to minimise commute times? How can it most effectively inform individual decisions on commutes to office, for shopping, and for weekend leisure? How can the latest transportation information be made available in a manner that can be a meaningful decision-support for people's choices on where to buy or rent their houses? 

Transportation data can be harvested from mass transit operators, mobile telephone companies, smart phone makers, transport solution providers, and the different categories of public-owned sensors available at various locations within the city. All this should be complemented with periodic surveys to update information. Such data, appropriately anonymised and aggregated (to limit both privacy concerns as well as any significant commercial loss for data generators), can be captured and made available on a platform with public APIs. It is no good merely providing associated data. The data has to be analysed into meaningful information which is relevant, proximate and actionable decision-support for different stakeholders. The design of the platform should keep this in mind.

This would most likely require hard-bargaining with mobile operators and mobile phone manufacturers (or App providers, chiefly Google and Apple). The metro railway agencies across cities and state road transportation corporations (where applicable) should overcome their hesitations and make public real-time information about their services. 

Making the data available would allow independent App developers to develop applications and figure out commercial models that respond to the demands of various stakeholders. In a large country with over 4000 cities and towns, mere provision of this information is likely to open up numerous opportunities which at least some among the stakeholders will seize and create business models. It is a great opportunity for creating the conditions for mass-flourishing.

But we should be prudent about the expectations from such an intervention. A few among the cities, with both the requisite capacity and eco-system as well as committed city leaders, will adopt it immediately with vigour. The others will have to surmount formidable behaviour, capacity and political economy challenges. But it will doubtless create a strong foundation for urban planning and demand response across cities. In some ways, it will get cities to the starting line in the urban transformation race. After that who know how the emergent dynamics of systems play out?

We should not underestimate the cumulative effect of countless decisions by people informed by such data. Over time, they can radically shift commute patterns, the fortunes of localities, behaviours of businesses, and so on. Most importantly, they can lead to informed public debates on the critical issue of urban transport. Public policy would invariably follow, at first in a few cities and towns. They are perhaps our biggest hope. What can public policy, through, say, the Smart Cities Mission, do to enable this vision?

Weekend reading links

1. Ananth and Raghuraman have an excellent article on the promise of inculcating simple management practices into SMEs,

Even a little nudge in the direction of good management — bringing in simple practices related to target setting, establishing incentives and monitoring performance — can bring about substantial improvements in productivity, sales growth and even reduction in product defects of these enterprises. The implication of these findings, for a country where 63 million micro small and medium enterprises (MSMEs) employ more than 110 million people and contribute close to 29 per cent of the economy, are potentially far reaching.

 This is important, in terms of the nature of capacity building trainings,

To put it together, a training intervention for MSME entrepreneurs to be impactful should be relevant and relatable to their business, demonstrate applicability, provide opportunities for entrepreneurs to use their own enterprises for action learning and instil in the entrepreneur’s mind the need to have a destination and the discipline to reach there.

2.  Good summary of NREGS impact related research. Interestingly, while the growth in NREGS allocation have been declining, its share of total expenditures has remained stable.

3. Are direct tax collections going to show negative growth for the first time in two decades? How much has the lowering of corporate taxes contributed to this?

4. Excellent article by Nidheesh MK on a PPP on local government governance with a corporate partnership involving the Anna Group, the maker of Kitex Garments, in  Kizhakkambalam Gram Panchayat in Kerala.

In 2013, after marshalling together a set of welfare schemes, Kitex rolled out a welfare arm fully financed by its corporate social responsibility funds. It was called “Twenty20", symbolizing the aspiration to turn the village into a world-class model by 2020... In 2015, probably for the first time, a corporate house directly entered the electoral arena in India. It was Kitex. Despite a unified opposition, Twenty20’s candidates won 17 of the 19 Kizhakkambalam Grama Panchayat seats, cornering over 70% of the polled votes... Since then, Kitex has gained a virtual monopoly over every aspect of public life in the village—from laying roads to directing the electorate to vote for a particular party in parliamentary elections. Its high form of populism is driving out politics from governance... that is, every strain of politics except that of its founder, Sabu Jacob, who is known simply as “Sir" or “Company Chairman" or the man who built the supermarket. In the corporate utopia he runs, laws are malleable, personal autonomy is, at times, a luxury, and traditional political parties are often compared to polluted rivers. Yet, many inhabitants still love the model, since there are giveaways and goodies, like the heavy discounts at the store.

The experiment is facing its challenge in the forthcoming Panchayat elections, with discontent brewing.

5. Is the UPI going to disrupt the mobile wallet market, thereby questioning the soaring valuation of Paytm? Interestingly, even on UPI, the two dominant apps are foreign, GooglePay and Walmart's PhonePe.

