Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • Jobs Numbers: The Good, the Bad, the Meh

    Jan 6, 2012Mike Konczal

    Some good news lurks in today's jobs numbers, but we're still a long way away from a real recovery.

    Some good news lurks in today's jobs numbers, but we're still a long way away from a real recovery.

    The new jobs numbers are out. Overall, 212,000 private sector jobs were created while 12,000 government jobs were lost, for a net total of 200,000 job gains. That loss, 12,000, is less than the average 23,000 government jobs that were lost per month in 2011, so it boosts the headline number. Yet 12,000 is still a lot to lose, especially when so many of those numbers come from education -- at least 9,000 local-level education jobs were cut.

    Where's the good news? There were solid increases in weekly hours (+0.5%) and payroll (+0.7%), meaning employed people are getting more money in their pockets. With more money, they can spend more, which will employ other people and create a virtuous loop of spending and employment. This will help boost demand broadly and start to add some energy to a depressed economy. If sustained, it could help take the current jobs reports -- which are good but not enough to end the unemployment crisis we currently have -- and turn them into jobs numbers capable of bringing about a serious recovery.

    But there's also an apparent queue for who will get jobs first. Right now we are seeing most job gains go to men and to those with higher education. Men have been gaining jobs over women across industries and occupations throughout 2011 -- and in the household survey women lost jobs last month. The employment-to-population ratio went down to 53 percent for women last month, bringing it to the lowest levels since 1988. The Roosevelt Institute will be doing additional research on this topic in 2012.

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    What's on the horizon? Something needs to trigger these 200,000 jobs a month reports into the 250,000 to 400,000 range.  At the current rate, we won't see full employment until 2024. Something needs to kick in. One way this could happen is if household formation takes off in 2012. There's a shadow household inventory of adults living with parents and adults living with other adults who, in better times, would have moved out. Household formations would take stress off the terrible housing market, but is it likely to take off itself without a boost? I'll be following this argument throughout the year.

    The other big way to put more gas in the economy's engine is through expanded fiscal and monetary policy. There's no sign from inflation or government borrowing rates that we've hit a danger zone in stimulating the economy, and there's plenty of slack in the short-term to put idle resources to work.

    Mike Konczal is a Fellow at the Roosevelt Institute.

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  • Cordray's Recess Appointment Helps Implement a Law That Already Passed

    Jan 4, 2012Mike Konczal

    President Obama rightfully sidestepped a GOP that insists on dismantling a law that addresses some of the fundamental breakdowns of the crisis.

    President Obama rightfully sidestepped a GOP that insists on dismantling a law that addresses some of the fundamental breakdowns of the crisis.

    One way to think about how the Dodd-Frank Wall Street Reform and Consumer Protection Act goes about policing finance is that it levels the playing field of rules and regulations between bank and non-bank financial firms. In the lead up to the crisis, financial firms acted like "shadow banks" without having to follow the rules regular banks did. The legal and regulatory infrastructure that evolved since the Great Depression for regular banks was never extended to these new shadow banks.

    This was especially true for consumer financial products, particularly home mortgages. There's a solid regulatory network for home mortgages in place when it comes to regular banks. However, when it came to subprime mortgages made through non-bank lenders, those rules didn't apply. Many financial regulators urged Federal Reserve Chairman Alan Greenspan to have the Fed start regulating subprime and leveling the regulatory playing field. So did the GAO and a HUD-Treasury task force. Greenspan wouldn’t. Hence Dodd-Frank's emphasis on reducing regulatory arbitrage by creating a special Bureau to consolidate consumer financial protection in one place.

    But the Consumer Financial Protection Bureau (CFPB) needs a director in order to start working on reducing the uneven playing field. As a recent report noted, "[w]ithout a Director, the CFPB cannot fully supervise non‐bank financial institutions such as independent payday lenders, non‐bank mortgage lenders, non‐bank mortgage servicers, debt collectors, credit reporting agencies and private student lenders." Enter our dysfunctional Senate.

    In early May of 2011, 44 Republican Senators signed onto a letter that requested three specific changes before they confirmed any nominee, "regardless of party affiliation," to head the CFPB. The changes included replacing "the single Director with a board to oversee the Bureau" and subjecting "the Bureau to the Congressional appropriations process."

    Dodd-Frank, signed into law in July 2010, created a Consumer Financial Protection Bureau that had a single director and was consciously funded in a very specific way. In order for the CFPB to fully work, it needs an appointed director -- certain powers don't kick in otherwise. So in effect a minority of Republican Senators say that they won't allow an act of law to be fully implemented unless certain, crucial, parts of the law are overturned.

