The horrible housing blunder

The West’s biggest economic policy mistake

Its obsession with home ownership undermines growth, fairness and public faith in capitalism

 


Economies can suffer both sudden crashes and chronic diseases. Housing markets in the rich world have caused both types of problem. A trillion dollars of dud mortgages blew up the financial system in 2007-08. But just as pernicious is the creeping dysfunction that housing has created over decades: vibrant cities without space to grow; ageing homeowners sitting in half-empty homes who are keen to protect their view; and a generation of young people who cannot easily afford to rent or buy and think capitalism has let them down.

As our special report this week explains, much of the blame lies with warped housing policies that date back to the second world war and which are intertwined with an infatuation with home ownership. They have caused one of the rich world’s most serious and longest-running economic failures. A fresh architecture is urgently needed.

At the root of that failure is a lack of building, especially near the thriving cities in which jobs are plentiful. From Sydney to Sydenham, fiddly regulations protect an elite of existing homeowners and prevent developers from building the skyscrapers and flats that the modern economy demands.

The resulting high rents and house prices make it hard for workers to move to where the most productive jobs are, and have slowed growth. Overall housing costs in America absorb 11% of GDP, up from 8% in the 1970s. If just three big cities—New York, San Francisco and San Jose—relaxed planning rules, America’s GDP could be 4% higher.

That is an enormous prize.

As well as being merely inefficient, housing markets are deeply unfair. Over a period of decades, falling interest rates have compounded inadequate supply and led to a surge in prices.

In America the frenzy is concentrated in thriving cities; in other rich countries average national prices have soared, especially in English-speaking countries where punting on property is a national sport.

The financial crisis did not kill off the trend. In Britain inflation-adjusted house prices are roughly equal to their pre-crisis peak, while real wages are no higher. In Australia, despite recent falls, prices remain 20% higher than in 2008. In Canada they are up by half.

The soaring cost of housing has created gaping inequalities and inflamed both generational and geographical divides. In 1990 a generation of baby-boomers, with a median age of 35, owned a third of America’s real estate by value.

In 2019 a similarly sized cohort of millennials, aged 31, owned just 4%. Young people’s view that housing is out of reach—unless you have rich parents—helps explain their drift towards “millennial socialism”.

And homeowners of all ages who are trapped in declining places resent the windfall housing gains enjoyed in and around successful cities.

In Britain areas with stagnant housing markets were more likely to vote for Brexit in 2016, even after accounting for differences in income and demography.

You might think fear and envy about housing is part of the human condition. In fact, the property pathology has its roots in a shift in public policy in the 1950s towards promoting home ownership. Since then governments have used subsidies, tax breaks and sales of public housing to encourage owner-occupation over renting. Politicians on the right have seen home ownership as a way to win votes by encouraging responsible citizenship. Those on the left see housing as a conduit for redistribution and for nudging poorer households to build wealth.

These arguments are overstated. It is hard to show whether property ownership makes better citizens. If you ignore leverage, it is usually better to own shares than to own homes. And the cult of owner-occupation has huge costs. Those who own homes often become nimbys who resist development in an effort to protect their investments.

Data-crunching by The Economist suggests that the number of new houses constructed per person in the rich world has fallen by half since the 1960s. Because supply is constrained and the system is skewed towards ownership, most people feel they risk being left behind if they rent.

As a result politicians focus on subsidising marginal buyers, as Britain has done in recent years. That channels cash to the middle classes and further boosts prices. And it fuels the build-up of mortgage debt that makes crises more likely.

It does not have to be this way. Not everywhere is afflicted with every part of the housing curse. Tokyo has no property shortage; between 2013 and 2017 it put up 728,000 dwellings—more than England did—without destroying quality of life. The number of rough sleepers has dropped by 80% in the past 20 years.

Switzerland gives local governments fiscal incentives to allow housing development—one reason why there is almost twice as much home-building per person as in America. New Zealand recoups some of homeowners’ windfall gains through land and property taxes based on valuations that are frequently updated.