Since early 2015, Paytm has raised nearly $4 billion in capital to lure customers and merchants alike. Most of its spending has gone towards cashbacks and marketing. Clearly, the spending was unsustainable. In recognition, the company has moved to slash spending on cashbacks to bring expenses under control over the past six months. It has even begun to charge customers for processing transactions, a fee that it used to bear earlier.

And these cutbacks will drive more customers into GooglePay and PhonePe which are resorting to the same discounts to attract and retain customers and have deeper pockets.

6. Can state governments provide the fiscal stimulus to revive the Indian economy?

7. Homeowners in the US are apparently relocating to low-tax jurisdictions in response to a federal tax overhaul in 2017, 

The law made it costlier to own a house in many high-price, high-tax areas, reshaping the economics of homeownership in those slices of the U.S. Two years after President Trump signed the tax law, its effects are rippling through local economies and housing markets, pushing some people to move from high-tax states where they have long lived. Parts of Florida, for example, are getting an influx of buyers from states such as New York, New Jersey and Illinois. Many people saw their overall taxes go down after the 2017 law was passed. But the law had two main changes making it tougher to live in high-cost, high-tax states, especially compared with lower-taxed options. It essentially curbed how much homeowners can subtract from their federal taxes for paying local property and income taxes, by capping the state and local tax deduction at $10,000. It also lowered the size of mortgages for which new buyers can deduct the interest, to $750,000 from $1 million. These changes have the biggest impact on a sliver of the population who have high incomes and live in expensive areas. They tend to have white-collar jobs and the ability to pick up and move. Many own their own businesses, work remotely or are nearing retirement.

Clearly the stickiness associated with place of birth or long period of living, being part of a community, and home ownership is losing its effect and a few thousands of dollars in savings is enough to make even the rich migrate.

8. Alex Tabarrok points to this very good video from the Centre for Civil Society on the difficulty of opening a private school in India.

Where goes the Indian private capital?

I have been thinking for a long time to write on the topic of where Indian private capital invests. But in the absence of hard data it was not possible to make a reasoned case about my concerns and hypothesis. However, based on numerous anecdotal evidence and other signatures, I am inclined to believe that there are very compelling reasons for concern. This is one area where research could go a long way to illuminate, trigger public debates, and inform public policy.

As India courts foreign direct investment, it may be useful to examine what is happening to the large Indian private capital owners. Where and what does the Indian capitalist invest? How much of this capital is leaking out and how? How much of it is in the public markets? What share of these investments constitute real "risk" capital, or capital into entrepreneurship? Is there a resource misallocation happening in the aggregate - proportion going into real estate, for example? What share of the private capital is going to manufacturing?

In this context, it is important to make the distinction about what constitutes Indian private capital. In terms of the capital itself, the reference is to the wealth of the richest Indians. In terms of destination, the reference is to companies and brands owned by Indian citizens, and incorporated and headquartered in India. 

Consider these signatures. Apart from Godrej, ITC, Parle, and Marico, where are the Indian FMCG companies? Apart from Godrej, Voltas, and Bluestar are there any major (top 5 in their category) home appliances brand? Is there any Indian car brand? Any Indian private bank, apart from Kotak, which has at least 25% owned by Indians? What about airlines - any Indian owned airline? How much of the Indian founded unicorns are owned by Indians (apart from the founder's capital)? What share of some of the larger Indian capital exits from start-ups has been re-invested in India, as against being reinvested outside? Are the "commanding heights" of the Indian economy being increasingly owned by multinationals and foreign investors?

What about Indian brands among heavy equipment - earth movers, construction equipment, agriculture implements, power BTGs, telecom equipment, solar panels and so on? Apart from Hero, is there any Indian FMCG or consumer durables or vehicle brand that is a significant enough entity in the global market? Even in software, apart from the IT companies which were started in the eighties and benefited from the early global tailwinds, is there any Indian owned software company with annual sales turnover of a $1 bn?

Any large enough PE fund with Indian non-institutional LPs which are not aimed at real estate? In fact, all Alternative Investment Funds (AIFs) raised in India and destined for "start-up or early stage ventures, social ventures, SMEs, infrastructure or other areas that government or regulators consider socially or economically desirable" has been meagre, far less than $1 bn (out of about $7 bn raised) in 2018. 

Is there any meaningful Indian presence in the market to buy the IBC resolved assets? What is the Indian LP share in the leveraged buyout market or among Asset Reconstruction Companies (ARCs)?

Where is the wealth of the tech billionaires being invested? Is it in the riskier private market or in public markets? What is the share of their public and private market exposures? How much of it is leaking out?

I am inclined to believe that the vast majority of private capital of the richest Indians (and includes the owners of the large corporate groups) is invested in one of the three areas - public markets, real estate (largely commercial Class A real estate, and directly or through funds), and infrastructure. I think the last category is perhaps the only "socially and economically desirable" sector, though it comes with the stigma of political connectedness. In fact, can one say that the only "risky" or "socially and economically desirable" area where Indian private capital is investing is in infrastructure? 