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    People are correctly referring to this as a new nullification crisis (see also here). Brookings Scholar Thomas Mann notes that insisting "that a legitimately passed law be changed before allowing it to function with a director [is] a modern-day form of nullification. Same with the director of the Center for Medicare and Medicaid Services. There is nothing normal or routine about this. The Senate policing of non-cabinet appointments is sometimes more aggressive but the current practice goes well beyond that, more like pre-Civil War days than 20th century practice." This has also gone on with the NLRB and, in a way, went on with the debt ceiling battle. Eventually the administration needed to challenge this.

    So it's great to see it recess appoint Richard Cordray as director. ThinkProgress outlines the initial legal analysis as to why Obama has the power to do this. Cordray will make a great director for the CFPB and the Bureau will continue to do the excellent work that it has already done.

    It's a shame that more confirmations weren't pushed through with this window. A large number of financial regulator positions need to be filled, and even more judicial spots sit empty. In terms of building a longer-term, ascendent liberalism, it is essential to appoint people such as judges and nurture them to become strong leaders in the future.

    It is uncertain whether this will shut down the confirmation process in the Senate, which may escalate tensions. If so, it will be a good time to reexamine how confirmations happen in the Senate more broadly. This is a part of government that was never meant to work the way it does now, and it is having serious consequences for the country.

    Mike Konczal is a Fellow at the Roosevelt Institute.

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  • The Most Popular Post of 2011: Who are the 1% and What Do They Do for a Living?

    Dec 23, 2011Mike Konczal

    Editor's note: As the year comes to a close, New Deal 2.0 is highlighting our most read post from the year. Our regular posting schedule will resume in January. See you in 2012!

    mike-konczal-newThere's good reason to focus on the top 1%: they're distorting our economy.

    Look, a crazy anti-capitalist anarchist carrying a bizarre sign incompatible with the basic tenets of liberals:

    Or not.

    Editor's note: As the year comes to a close, New Deal 2.0 is highlighting our most read post from the year. Our regular posting schedule will resume in January. See you in 2012!

    There's good reason to focus on the top 1%: they're distorting our economy.

    Look, a crazy anti-capitalist anarchist carrying a bizarre sign incompatible with the basic tenets of liberals:

    Or not.

    A lot of emphasis is on the "99%" versus the "1%" in these protests. But who are the 1% and what do they do for a living? Are they all Wilt Chamberlains and Oprahs and other people taking part in the dynamism of the new economy? Nope. It's same as it ever was -- high-level management and the financial sector.

    Suzy Khimm goes through the numbers here. I'm curious about occupations. I'll hand the mic off to "Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data" by Bakija, Cole, and Heim. This is the latest and greatest report on occupations and inequality. Here's a chart of the occupations of the top 1%:

    distribution_1_percent

    Inequality has fractals. Let's go into the top 0.1% -- what do they look like? Here's the chart of the occupations of the top 0.1%, including capital gains:

    It boils down to managers, executives, and people who work in finance. From the paper: "[o]ur findings suggest that the incomes of executives, managers, supervisors, and financial professionals can account for 60 percent of the increase in the share of national income going to the top percentile of the income distribution between 1979 and 2005."

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    For fun, there are more than twice as many people listed as "Not working or deceased" than are in "arts, media, sports." For every elite sports player who earned a place at the top of the income pyramid due to technology changes and superstar, tournament-style labor markets that broadcast him across the globe, there are two trust fund babies.

    The top 1% of managers and executives often means C-level employees, especially CEOs. And their earnings versus the average worker have skyrocketed in the past 30 years, so this shouldn't be surprising:

    How has this evolved over time? Can we get a cross-section of that protest sign above?

    Same candidates. There's a reason the protests ended up on Wall Street: The top 1% and top 0.1% comprises all the senior bosses and the financial sector.

    One of the best things about Occupy Wall Street is that there is no chatter about Obama or Perry or whatever is the electoral political issue of the day. There are a lot of people rethinking things, discussing, learning, and conceptualizing the kinds of world they want to create. Since so much about inequality is a function of the legal structure known as a "corporation," I'd encourage you to check out Alex Gourevitch on how the corporate is structured in our laws.

    The paper notes that stock market returns drive much of the manager's income. This is related to a process of financialization, something JW Mason has done a fantastic job outlining here. The "dominant ethos among managers today is that a business exists only to enrich its shareholders, including, of course, senior managers themselves," and this is done by paying out more in dividends that is earned in profits. Think of it as our-real-economy-as-ATM-machine, cashing out wealth during the good times and then leaving workers and the rest of the real economy to deal with the aftermath.