Most important, in a few places the rate of home ownership is low and no one bats an eyelid. It is just 50% in Germany, which has a rental sector that encourages long-term tenancies and provides clear and enforceable rights for renters. With ample supply and few tax breaks or subsidies for owner-occupiers, home ownership is far less alluring and the political clout of nimbys is muted.

Despite strong recent growth in some cities, Germany’s real house prices are, on average, no higher than they were in 1980.

A home run

Is it possible to escape the home-ownership fetish?

Few governments today can ignore the anger over housing shortages and intergenerational unfairness. Some have responded with bad ideas like rent controls or even more mortgage subsidies. Yet there has been some progress.

America has capped its tax break for mortgage-interest payments.

Britain has banned murky upfront fees from rental contracts and curbed risky mortgage lending.

A fledgling yimby—“yes in my backyard”—movement has sprung up in many successful cities to promote construction. Those, like this newspaper, who want popular support for free markets to endure should hope that such movements succeed.

Far from shoring up capitalism, housing policies have made the system unsafe, inefficient and unfair. Time to tear down this rotten edifice and build a new housing market that works.

Dystopia Is Arriving in Stages

Science fiction has a warning about developing mind-reading technology without any proper framework for how to control it. It should be heded.

Alexander Friedman

afriedman17_Matjaz Slanic Getty Images_brainwavesmindreaddata


NEW YORK – It is commonly believed that the future of humanity will one day be threatened by the rise of artificial intelligence (AI), perhaps embodied in malevolent robots.

Yet as we enter the third decade of the millennium, it is not the singularity we should fear, but rather a much older enemy: ourselves.

Think less The Terminator, more Minority Report.

We are rapidly developing literal mind-reading technology without any framework for how to control it.

Imagine, for a moment, if human beings had evolved to be able to read each other’s minds.

How would that have gone for us?

To answer this question, consider your own internal dialogues. It is safe to assume that every one of us has had thoughts that would be shocking even (or especially) to those closest to us. How would those who might not wish us well have reacted to being able to hear what emotional rants go through our heads from time to time?

Would they have had the judgment to let them pass, recognizing them as just flashes of emotion? Or would some have responded opportunistically, taking advantage of thoughts we would otherwise not wish to betray?

Evolution did not enable us to read minds because that power might have ended our existence as a species. Instead, as our ancient ancestors organized into groups for protection, most of us learned what could be said and what was best left unspoken.

Over time, this became a highly evolved human trait that enabled societies to form, cities to rise, and even hundreds of stressed out people to be jammed into a flying tube, usually without attacking their seat-mates. It forms a core part of what we now call EQ, or emotional intelligence.

And yet technology is now beginning to threaten this necessary evolutionary adaptation in a fundamental way.

The first stage has taken place in social media. Facebook underscored this trajectory, when Russian manipulation of the platform affected the United States’ presidential election in 2016.

And Twitter, which empowers a user to dash off a passing thought or emotion that might then be shared with millions, amplifies this trend.

Imagine how North Korean leaders struggled to interpret President Donald Trump’s tweet of nuclear “fire and fury.”

Was it a real threat from a new and erratic US leader, or just a spur-of-the-moment exhalation, a mental flash without a filter that would best be ignored?

Back in the days of the bipolar superpower world, the iconic US-Soviet hotline phone was installed as a way to clarify each side’s intentions, lest through some misunderstanding the world might otherwise disappear beneath a nuclear mushroom cloud.

Today, in our much more complicated multipolar and asymmetric-threat-driven world, social media offers all who are willing a giant, unedited megaphone. Social media has become a tool that can undermine democracy; and yet it is mere child’s play compared to what is now barreling our way.

Companies ranging from start-ups to multinational conglomerates have recently announced startling innovations that enable mind reading.

Elon Musk’s company Neuralink is seeking approval for human trials of a device implanted in users’ brains to read their minds.

Nissan has developed “Brain-to-Vehicle” technology that enables a car to read instructions from a driver’s mind.

Facebook has funded scientists that use brainwaves to decode speech.