It was not always like this. Historically, there were large and very old family-owned Indian corporate houses whose brands were household names when the economy was liberalised. How have they fared in their respective market segments over the past three decades? How many of them have been able to stand their ground and grow on the face of competition from multinational companies? Have any of the new generation of family leaders of these companies been able to seed anything new and not merely harvest what their forefathers built? 

Now, I may be off-mark in one or two places in my assessment. But that is beside the point. The larger point is about shining light on the investment destinations of Indian private capital and its implications for the Indian economy.

As mentioned at the beginning, this is an area for research. It is important that such information be debated in the public domain, consensus built, and policy making shaped on important areas like corporate and personal income taxation. It is also important since if Indian private capital itself is not investing in Indian entrepreneurship, then it is surely a stretch to expect foreign capital to invest in them. It then raises then questions about why is this the case and what can be done to address the problem.

Academic scholarship in service of false narratives

Anat Admati has an excellent article that highlights the close links between economic choices and its politics.

In the real world... important economic outcomes are often the consequences of political forces. 

She talks about how economists have contributed to providing the intellectual cover for ideological views which have no evidentiary basis, and about how academics analyse problems on purely technical terms ignoring the political system in which they are located.

This advice to academic scholars is very apt and timely,

Policy involvement, however, requires not only disclosing potential conflicts of interest but, most importantly, scrutinizing research carefully to ensure it is adequate for guiding policy... As a theorist, I know models have unrealistic and sometimes stylized assumptions, yet models can bring important insights, and theoretical and empirical papers that capture key features of the real world can be useful for policy. It takes a big leap of faith, however, and can actually do more harm than good, to claim that models whose assumptions greatly distort the real world are adequate for real-world applications... Applying inadequate economic models to policy in the real world is akin to building bridges using flawed engineering models. Serious harm may follow. We can also enrich our teaching and connect more dots for our students by developing interdisciplinary courses and by bringing out the bigger picture, at least occasionally, in teaching standard courses... If only conflicted experts engage in the process of creating rules, especially on important issues that appear technical and confusing such as accounting standards or financial regulation, we get what Karthik Ramanna calls “thin political markets” and our assumptions about markets are more likely to be false.

This is a cautionary note to economists who peddle counter-narratives on minimum wages, business concentration, widening inequality and so on by pointing to models which support their arguments.

This is a nice list of 34 financial market related claims which have no evidentiary basis, but continue to be part of mainstream narratives. 

End of central banking as we have known it?

Greg Ip has a very nice article on the emerging world of constrained central banking and monetary policy.

Since World War II, every recovery was ushered in with lower rates as the Fed moved to stimulate growth. Every recession was preceded by higher interest rates as the Fed sought to contain inflation. But with interest rates now stuck around zero, central banks are left without their principal lever over the business cycle... The Fed typically cuts short-term interest rates by 5 percentage points in a recession... yet that is impossible now with rates below 2%. Workers, companies, investors and politicians might need to prepare for a world where the business cycle rises and falls largely without the influence of central banks... In November, Fed Chairman Jerome Powell warned Congress that “the new normal now is lower interest rates, lower inflation, probably lower growth…all over the world.”... Central banks are calling on elected officials to employ taxes, spending and deficits to combat recessions. “It’s high time I think for fiscal policy to take charge,” Mario Draghi said in September, shortly before stepping down as ECB president.

This description of the causes of business cycles,

The causes of business cycles were diverse, Wesley Clair Mitchell, an NBER founder, wrote in 1927. They included “the weather, the uncertainty which beclouds all plans that stretch into the future, the emotional aberrations to which business decisions are subject, the innovations characteristic of modern society, the ‘progressive’ character of our age, the magnitude of savings, the construction of industrial equipment, ‘generalized overproduction,’ the operations of banks, the flow of money incomes, and the conduct of business for profits.” He didn’t mention monetary or fiscal policy because, for all practical purposes, they didn’t exist. Until 1913, the U.S. hadn’t had a central bank, except for two brief periods. As for fiscal policy, U.S. federal spending and taxation were too small to matter.

On the nature of business cycles,

From 1854 to 1913, the U.S. had 15 recessions, according to the National Bureau of Economic Research, the academic research group that dates business cycles. Many were severe. One slump lasted from 1873 to 1879, and some historians argue it lingered until 1896... U.S. recessions were more frequent before the Federal Reserve took control over interest rates, using them as a lever to slow inflation or boost the economy.