    Both articles mention chapter 6 of Doug Henwood's Wall Street; anyone interested in how things have changed and where they need to go would be wise to check it out. It's even available for free pdf book download here.

    There's good reason to focus on the top 1% instead of the top 10 or 50%. There is evidence that financial pay at this elite level is correlated with deregulation and the other legal changes that brought on the crisis. High-ranking senior corporate executives' pay has dwarfed workers' salaries, but is only a reward for engaging in shady financial engineering practices. These problems require a legal solution and thus they require a democratic challenge and a rethinking of how we want to structure our economy. Here's to the 99% and Occupy Wall Street helping get us there.

    Mike Konczal is a Fellow at the Roosevelt Institute.

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  • Could We Redirect Tax Subsidies to Pay for Free College?

    Dec 20, 2011Mike Konczal

    Want a way to pay for free higher education? Take a look at all the tax breaks that ease the burden of student debt.

    Want a way to pay for free higher education? Take a look at all the tax breaks that ease the burden of student debt.

    Josh Eidelson has a great post at The Nation, "Fighting Privatization, Occupy Activists at CUNY and UC Kick Into High Gear," that dives into the battles currently being waged against the dismantling of public higher education. One of the Occupy movement's major objectives is combating the privatization of public higher education and its replacement with a debt-fueled economy of indenture.

    While prepping a recent Occupy panel, Sarah Jaffe brought up how we subsidize student debt in a similar way to mortgage debt, that is, through allowing people to deduce the interest paid on this debt from taxes. According to Pew Charitable Trust's website subsidyscope, the deductibility of student loan interest alone costs taxpayers $1.4 billion dollars. Instead of taking $1.4 billion dollars and directly making college cheaper, students take out massive amounts of student loan debt and we alter the tax code to make that debt $1.4 billion dollars cheaper.

    This is an example of what Suzanne Mettler calls "the submerged state," a pattern where the government has, as she says, "shunned the outright disbursing of benefits to individuals and families and favored instead less visible and more indirect incentives and subsidies, from tax breaks to payments for services to private companies. These submerged policies...obscure the role of government and exaggerate that of the market." Instead of directly providing public options, we subsidize the purchasing of private goods, often using the tax code.

    Let's take the case of student debt and the tax code. How much would it cost to make public colleges and universities free? Rough estimates (quoting Jeffrey Sach's latest book) put the price of free public higher education at $15-$30 billion, which fits other estimates I've seen.

    Now what are the costs of how we subsidize higher education through the tax code? There's already the $1.4 from the interest exemption. Also from subsidyscope, there's the exclusion of employer-provided educational assistance ($1.1 billion), exclusion of interest on student-loan bonds ($0.6 billion), exclusion of scholarship and fellowship income ($3.0 billion), exclusion of tax on earnings of qualified tuition programs: savings account programs ($0.6 billion), the HOPE tax credit ($5.4 billion), the Lifetime Learning tax credit ($5.5 billion), parental personal exemption for students age 19 or over ($3.4 billion), and state prepaid tuition plans ($1.75 billion). There's also the stimulus's American Opportunity Tax Credit ($14.4 billion) and some part of the deductibility of charitable contributions (education) ($4.9 billion).

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    Even without the last two, that's $22.75 billion we are paying through the tax code to make college tuition and student debt more manageable. This amount is in the middle the range of the cost of just making public high education free. Now these aren't equivalent -- much of what is spent through the tax code will be biased more towards private and professional schools, which are more expensive. But this also isn't anywhere near the full extent we subsidize student debt (a government creation from 1965).

    But there is a choice in how to provide mass higher education. We can either use resources to reduce the price of the good upfront -- make college free -- or to subsidize the purchase of the good -- here through the numerous hoops of the tax code. The amount of money we take from the tax code to try and make student debts and runaway tuition more bearable could be used instead to just provide free public colleges.

    There are winners and losers in each case. When we subsidize through the tax code, people who are well off and pay more taxes benefit more. People who can afford support staff, such as accountants and lawyers, are also more likely to understand how to take maximum advantage of these benefits. These subsidies benefit private educational institutions over public ones, as they'll make private education feel more "natural" while obscuring the role of the government in setting up these markets. They give public college a nudge towards corporatization and privatization. Much of these subsidies are likely captured either by the higher education institutions themselves or the debt lenders. These subsidies will make tuition and debt easier to deal with, but providing colleges free as a public option would likely do far more to contain costs (also see here).