A recent paper in the science journal Nature explains how AI can create speech by analyzing brain signals.

Researchers at Columbia University have developed technology that can analyze brain activity to determine what a user wants and vocalize those desires via a synthesizer.

Clearly, these kinds of advances can offer real benefits, including helping those suffering from paralysis or neurological disorders.

Early examples of neuroprosthetics, such as cochlear implants, which enable a deaf person to hear, or promising devices that could allow the blind to see, are already in use.

But there are also darker potential applications, like enabling advertisers to micro-hone their offerings to individuals’ unspoken desires, or employers to spy on their workers, or police to monitor citizens’ possible criminal intent on a vast scale, akin to the way London residents today are tracked on CCTV.

An early warning is ToTok, one of the most downloaded social-media apps, which, it was recently revealed, the United Arab Emirates government had been using to spy on users. And what happens if mind-reading devices are hacked? It is difficult to imagine a more relevant area of data privacy than that which exists in the human brain.

Musk believes that brain interfaces will be necessary for humans to keep up with AI.

This brings us back to Philip K. Dick’s science fiction horror story “The Minority Report” (the basis of the 2002 film).

Consider the myriad of thorny ethical, legal, and social-order implications of a policeman stopping a crime before it takes place because he or she could “assess” an individual’s likely intent by reading their brainwaves.

When is a crime committed? When the thought takes place? When actions begin that manifest the thought in reality? When the gun is pointed? When the trigger finger tightens?

A principal challenge of technological innovation is that it usually takes society a long time to catch up, understand the broader implications of how the new technology can be used and abused, and provide appropriate legal and regulatory frameworks to regulate its conduct.

In the second decade of this millennium, social media moved from a tool to connect to a platform with immense power to spread lies and manipulate elections.

Society is now grappling with how to harness the best of this innovation, while mitigating its potential for abuse.

Perhaps, before we have even figured that out, the third decade of the millennium will confront us with far more consequential technological challenges.


Alexander Friedman, an investor, is a former Chief Executive Officer of GAM Investments, Chief Investment Officer of UBS, Chief Financial Officer of the Bill & Melinda Gates Foundation, and White House Fellow.


Trump Hopes Trade Deals Will Boost Growth. Experts Don’t Agree.

Trump administration officials say the “Phase 1” deal signed Wednesday will promote growth. Many economic forecasters are less optimistic.

By Jim Tankersley


President Trump signed a limited trade agreement with China at the White House on Wednesday.Credit...Pete Marovich for The New York Times


WASHINGTON — Cabinet secretaries and White House officials have predicted that President Trump’s initial trade agreement with China and his revised accord with Mexico and Canada — slated for final passage this week — will deliver twin jolts to the economy.

But outside forecasters, including some economists who have welcomed the China agreement in particular, have predicted much more modest gains — and, in some cases, no gains at all.

“We now have U.S.M.C.A.; that’s going to pass the Senate this week,” Treasury Secretary Steven Mnuchin said Wednesday on CNBC, referring to the United States-Mexico-Canada Agreement. “We have China Phase 1, there is a deal with Japan, a deal with Korea. These are all going to have significant positive effects on the 2020 economy.”

He and other officials have good reason to hope: Mr. Trump is up for re-election, and the economy appears to have grown by just over 2 percent in 2019, a dip from 2018 and well short of the administration’s forecasts of growth above 3 percent for the year.

The administration has yet to publish an official 2020 growth forecast. Mr. Mnuchin said on Sunday that he expected the economy to grow between 2.5 percent and 3 percent this year, though he cautioned that growth could fall to the lower end of that range because of troubles at the aerospace giant Boeing.

Other forecasts were less optimistic. The World Bank said last week that it expected the United States economy to grow by 1.8 percent this year. The first phase of the China trade deals and the U.S.M.C.A. are not expected to have much of an impact on the more pessimistic predictions.

“I have not changed my forecast as of yet and don’t expect to materially,” said Rubeela Farooqi, chief United States economist for High Frequency Economics. She expects the nation’s economy to grow by 1.8 percent this year.