On the origins of monetary and fiscal policies,

When central banks were established, they didn’t engage in monetary policy, which means adjusting interest rates to counter recession or rein in inflation. Many countries were on the gold standard which, by tying the supply of currency to the stock of gold, prevented sustained inflation. The Fed was established in 1913 to act as lender of last resort, supplying funds to commercial banks that were short of cash, not to manage inflation or unemployment. Not until the Great Depression did that change. In 1933, Franklin D. Roosevelt took the U.S. off the gold standard, giving the Fed much more discretion over interest rates and the money supply. Two years later, Congress centralized Fed decision-making in Washington, better equipping it to manage the broader economy... John Maynard Keynes... showed how individuals and firms, acting rationally, could together spend too little to keep everyone employed. In those circumstances, monetary or fiscal policy could generate more demand for a nation’s goods and services, Mr. Keynes argued... The Employment Act of 1946 committed the U.S. to the idea of using fiscal and monetary policy to maintain full employment and low rates of inflation.

This is a nice summary of the history of monetary policy,

The next quarter-century followed a textbook script. In postwar America, rapid economic growth and falling unemployment yielded rising inflation. The Fed responded by raising interest rates, reducing investment in buildings, equipment and houses. The economy would slide into recession, and inflation would fall. The Fed then lowered interest rates, investment would recover, and growth would resume. The textbook model began to fray at the end of the 1960s. Economists thought low interest rates and budget deficits could permanently reduce unemployment in exchange for only a modest uptick in inflation. Instead, inflation accelerated, and the Fed induced several deep and painful recessions to get it back down.

By the late 1990s, new challenges emerged. One was at first a good thing. Inflation became both low and unusually stable, barely fluctuating in response to economic growth and unemployment. The second change was less beneficial. Regular prices were more stable, but asset prices became less so. The recessions of 2001 and 2008 weren’t caused by the Fed raising rates. They resulted from a boom and bust in asset prices, first in technology stocks, then in house prices and mortgage debt.

After the last bust, the Fed kept interest rates near zero from 2008 until 2015. The central bank also purchased government bonds with newly created money—a new monetary tool dubbed quantitative easing—to push down long-term interest rates. Despite such aggressive stimulus, economic growth has been slow. Unemployment has fallen to a 50-year low, but inflation has persistently run below the 2% target the Fed set. A similar situation prevails abroad. In Japan, Britain and Germany, unemployment is down to historic lows. But despite short-and long-term interest rates near and sometimes below zero, growth has been muted. Since 2009, inflation has averaged 0.3% in Japan and 1.3% in the eurozone. The textbook model of monetary policy is barely operating, and economists have spent the last decade puzzling why.

This about the asymmetric nature of monetary policy effectiveness,

A central bank can always raise rates enough to slow growth in pursuit of lower inflation; but it can’t always lower them enough to ensure faster growth and higher inflation.

On why interest rates transmission in the US may be weaker today,

The economy has changed in ways that weaken its response to interest-rate cuts, they wrote. The economy’s two most interest-sensitive sectors, durable goods manufacturing, such as autos, and construction, fell to 10% of national output in 2018 from 20% in 1967, in part because America’s aging population spends less on houses and cars. Over the same period, financial and professional services, education and health care, all far less interest sensitive, grew to 47% from 26%... the response of employment to interest rates has fallen by a third, meaning it is harder for the Fed to generate a boom.

My one quibble with this narrative is on an issue of attribution. How do we know that monetary policy was responsible for all these trends being attributed to it? How much role did central banking play in ushering in the Great Moderation and sustaining it for nearly a quarter century? How do we separate monetary policy's impact from the numerous other forces that converged at the same time? How do we know that the quantitative easing monetary policy since the crisis has been more beneficial than costly? In fact, how do we refute the criticism that the extended monetary accommodation has entrenched the existing elite power, widened economic inequality, and ripened popular discontent? In other words, how can we claim that the positives associated with monetary policy are causation and not mere correlation?

Weekend reading links

1. This summary of sectors of activity for India's start-ups indicates where the priorities lie.

Clearly copy-cat 'innovations'.

2. Very insightful graphic about the traffic challenge facing cities, this case Mumbai.

Quite apart from the doubling of vehicle numbers over the decade with pretty much the same road space, there is also the disproportionate share of road space occupied by private cars.

3. Fascinating profile from 2013 of Qassem Suleimani in the New Yorker by Dexter Filkins. Clearly, this is no ordinary "terrorist", not even ordinary general. Is this likely the most influential political assassination of our times?

4. MR points to the Economist on state capacity facts in some African countries,

Government revenues average about 17% of gdp in sub-Saharan Africa, according to the IMF. Nigeria has more than 300 times as many people as Luxembourg, but collects less tax. If Ethiopia shared out its tax revenues equally, each citizen would get around $80 a year. The government of the Democratic Republic of Congo is so penurious that its annual health spending per person could not buy a copy of this newspaper.

How much can these countries realistically collect?