    Most importantly, it breaks the link between citizenship and education. The subsidy approach replaces the claim to a necessary good to be full, participating citizens in our market economy with the claim of a consumer, whose claim is ultimately one of willingness to pay either through wealth or debt. The first kind is the place where progressives have the stronger argument about freedom, as opposed to those who see the market as the only source of freedom available.

    Mike Konczal is a Fellow at the Roosevelt Institute.

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  • Amir Sufi on the Balance Sheet Recession and How to Address Household Debt

    Dec 16, 2011Mike Konczal

    money-globe-150I think that Amir Sufi (University of Chicago Booth School of Business) and Atif Mian (University of California, Berkeley) are doing the most interesting and important empirical work on what is going on with this Great Recession.

    money-globe-150I think that Amir Sufi (University of Chicago Booth School of Business) and Atif Mian (University of California, Berkeley) are doing the most interesting and important empirical work on what is going on with this Great Recession. So I was excited to see that they just released two new papers on the subject, "What Explains High Unemployment? The Aggregate Demand Channel" and "Household Balance Sheets, Consumption, and the Economic Slump." Here's an editorial -- "How Household Debt Contributes to Unemployment" -- summarizing their research. They have used a lot of innovative methods and data sets in order to pinpoint the problem of the "household balance sheet" and housing debt overhang and its link to sluggish growth and employment. These papers have been covered in the blogosphere already (here's Paul KrugmanCalculated Risk and Kevin Drum all discussing it.) I was able to interview Amir Sufi about this research.

    Mike Konczal: To get started, your papers, and much of the similar work on the matter, show how debt is impacting our slow recovery. In order for this to happen in an otherwise functioning economy, your model introduces three frictions.  Can you describe them?

    Amir Sufi: From an academic perspective, most macroeconomics is done within a representative agent framework where all types of people are identical. What that means is that leverage can never really matter -- because it is one guy basically borrowing from himself.

    So the first main ingredient in this paper -- and I think Eggertsson and Krugman have said this in the most straightforward way -- is that you have got to have some agents in the economy who are borrowers and some who are savers. For leverage to matter in an economic model, you are going to have to have heterogeneity among households in the model. From a practical point of view, when talking about the real world that's pretty obvious, but for the macroeconomic model you need to add that in.

    The second ingredient is some shock that reduces the consumption of the borrowers very sharply. Both the Eggertsson/Krugman paper and another by Veronica Guerrieri and Guido Lorenzoni make the argument that the fundamental shock is to the ability of the borrowers to borrow -- they are forced to either default or massively pay back their debt burdens. In the context that I interpret it in the real world, it is the combination of the decline in house prices that took away the home equity channel, along with the collapse in credit card availability because of the financial crisis. Those are the big shocks that matter.

    In my view, those two things are noncontroversial. Even when I present them to more right-leaning economists who don't believe frictions are so important, they're are willing to accept these assumptions. The third thing is trickier. The standard response of economists who don't believe in frictions is: fine, the consumption of these borrowers declines massively, but there's no reason the economy shouldn't equilibrate itself by the savers making up for the lost consumption. And what mediates that channel generally is the interest rate. When the borrowers reduce their consumption, the interest rate collapses -- it's like a positive shock to savings demand. At that point the savers, seeing the lower interest rate, should start buying cars, redoing their kitchens, and everything we think people do when there's lower interest rates.

    What you need, and this is where the third thing, the zero-lower bound, comes in, is some friction that prevents the savers from making up the shortfall. And that's where the liquidity trap stuff really comes in. In order to get the savers to consume more, you need the interest rate to get really negative, but it can't get negative because of the zero-lower bound on nominal interest rates.

    And then you get into all kinds of problems, like the Fisher debt-deflation stuff. The normal way you try to get real interest rates negative is through expected inflation, but the only way you can get expected inflation is if you force the current price level down, which is deflation. But the debt burdens are written in nominal terms. If you push the price level down, you get this vicious cycle where the borrowers cut their consumption by even more.

    I want to add that the third ingredient -- the friction -- doesn't need to be the zero lower bound on nominal interest rates. But that is what has been articulated in the theory work most prominently.

    MK: Reading much of the zero lower bounds literature now, it strikes me that it was a conversation among a handful of Princeton and New Keynesian academics when it first started. But looking at it now, it seems very obvious that the zero-lower bound creates a challenge. If right-leaning economists don't think the zero-lower bound is a friction, what do they think?