The China agreement, she said, “is a step in the right direction, but tariffs remain in place, and I’m not sure they will be rolled back imminently.”

The Phase 1 agreement could affect American growth in two ways, and administration officials are counting on both to deliver.

First, the deal calls for China to begin purchasing what the administration says will be $200 billion worth of American crops and other exported goods and services. Those purchases should increase exports from the United States to China, which, all else being equal, would promote growth.

Second, and perhaps more important, administration officials appear to be counting on the agreement to revive business investment in the United States, which has fallen in recent quarters after surging in the first half of 2018. The uncertainty that Mr. Trump and the Chinese sowed as they imposed escalating tariffs on each other’s imports was largely to blame for that sluggishness, many companies and economists have said.

The bullish case for the China agreement is that it will ease that uncertainty. Some economists say the U.S.M.C.A. could do the same. For months, administration officials have touted a study by the United States International Trade Commission that predicted that the North American trade deal could raise growth by 0.35 percent, largely by reducing uncertainty over trade in digital services.

Andrew Hunter, senior United States economist at Capital Economics, backed that assessment on Tuesday. “The gap that opened up last year between investment and corporate profits suggests that tariff uncertainty has caused firms to delay” investment plans, he wrote in a research note. He added, “With the U.S.M.C.A. deal signed and the threat of further tariffs on Chinese goods seemingly off the table, that drag should now be fading.”

Many economists have praised the agreements for reducing uncertainty, but few have raised their growth forecasts because of them. That is in part because they say the deals still leave a large number of tariffs in place — particularly those against China, but also on some steel, aluminum, solar panels and washing machines imported from other countries.

They also noted that Mr. Trump had waged his trade wars on fronts well beyond North America and China. New trade battles loom this year, including one between the United States and France over a French push to impose a new tax that hits American tech giants like Google and Amazon.

Mary Lovely, a senior fellow at the Peterson Institute for International Economics, said the Phase 1 agreement was “good news for the U.S. and the world economy.” But, she said, “there remains considerable uncertainly for businesses using China as a platform for products destined for the U.S. market, and we will continue to see the impact of this in slower investment and higher business costs.”

Lewis Alexander, chief United States economist at Nomura, revised his 2020 growth forecast up by 0.1 percentage points in late fall to reflect the suspension of a new round of tariffs that had been set to take effect in December. He said he did not expect a material gain in business investment because of the deals.

Several economists expressed optimism that a “Phase 2” deal with China that rolls back more tariffs — coupled with a long stretch of trade peace on other fronts — could deliver more benefits to the economy. But administration officials appear to have ruled out such a deal before November.

“Yes, there is some upside risk to our outlook if things go better than we expect,” Mr. Alexander said. “But in general the direct effects of tariff changes are not large, and to really change the tone, a lot of things about the U.S.-China relationship would have to be settled in a way that seemed durable. It’s hard to see how that could be achieved in an election year.”


Former Bush Adviser Karl Rove on Trump

'Populism Isn't Sustainable Over the Long Haul'

Interview Conducted by René Pfister in Washington, D.C.

Karl Rove: "The Republican base will be strongly with Trump."
Karl Rove: "The Republican base will be strongly with Trump."



In an interview, former White House Deputy Chief of Staff Karl Rove, a longtime adviser to former President George W. Bush, argues the Republican Party will lose in the long term if it continues following Donald Trump's path.


DER SPIEGEL: Mr. Rove, you wrote a book about William McKinley, the 25th president of the United States. In it, you describe him as a politician who modernized the Republican Party at the beginning of the 20th century. McKinley welcomed the influx of new immigrants and tried to unite the U.S. after the Civil War. Is it fair to say that McKinley is the opposite of Donald Trump?

Rove: Well, I'll leave that up to people to figure out. McKinley was a man of enormous character and integrity, which won him bipartisan respect. He demonstrated a willingness to buck his party on the issue of immigration, particularly in supporting the entrance of Catholics from Italy and Eastern Europe.