The best estimates are that they lose revenues worth 2% of gdp through corporate-tax avoidance, of all kinds, and perhaps another 1-2% through individual wealth stashed offshore. The revenue forgone through tax expenditures is roughly 5% of gdp. It is neither feasible nor desirable to close all those gaps, so the realistic gains are smaller. Other measures, such as increasing compliance or expanding property taxes, could also add a few percentage points.

5. The landslide election victory in Taiwan of anti-mainland and formal independence advocating Democratic Progressive Party of incumbent President Tsai Ing-wen presents an intriguing challenge to China.

6. This WSJ summary of the residential real estate crisis in India is spot on,

The housing crisis reflects the sea change that has taken place in India’s financial industry amid liberalization efforts to meet the needs of a fast-growing economy. Two decades ago it was close to impossible for most people to get a mortgage, and red-tape made it difficult and unprofitable for developers to attempt large projects. Even the best-paid usually had to save until near retirement before they could afford a home.

When market liberalizations in the early 2000s made it easier to raise money on the stock market and with loans, as well as to obtain home mortgages, buyers and builders went overboard. Across the country there was an explosion in new apartment construction. Complexes with a total of five million apartments and villas were launched between 2009 and 2019 according to PropEquity, a real-estate research company. Real-estate loans at India’s banks, as well as at nonbanking finance companies known as shadow banks, quadrupled to more than $70 billion.

The developers, though, quickly ran into problems getting government clearances and finding enough workers to build their projects. Apartments that were supposed to be built in three years ended up taking five years or more. Then, funding for projects dried up, as banks and shadow banks cut back amid growing piles of soured real-estate and infrastructure loans. This forced more delays and even the mothballing of many projects. More than 450,000 apartments have been delayed for more than three years, according to a recent government survey. The value of all the delayed projects is more than $50 billion, 10 times the number five years ago and still half of what it will be in the next few years, according to PropEquity.

As has been written in Can India Grow?, the country clearly does not have the capital accumulation or customer base to support such rapid growth.

7. A good primer on private debt.

8. Investigative reporting on the sorry state of correctional facilities in Mississippi and the pervasive use of mobile phones sneaked in by inmates. Indian jails are no worse than these.

9. A very balanced assessment by David Leonhardt of China's progress over the last decade and its comparison with US's stagnation or even decline. This conclusion is very appropriate

China has now exceeded the world’s expectations for three decades in a row — which, of course, does not guarantee that the streak will continue in this new decade.

10. WSJ writes that the bilateral US-China trade deal, which keeps aside the WTO's dispute resolution system, may be trendsetter in the global settlement of trade disputes, thereby raising the possibility of the unravelling of the existing world trade order.

11. Thomas Philippon argues that "US only pretends to have free markets", whereas the real freer markets are in Europe,

Internet service, cellphone plans, and plane tickets are now much cheaper in Europe and Asia than in the United States, and the price differences are staggering. In 2018, according to data gathered by the comparison site Cable, the average monthly cost of a broadband internet connection was $29 in Italy, $31 in France, $32 in South Korea, and $37 in Germany and Japan. The same connection cost $68 in the United States, putting the country on par with Madagascar, Honduras, and Swaziland. American households spend about $100 a month on cellphone services, the Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics indicates. Households in France and Germany pay less than half of that, according to the economists Mara Faccio and Luigi Zingales. None of this has happened by chance. In 1999, the United States had free and competitive markets in many industries that, in Europe, were dominated by oligopolies. Today the opposite is true. French households can typically choose among five or more internet-service providers; American households are lucky if they have a choice between two, and many have only one. The American airline industry has become fully oligopolistic; profits per passenger mile are now about twice as high as in Europe, where low-cost airlines compete aggressively with incumbents.

He argues that the European integration project ended up favouring the forces of competition, with countries wary of allowing other country domestic champions being promoted by their regulators. This led to a consensus on strong regulators.

Politicians were more worried about the regulator being captured by the other country than they were attracted by the opportunity to capture the regulator themselves. French (or German) politicians might not like a strong and independent antitrust regulator within their own borders, but they like even less the idea of Germany (or France) exerting political influence over the EU’s antitrust regulator. As a result, if they are to agree on any supranational institution, it will have a bias toward more independence. The case of the industrial giants Alstom and Siemens provided an almost perfect test of my theory. After Germany’s Siemens and France’s Alstom decided in 2017 to merge their rail activities, the EU’s two largest and most influential member states both wanted the merger approved. But the EU’s powerful competition commissioner, Margrethe Vestager, stood her ground. She and her team concluded that the merger “would have significantly reduced competition” in signaling equipment and high-speed trains, “depriving customers, including train operators and rail-infrastructure managers, of a choice of suppliers and products.” The European Commission blocked the merger in February 2019.