    AS: I think that right-leaning economists don't deny that the zero lower bound could be a friction. I think the zero-lower bound does bother them, that they think it is a fundamental friction. I think where they'd disagree with Paul, and to an extent even I disagree with Paul, is that if you look at his model, the optimal policy in those models isn't necessarily fiscal stimulus, it is writing down the debts of borrowers. That's the number one policy that fixes the problem.

    Gauti and Paul's model in particular has a tightened borrowing constraint on borrowers that pushes down their consumption, which in turn leads to zero lower bound problems. The quickest and most effective way in their model would be some type of transfer from the savers to the borrowers to offset this dramatic decline in consumption. Principle forgiveness is exactly such a transfer. Fiscal stimulus is a form of this transfer where we borrow from future generations to make up for the shortfall in demand. But it strikes me as much less direct and potentially more distortive than principle forgiveness.

    I come from a finance micro background, so if I were to criticize the zero-lower bound literature, which I use, it is that fiscal stimulus doesn't fall so naturally out of it. Paul goes to lengths to argue against the argument "how can more debt solve a debt problem?" and explains it is because the borrowers are constrained, and there's some truth to that. But the fundamental problem in these models, what generates the zero-lower bound problem, is a sharp reduction in consumption by borrowers. Why not attack that problem head on? If you look at Rogoff's opinion against Krugman's, I think this is the main difference. They agree on the zero-lower bound nature of the problem, but have different tactics on how to fight it. I tend to agree with the view that directly targeting the household debt problem seems to make more sense than fiscal stimulus.

    MK: Looking at these models, the real world implication is that a sharp drop in housing prices and a subsequent increase in debt-to-leverage should cause a decrease in consumption. But it isn't necessarily clear why this must be the case. Most of the papers don't develop this, often taking a debt limit as exogenous, though one could imagine people going about their spending decisions in much the same way before or after a housing crash. I was wondering if you have an answer for this.

    AS: I think there's a few ways to think about it that we outline in our consumption paper. Why does the shock lead to such a strong reduction in consumption? One, and this is based on previous research, a lot of the consumption by the indebted households during the housing boom was being financed through home equity withdrawal. So just mechanically, consumption can't stay at the same path because they no longer have their homes to borrow against to finance consumption.

    The second thing is that the deleveraging effect is real. The Survey of Consumer Finances shows that up until the 90th percentile of the distribution, as of 2007, made up around 65 percent of people's net worth. If you see a massive decline in the value of your home, it is kind of mechanical that if you are thinking about savings and retirement you'll think, "I was planning on having enough equity in my home when I retire that I could just borrow against it for the rest of my life. Now I don't, so I have to adjust my consumption path immediately."

    The third thing comes from the credit supply channel. These guys can no longer refinance into lower rates, therefore their income in a relative sense goes down because they can't get these lower interest payments. Hence you'd see their relative consumption against those that can refinance decline. Also, the act of delinquency itself reduces consumption -- your credit score is shot, foreclosures have an effect on durable consumption. Regardless of what you think of the theory, the empirical evidence in our stuff is undeniable: highly indebted households see very sharp relative declines in spending.

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    MK: A lot of the underwater mortgages in the country are in a handful of states. How well does your research deal with local conditions? Many of these places would have had a major housing construction boom too.

    AS: We take on the local difference, and this is where our housing supply elasticity instrument becomes so critical. You are correct: if you unconditionally look at the high debt-to-income places, a lot of it is highly correlated with places that had construction booms and a lot of migration. To get rid of the construction and migration effects, we try to use exogenous variation in debt-to-income ratios that is driven by housing supply elasticity. This is a technique called "two-stage least squares." We regress the debt-income ratio on how hard it is to build in an area. The idea is that this instrument allows us to disentangle the effect of debt levels from construction and migration. The results after doing this are very strong. Any place that had a high debt-income ratio, whether or not it had a construction boom, is suffering massively now.

    MK: A response to your argument is that the savings rate hasn't gone up that much. It's up, but lower than historical averages and has stayed pretty much in the 5 percent region. If your theory relies on people saving more, is this a problem?

    AS: First, it is in some sense about the derivative. It might not be high historically, but it is high when compared to 2002 through 2007. Every single quarter since 2008, it's been higher than during the expansion preceding this recession.