The largest pressure group at the time was an anti-Catholic group called the American Protective Association. In 1896, they declared that McKinley was the only Republican candidate for president who was unacceptable to them. It was because when he ran for re-election as governor of Ohio, they had found out that there were prison guards at a state prison who were Catholics.

The APA demanded that McKinley fire them, and he refused. So, they took him on in the 1896 election, but he overcame their opposition and won the nomination. He retaliated in a way by having the opening prayer at the Republican National Convention in St. Louis issued by a rabbi. The second day, it was an African-American preacher who gave the prayer.

DER SPIEGEL: Why did he do that?

Rove: McKinley was a reformer, and he recognized that the country was changing. It was becoming more urban. America was accepting more immigrants.

It was almost scandalous because the Republican Party in the North was the white Anglo-Saxon Protestant party, and here's a guy who's the first Republican presidential candidate to be endorsed by figures in the Catholic hierarchy.

DER SPIEGEL: In your book on McKinley, you write that politics is based on creating the broadest voter base possible. You call it the "play of addition." But in the 2016 election, Donald Trump played, if you like, the game of subtraction. He focused on white working-class voters. Nevertheless, he won. Why?

Rove: Because he added blue-collar, non-college graduates to the Republican coalition, winning Pennsylvania, Michigan, and Wisconsin. He got people who live in Kenosha and Allentown and the suburbs of Detroit who are nominal Democrats but could not bring themselves in 2016 to vote for Hillary Clinton to vote for him.

Now, the other part of that equation is that, in those three states, Clinton turned off parts of the Democratic coalition. Trump was given his moment when people said, "If I'm a blue-collar, working-class person who lives between the coasts, I don't think I'm being respected.

Hillary thinks I'm deplorable, and then the guy before her (Obama) talked about me clinging to my religion and my guns."

DER SPIEGEL: After Barack Obama defeated Mitt Romney in the 2012 presidential election, the consensus among Republicans had been that party had to focus harder on attracting non-white voters. Given the outcome of the 2016 election, was this analysis wrong?

Rove: No, not over the long haul.

DER SPIEGEL: Then why is the Trump campaign once again focusing on white voters?

Rove: Look, I'm not their spokesman. But they will make the argument that they can do marginally better in the African American and Latino communities because of the good state of the American economy. We have the lowest unemployment rates among African Americans and Latinos since we began breaking those statistics out by race in 1948.

DER SPIEGEL: One parallel between the age of McKinley and today is that a deep divide runs through the U.S. What, in your view, are the reasons for that?

Rove: It's interesting. We were going through a moment of populism back then, and we're going through a moment of populism now -- and both had their roots in the divide between the have-nots and the wealthy.

The crisis of the 1870s and '80s was marked by the conflict between debtors and savers. People who had money and saved it were better off than people who had mortgages and borrowed money. In that era, it led to the creation of the Populist Party, but inside the Democratic Party.

This time, the 2008 financial crisis led to a populist impulse inside the Republican Party, as well.

DER SPIEGEL: What, exactly, is Donald Trump's talent?

Rove: Well, he's very good at reading people, very good at reading crowds. Trump is a showman, whether it's his TV audience or the crowd at his rally. He figures out what to do to motivate the crowd. Those people are doting on every word. The author Salena Zito was right: The press takes Trump literally but not seriously, and the crowds take him seriously but not literally.

DER SPIEGEL: You have spent your whole life in the mainstream of the Republican Party.

Given all the scandals surrounding Donald Trump, how can someone who truly believes in values like family and integrity support him?

Rove: Well, I run into this a lot. People will come up to me in airports and say, "I see you on Fox News. I read you in the Wall Street Journal.

I really like what Trump is doing. I like the (conservative) judges (he appoints). I like the tax cuts, the strong defense."

And I say: And what about the tweets? The answer is: "Oh God, I wish he'd stop tweeting."

We are at a tribal moment. If you attacked Obama when he was in office, Democrats would leap to his defense.