And on the costs of business concentration and lack of competition,

What the middle class may not fully understand, however, is that much of its stagnation is due to the money that monopolists and oligopolists can squeeze out of consumers. Telecoms and airlines are some of the worst offenders, but barriers to entry also drive up the prices of legal, financial, and professional services. Anticompetitive behavior among hospitals and pharmaceutical companies is a significant contributor to the exorbitant cost of health care in the United States. In my research on monopolization in the American economy, I estimate that the basket of goods and services consumed by a typical household in 2018 cost 5 to 10 percent more than it would have had competition remained as healthy as it was in 2000. Competitive prices would directly save at least $300 a month per household, translating to a nationwide annual household savings of about $600 billion. 

And this figure captures only half of the benefits that increased competition would bring. Competition boosts production, employment, and wages. When firms face competition in the marketplace, they also invest more, which drives up productivity and further increases wages. Indeed, my research indicates that private investment—broadly defined to include plants and equipment, as well as software, research and development, and intellectual property—has been surprisingly weak in recent years, despite low interest rates and record profits and stock prices. Monopoly profits do not translate into increased investment. Instead, just as economic theory predicts, they flow into dividends and share buybacks.  

Taking into account these indirect effects, I estimate that the gross domestic product of the United States would increase by almost $1 trillion and labor income by about $1.25 trillion if we could return to the levels of competition that prevailed circa 2000. Profits, on the other hand, would decrease by about $250 billion. Crucially, these figures combine large efficiency gains shared by all citizens with significant redistribution toward wage earners. The median household would earn a lot more in labor income and a bit less in dividends.

Capitalism, market failures, and regulation

Free market supporters claim that markets are largely self-organising and self-regulating, and governments should step in only when there is a market failure. They talk about the disciplining powers of the financial markets in facilitating efficient intermediation from savers to borrowers.

Take three recent examples of economic sectors from India which are fairly deregulated and which are very competitive - airlines, telecommunications, and renewables. All the three have witnessed very strong market growth and have had long durations of cheap and plentiful credit inflows. All three have been characterised by very aggressive competition, leading to ultra-low tariffs and prices. The problem is that all the three sectors and their creditors are today entrapped in a bad equilibrium, struggling to clean up the mess and restore profitability.

In all the three cases, the much vaunted dynamics of the market mechanism went missing. Businesses invested or bid without concern for sustainability, outbid each other to lower prices without regard for margins, and lenders recklessly opened up their credit taps.

Livemint reports that the aviation sector may be following the telecoms and renewables sectors into a crisis. Even the opportunity presented by the collapse of Jet Airways (the reduction of supply and attendant boost to pricing power) has not helped. Sample this,

In their quest to capture the capacity vacuum left by Jet Airways, airlines had cut fares and added capacity, but nearly every incumbent is now facing a profit squeeze. They had also bet on ordering the latest and most fuel-efficient engines and aircraft to squeeze out a profit wherever they could. But that strategy appears to have spectacularly backfired... Indian airlines are expected to lose over $600 million in FY20 as compared to a previous estimate of a full-year profit of $500-700 million, consultancy Centre for Asia Pacific Aviation (CAPA) India said in a recent report. The cash position of the industry remains under pressure, with corresponding risks. Most airlines other than IndiGo are precariously placed, with cash balances available—in some cases—to cover only a few days or weeks of expenses, it added... With no airline willing to raise fares, ballooning costs mean that the sector has entered into a worrying unsustainable cycle, prompting aviation minister Hardeep Singh Puri to warn industry participants to stop “predatory pricing".

This is a telling point about the so-called market discipline,

“We are all held captive to the actions of the stupidest competitors, whoever they may be on a given day. They set the price and other airlines have no option but to follow," said a third senior airline executive on condition of anonymity. “This has been causing a lot of financial distress in the sector." “All it takes is one discount, and the entire pricing discipline collapses like a pack of cards," said the executive. “And, of late, the pricing discipline in the period of a week to a fortnight before departure has vanished." Previously, this booking period was considered a prime time slot where discounts offered would be minimal, but the country’s sluggish economy has prompted airlines to offer lower fares, said the second airline official mentioned above. “This is not a feasible model. Casualties in terms of closure of airlines are bound to happen," the executive added.

Any sudden increase in oil prices could be a body blow to the sector. 

In all three sectors, the competitive market mechanism and disciplining powers of finance could not prevent reckless investment decisions. Further, not only could it not help the market arrive at sustainable pricing (the so-called Econ 101-speak, "market clearing" price), market competition actually forced the sellers into a destructive race to the bottom with pricing. 

Not to mention, this is only the latest example of such bad outcomes in the same three and other sectors, arising from unbridled market competition. 

None of this should be a reason to junk the market mechanism, which for all its flaws is superior to its alternatives, but be aware of its serious limitations. It is a cautionary note against the typical blind and naive faith that supporters exhibit. 