    But the more fundamental issue is that the savings rate is a very misleading number because it is endogenous. It's easiest to see this argument by looking at (1 - the savings rate), which is how much consumption you are doing out of your current income. It is true that consumption is not that much lower relative to total income than it has been historically. But of course that is a silly way of looking at it. The point is that consumption is way down, period. We don't care whether it low relative to current income.

    Once you think about it this way, the problem with the savings rate becomes a lot more obvious. The right benchmark for judging whether consumption is low or savings is high is not relative to current income, it is relative to the consumption you had before the recession. When you say, "People don't seem to be consuming that much less as a fraction of their total income," I say, "Who cares?" The point is that their income is way lower precisely because of the recession. And their income is lower because everybody is consuming less. This is why the savings rate is kind of a silly number when talking about a deleveraging recession.

    The right way to look at it is to say how much has consumption fallen since 2006. It has gone down tremendously! And that's prima facie evidence that consumers are deleveraging. People are earning less, because they are consuming less, which is the essence of the deleveraging argument.

    Finally, you also have to take into account that interest rates are basically zero. If interest rates are zero, then people are really saving a huge amount of money, because they are saving 5 percent at a zero interest rate. You have to adjust for interest rates to determine whether or not savings rates are historically high.

    MK: Another response to this model is that the debt-to-income ratios don't actually matter that much. What is really driving this is a wealth effect. People feel poorer from losing housing value, and thus they spend less. James Surowiecki just had a piece arguing against these balance sheet recession models in The New Yorker, "The Deleveraging Myth." Dean Baker from CEPR makes this argument as well.

    AS: Well obviously I disagree 100 percent with that for both theoretical and empirical reasons. The theoretical reason is that housing should not be thought of in a pure wealth sense. We all have to consume housing going forward. And the value of my house going down is also the same value of the price of housing going down. The easiest way to imagine this is to picture a young couple that currently rents and will buy a house in the future. If housing prices decline, it is good for them because they can then more easily buy a house in the future. Clearly, this is not a negative wealth effect for the young couple.

    MK: But as far as I understand it there are studies that find a wealth effect in housing.

    AS: This is a semantic point on what you call it. I'm saying as an economist that if you call something a wealth effect, then it has nothing to do with borrowing constraints and debt levels, and that effect in theory should be zero. To the degree that we observe that when people's house prices go up they consume more, that's not a wealth effect -- that's a borrowing constraint being alleviated, and people borrowing against collateral that they couldn't before. Which is a very different thing, and it matters empirically. My own research on this topic shows definitively that people consume aggressively out of housing wealth because of borrowing constraints, not a simple wealth effect.

    Here's why I fundamentally disagree with the "wealth effect" argument. Suppose you have an economy that looks like the U.S. before the recession, where you have an extremely skewed net wealth distribution. The wealth effect argument is that the response of the economy to house price declines would have been the same if you flattened that out versus if you had the polarization that we have now. And I disagree with that fundamentally, and that's what the research shows. The net wealth distribution matters. People who have very high debt-to-income ratios cut their spending very dramatically, and there is no way a pure wealth effect can explain the magnitude of the cut.

    MK: How necessary is debt forgiveness?

    AS: I'll say this: We are about four years into this mess, and we still don't have any sense what the elasticity of consumption would be with respect to principle forgiveness. The reason we don't have that estimate is that there's been no principle forgiveness government programs. Of all that has been allocated, there's been virtually nothing allocated to principle reduction to see if it works.

    I'm not willing to come out and say principle forgiveness will solve all of our problems. But at the very least, shouldn't we have some basic idea of how responsive spending of highly indebted households would be to principle forgiveness? We've tried a ridiculous number of things in terms of government policy during this downturn: fiscal stimulus, homebuyer tax rebates, cash for clunkers, etc. Can't we at least give principle forgiveness a chance, even if it is on a very small scale?

    MK: Any concluding remarks?

    AS: The distribution of net wealth matters a lot. Let's suppose there's $100 of wealth in the economy and there's a hundred people. If everybody had $1 of wealth, and then there's a massive drop in house prices, my argument is that this recession wouldn't have been nearly as severe. It's because the five guys at the top have all of the $100 and are just lending to the other 95, that's why the recession is so severe when house prices collapse. Paul said this a few times on his blog, and he's usually very clear, but I don't think he's been clear enough on explaining this. These models on why deleveraging matters are all about the net wealth distribution. We shouldn't be surprised that this recession and the Great Depression were preceded by very large increases in wealth inequality. This is well documented during the 1920s and the 2000s. This is why I get a bit annoyed at the guys who are saying it's just a pure wealth effect, because it's something bigger than that.

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