Today, you'll notice there's a lot of disquietude being expressed about his years in the White House. He wasn't liberal enough. He didn't press far enough. But the Democrats weren't saying those things when he was in office, because, by God, if you're attacking my leader, I'm going to stand with him firmly. Same with Trump.

DER SPIEGEL: Is Trump's crude language on Twitter a means for keeping his base happy?

Rove: Yeah, it is, but American elections are won by the voters who swing from side to side.

Now granted, there aren't a lot of them today.

When you're talking about the Nixon and Reagan elections, you're talking about a time when a third of the electorate was up for grabs. This election, it will be 8 or 10 percent. But therein lies the difference between winning and losing.

DER SPIEGEL: What will the Republican Party look like after Donald Trump?

Rove: You know, we had Reaganism -- an optimistic, sunny, conservative philosophy that a lot of Republicans today still identify themselves with. What's going to be interesting to see in the decades ahead, is whether Trump has made the Republican Party into a populist party tinged with nationalism and occasional alt-right sympathies, and anti-immigrant and anti-Muslim attitudes? Or whether people turn not back to the old conservatism but design something new that looks a little bit like today and a little bit like Reagan, but it's something new.

DER SPIEGEL: What's your answer?

Rove: I think that happens, because populism is not sustainable over the long haul. We saw the populism of President Andrew Jackson, but it receded quickly. And then we have the populism of Trump today, but I don't see a ready heir. Is it Vice President Mike Pence?

DER SPIEGEL: Maybe Donald Trump Jr.? He obviously wants to run at some point.

Rove: Well, we'll see.

DER SPIEGEL: Your analysis of the situation among the Republicans has been the same for years: The party will need to widen its voter base if it wants to assert itself in a country where whites are increasingly in the minority. But doesn't that also mean that the Republicans are doomed if they continue to follow Donald Trump's path?

Rove: Well, I don't know. We won't die. We'll lose and then we'll change. That's one of the strengths of our two-party system. These two parties (the Democrats and the Republicans) are broad coalitions, and if they start to lose, they wake up and say, "We've got to do something different."

DER SPIEGEL: Who is the Democrat with the best chances of defeating Donald Trump?

Rove: My personal view is that Joe Biden is the most dangerous of the Democrats if he could win the nomination. He's a little goofy, a little weird. He can't put two sentences together, but he's sort of a normal Democrat. He could stand up and take back that 8 to 12 percent of the vote that will decide the election. The voters could look at him and say, "Look, our country will be OK with him as president. Uncle Joe can do that."

DER SPIEGEL: Can a moderate conservative like you seriously vote for Donald Trump in 2020?

Rove: Oh yeah.

DER SPIEGEL: Why?

Rove: There are conservatives in Britain who don't like what Boris Johnson is doing, but when they look at a socialist like Jeremy Corbyn, they know it will be worse. Same here.

The Republican base will be strongly with Trump.

And some voters who are up for grabs in 2020 can bring themselves reluctantly to vote for him because they think that Elizabeth Warren or Bernie Sanders are worse. And they are.

How Ownership Concentration Is Happening, and Why It Matters

While the globalization that embodied the 1990s liberated multinational corporations, the advent of the Internet economy a decade later boosted corporate concentration further. And the adverse effects this is having on competition, wealth distribution, and fiscal transparency are likely to worsen in the coming years.

Alissa Amico

amico6_Abdo Essam EyeEm Getty Images_chessboard


DUBAI – If the global economy were a chess game, few pieces would be left on the board. Most would be relegated to the role of bystanders, observing a concentration of power in the hands of an ever-dwindling number of global players.

Now let us imagine that the pieces left standing are corporate entities, with a shrinking number of ultimate owners at the helm. This analogy fundamentally characterizes the global economy today.

The globalization that embodied the 1990s unleashed the power of multinational corporations, enabling them rapidly to crush local competition in smaller markets. With the advent of the Internet economy a decade later, online distribution and network effects boosted corporate concentration further, giving rise to behemoths like Amazon, Google, Airbnb, and Facebook.