This is also not an argument for direct price regulation by a public agency. It is about being nuanced with resource allocation decisions (as against the blind faith in auctions), encouraging industry-wide principles of restraint and safeguards against race to the bottom, regulators being even-handed in protecting interests of both consumers and providers, carefully calibrating and phasing reforms (the removal of interconnect charges in telecoms), vigilance on sectoral credit flows and exposures. 

It is a reminder about the important role of the state. One, there are several major areas where state has to be the dominant provider - education at all levels, primary and secondary health, many infrastructure services. There is no country in the world which has ever developed by following the market-will-deliver approach in these areas. Two, there is the role of state in creating the market itself and constantly monitoring to keep markets honest (and not merely stepping in where market fails) - finance is the best example. It is now widely acknowledged by even those on the right (except those ideologically blind and evidence-immune kinds) that financial markets have to be regulated. Fairly active regulation is necessary to create and sustain the market itself, and not merely address market failures. This is true of many sectors, including wherever private sector delivers infrastructure services.

The argument that government is anyways doing things badly, so why not deregulate and let markets do the job is alluring. But it can end up doing more harm and entrap the system in even worse equilibrium from which getting out is really hard. For example, since public health care system has broken down, we are chasing the market God of health insurance (with strategic purchasing etc), and in the process neglecting primary and secondary care, thereby worsening the problem. Or, since public schools are delivering abysmal outcomes, we are talking about vouchers and private schools, little realising that our experience with private education is even worse (witness the mess that privately run professional colleges and market competition has ended up creating).

In the context of increased private participation (public provisioning of privately produced goods and services), two things assume importance. One, markets and private participation demand regulation and contract management, which becomes daunting challenges for a weakly capacitated state. The attendant capture and corruption is likely to leave us with an even worse equilibrium than now. Second, Indian capitalism, at all levels, is still deeply infused with a corrosive culture of cutting corners, cronyism, and rent-seeking. This makes abuse of the market mechanism and contracts a most likely scenario.

America transportation graphics of the day

The intensity of personal vehicle usage has been declining in the US. Average annual number of vehicle trips has been declining since 1995.

And the per capita vehicle miles driven too has been falling, diverging from income growth.

The reasons,

Among the reasons for the national decline are migration to dense urban areas; young adults’ preference to live close to their jobs or to use alternate modes of transportation; more online working, shopping and streaming; and a growing population of retirees who don’t commute to jobs anymore.

And this is interesting,

Evolving travel patterns have prodded urban planners to take steps that would have been unthinkable just a few years ago. They are reducing the number of lanes on city streets, intentionally slowing down traffic and making room for bicycles, pedestrians and public transit. They are eliminating parking requirements for new construction. And they are welcoming the proliferation of shared bicycle and scooter services.

But despite all this, the car remains the preferred choice, with slightly more than three-fourths of Americans still driving to work.  

Seven decadal stories

1. On the outsourcing industry from the WSJ,

The number of active Uber drivers in the U.S. grew from a base of almost zero in 2012 to more than 460,000 at the end of 2015, according to a paper by Uber’s economist Jonathan Hall and the late Princeton University economist Alan Krueger... In addition, the researchers found, most online-platform workers earned less than $2,500 in 2016 from their gigs. That suggests workers on the whole use gigs to supplement income or tide them over between jobs, not as a replacement for traditional work with stable pay and in many cases benefits...

Experts say it’s typical for contractors—who usually get paid less than workers hired directly by corporations—to make up 20% to 50% of a large company’s total workforce. Google parent Alphabet Inc. has more outsourced workers than full-time employees. These 100,000-plus TVCs—an abbreviation for temps, vendors and contractors—test Google’s self-driving cars, review legal documents and manage data projects, among other jobs. They wear red badges at work, while Alphabet employees wear white ones.

2. On how shale gas upended the global energy markets,

Ten years ago, the U.S. ranked third in global oil production, trailing Saudi Arabia and Russia. A decade later, it leads the world in oil as well as natural-gas output, having more than doubled the amount of crude it pumps while raising gas production by roughly two-thirds, according to federal data. There is a simple reason for the surge: fracking. Horizontal drilling and hydraulic fracturing techniques spurred a historic U.S. production boom during the decade that has driven down consumer prices, buoyed the national economy and reshaped geopolitics... A decade ago, drilling and fracking in tight rock formations such as shale produced less than one million barrels of oil a day in the U.S., according to data from the Energy Information Administration. Today that figure is roughly eight million barrels a day.

This is perhaps one of the most important geo-political graphics of the last decade,

But its sustainability is called to question by the commercial viability of shale gas for its investors. This has reduced the flow of capital, and forced companies to pull-back on investments and even production.