Today, corporate ownership concentration is being fostered by new factors, which could ultimately pose a systemic threat to the global economy. One of the most important is the decline of public equity markets across developed economies: the number of companies accessing them has halved during the past decade. In most markets outside Asia, new firms are not listing; on the contrary, in response to greater compliance and regulatory obligations, some are de-listing.

This is occurring despite policymakers’ attempts over the past five years to revitalize capital markets and create incentives for fresh listings, especially of technology and state-owned firms. The recently aborted WeWork initial public offering (IPO) highlights the anemic condition of equity markets today. The listing of Saudi Aramco in December gained attention not only due to its size and symbolic importance, but also because IPOs have become rare.

With the decline in offerings globally, many of today’s “too-large-to-fail” companies are not financial institutions, as was the case during the 2008 crisis, but privately held non-financial firms. Ownership concentration is also a reality for listed firms, where the top three shareholders have majority control in 50% of the world’s largest companies, according to recent OECD estimates.

This trend – set to continue in the coming years – is underpinning an increasing rift in economic ownership rights between company founders and ordinary investors. For example, investors in the Snapchat IPO were offered – for the first time in modern history – non-voting shares. While the IPO prompted an outcry, Snapchat is representative of the ownership structures at Tesla, Uber, Amazon, and other large companies where founders use multiple share classes to retain control with minority ownership.

At the same time, with enthusiasm for privatization declining globally, governments remain significant – and, in many cases, controlling – owners of large pockets of corporate wealth.

Indeed, in almost 10% of the world’s listed companies, the public sector has a controlling stake.

The consequences of this can be seen in the Nissan-Renault debacle, which highlights the governance perils of state-invested multinationals.

Some investors – such as Norway’s sovereign wealth fund, which owns 2% of every European listed company – take a diversified approach.

Other sovereign investors, such as Saudi Arabia’s Public Investment Fund, have much more concentrated stakes and play a more active role in governance.

But not only sovereign investors are becoming concentrated players.

With the ongoing shift of capital from actively to passively managed funds, asset managers’ portfolios are becoming significantly more concentrated.

A recent study by two Harvard researchers, Lucian Bebchuk and Scott Hirst, found that 80% of the capital allocated to investment funds today is going to Vanguard, BlackRock, and State Street.

In two decades, these three players are predicted to cast as much as 40% of the votes in S&P 500 companies, while their stewardship resources have not grown proportionately.

The growing concentration of capital in these investment funds raises a host of new concerns, not least competition-related, as asset managers vote on strategic matters in companies that might be rivals.

In the airline industry, for example, the ten largest institutional investors own 20% of the global market capitalization. Indeed, concentration-related conflicts of interest faced by institutional investors and asset managers are already raising eyebrows in policy circles.

This picture is further complicated by the concentration of other financial intermediaries. Stock markets are now no longer mutualized or state-owned, but are instead mostly organized in a few large, self-listed exchange groups.

As a result, competition for new listings is not occurring between national stock exchanges, but between an oligopoly of exchange groups whose ultimate objective is less the protection of the rights of shareholders in listed companies and more the defense of their own shareholders rights.

Ultimately, these trends translate into a dwindling number of large enterprises and financial intermediaries with increasingly concentrated ownership.

While a degree of ownership concentration can create value, it can also create negative externalities on competition, wealth distribution, and fiscal transparency on a macro level.

On a micro level, the current level of economic concentration facilitates neither fair rents for minority shareholders nor respect for consumer rights.

Broadening corporations’ definitions of their purpose and responsibilities toward stakeholders, and focusing on the stewardship responsibilities of institutional investors and asset managers – both remedies currently in vogue among corporate executives and policymakers – is insufficient.

Instead, what is needed is a focus on the duties of controlling shareholders toward minority investors.

Stronger checks and balances, and perhaps even Chinese Walls, also need to be introduced for large asset managers.

These and other remedies to address concentration are essential, not only in the name of better corporate governance, but also as a response to the worldwide wave of protests against the increasingly unjust distribution of national income and global wealth.


Alissa Amico is Managing Director of GOVERN, the Economic and Corporate Governance Center.