3. The rise of big technology companies has been among the most definitive trends of the last decade.

Over the past decade, five big technology companies morphed into five great technology empires. The stock market values this group— Apple Inc, Microsoft Corp, Amazon.com Inc, Google parent Alphabet Inc and Facebook Inc — at more than $4 trillion, while the six surviving men behind four of those companies are together worth nearly $450 billion, according to Forbes... Such an accumulation of wealth is unparalleled perhaps since Standard Oil... As the five tech superstars blazed, they changed practically everything they touched. They vacuumed up data, hired so many top engineers and bought out so many rivals, the breadth of their powers not only kept expanding but reshaped and redefined the technology universe... As successful as the tech giants have been, however, such concentration of power, both in computing and in the marketplace, has also come at a cost. As the decade ends, our dependency on these platforms is feeding a backlash over privacy, screen addiction, software algorithms that mislead users, the spread of misinformation and online mobs that pollute political discourse, and more... Facebook, Google’s YouTube and Amazon have allowed unfettered growth on their platforms for so long, they are difficult to police.

Aside from network effects, there are also other entry barriers,

Over the past decade-plus, Amazon turned the computing infrastructure that supports its own operations into a juggernaut new business, Amazon Web Services, powering other companies’ systems in its cloud. AWS is on pace for $35 billion in revenue this year, up 20 times since 2012, the first year Amazon reported the entity’s stand-alone results. It also carries the fattest profit margin among Amazon’s businesses. Microsoft and Google are trying to catch up in providing their own cloud services. The three companies have such vast computing infrastructure, it’s hard for others to compete, another example of how scale spins the flywheel powering the companies’ momentum.

These types of regulatory arbitrages have been at the heart of big-tech's rise,

To date, the giants have grown mostly unfettered because a powerful if little-known law lets them avoid responsibility for what is posted on their platforms, from hate speech to third-party sales of dangerous products. If the “techlash” ever pushes politicians to rewrite that rule, it could change the internet as we know it.

Another example of regulatory arbitraging has been the legal status of the 'employees' of internet companies as independent contractors,

California passed a law in 2019, going into effect Jan. 1, that would classify some independent contractors as employees. The result could be improved wages and benefits for gig workers, but also higher costs and liabilities to gig companies. Uber, Lyft and DoorDash, which argue that they offer flexible hours and low-commitment work, and address consumer demands that would otherwise be economically unfeasible, were among those that opposed the law. Meanwhile, other states including New York and New Jersey are also looking at ways to classify gig workers as employees. 

4. The financial market trend of the decade was the avalanche of capital flowing into startups, inflating valuation bubbles everywhere. A Bloomberg opinion piece calls it the flow of "other people's money".

In 2009, $27.2 billion was invested in U.S. tech startups, according to figures from the National Venture Capital Association. In the 12 months ended in September, that figure was more than $143 billion... There is more money than good ideas, which provides incentives to rationalize bad businesses and bad behavior.

Ananth draws attention to this very good article by Anand Sridharan highlighting how the era of plentiful, cheap, and recklessly deployed capital has had a corrosive effect on entrepreneurship and capitalism. A generation or more of entrepreneurs will struggle to shake off its adverse legacy.

5. The scorecard of American Unicorns which had IPOs this year,

This, despite the soaring equity markets.

6. One of the most transformational developments has been the rapid emergence of the smart phone as the ultimate personal device. Over this decade, the smart phone has come to render obsolete the camera, satellite navigation system, camcorder, music devices like iPods, and messaging devices like Blackberry.

7. Joe Nocera, describing the decade as "private equity decade, writes that the decade exposed the disturbing practices of private equity.

In 2009, private equity firms completed 1,927 deals worth $142 billion, according to the financial data firm Pitchbook. By 2018, there were 5,180 private equity deals worth $727 billion.

This assessment of PE is spot on,

What has also become clear this decade is the high-minded rationale the private equity industry once used to justify its deals has largely evaporated. You don’t hear much anymore about how taking a company private will remove short-term incentives, impose necessary restructuring, yadda, yadda, yadda. The main thing private equity has done this decade is to pile debt onto companies — imposing repayment costs while pulling out fees and dividends that have no bearing on what the private equity firm has actually done. Famously, Toys “R” Us went bankrupt because it was buried in private equity debt. So did Gymboree, Sports Authority, Linens ’n Things, and many others. In 2017, when the Limited announced it was shutting down its 250 stores — and throwing its employees out of work — the private equity firm that owned it, Sun Capital Partners Inc., reported to investors that it had nearly doubled its money, thanks to the dividends and fees it had paid itself... In other words, whatever larger purpose private equity might have once had, the 2010s exposed an industry that cared about lining its own pockets — often at the expense of the companies it bought. It has become dealmaking for its own sake.

I had blogged earlier about this Daniel Rasmussen article. This summary is apt,

As an industry, PE firms take control of businesses to increase debt and redirect spending from capital expenditures and other forms of investment toward paying down that debt. As a result, or in tandem, the growth of the business slows. That is a simple, structural change, not a grand shift in strategy or a change that really requires any expertise in management.