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FT.com / Investor's notebook - Insight: The threat of a return to thrift
Pessimism on consumer led economic growth.
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The result was that people gave up saving. Why save from income if rising asset prices did your saving for you while you slept? Why not consume more than you earn if you can borrow cheaply using your constantly rising wealth as the asset to borrow against?
When Volker walked into the Fed 30 years ago, the US national savings rate had been relatively static for decades at around 20 per cent of GDP and total US debt to GDP was about 160 per cent. Household debt was 47 per cent of national income. When the credit bubble burst in August 2007, the national savings ratio had fallen to 14 per cent of GDP and debt had risen to 350 per cent with household debt at just under 100 per cent of GDP. Even today, household debt in the US, although now contracting, still exceeds the level at the beginning of this crisis.
The disinflationary forces that drove the switch from thrift to leverage are over. This means the next decade will be one of replacing leverage with thrift. That will hurt retail spending.
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This will set off feedback loops between the real economy and financial one, in the opposite direction to that we have been experiencing. It will cause consumer incomes and employment to deteriorate, along with the real economy, giving rise to increased defaults on consumer credit, commercial real estate and other loans, as well as, of course, housing mortgages. The default ratio on prime mortgages is already well above the US treasury’s stress test limit set for the banks. And the default rates on consumer debt, including credits, are rising very fast. The credit crisis hit to banks’ balance sheets is far from over.
Obfuscating Inequality « The Baseline Scenario
Will Wilkinson has gotten a lot of Internet love for his article “Thinking Clearly About Economic Inequality”, which argues that increasing inequality is not as bad as people like Paul Krugman make it out to be. I thought it was a rhetorically clever but deeply misleading attempt to blur the obvious issue – economic inequality is increasing – by looking at it through a dizzying array of qualifying lenses.
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Wilkinson then tries to explain why increased income inequality does not translate into increased happiness inequality (although Steven and Wolfers actually say that it has translated into increased happiness inequality since the 1990s). There are two parts to this argument, but basically they collapse down to one. First, he says that the quality of budget-level products has increased faster than the quality of luxury-level products (like refrigerators), so that the differential in material comfort is decreasing for a given differential in monetary consumption. Second, he says that rich people are actually taxing themselves by spending huge amounts of money on “real estate with ocean views, or Ivy League diplomas, or goods like yachts” that do not provide value commensurate to their cost.
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And here Wilkinson undercuts his own argument. He points to the relatively small practical difference between a $300 refrigerator and a $10,000 refrigerator, which is far bigger than the difference between no refrigerator and a refrigerator – which was the relevant difference maybe fifty years ago. Good point. But he also talks about how vanilla and pepper suffered the same fate – only much longer before. The lesson is that different products and services that people want change over time, and at different times, from being rare luxuries to being relative commodities. Just because one former luxury good is now a commodity good doesn’t mean there aren’t other valuable goods that many people cannot afford.
Economic Principals » Blog Archive » The U-Turn
on John Bates Clark medal winner, economist Emmanuel Saez
Lance Mannion: Millionaires and the millionaires who love them
One financier essentially tells Sherman that the going rate for any job which involves being woken up in the middle of the night should be roughly $2 million a year — which is not the kind of attitude guaranteed to make you friends among, say, the farming community.
Economic Mobility Project: Ensuring the American Dream is kept alive
Pew's Economic Mobility Project (EMP) focuses public attention on economic mobility---the ability to move up or down the income ladder within a lifetime, or from one generation to the next.
Wages and Human Capital in the U.S. Financial Industry: 1909-2006
We use detailed information about wages, education and occupations to shed light on the evolution of the U.S. financial sector over the past century. We uncover a set of new, interrelated stylized facts: financial jobs were relatively skill intensive, complex, and highly paid until the 1930s and after the 1980s, but not in the interim period. We investigate the determinants of this evolution and find that financial deregulation and corporate activities linked to IPOs and credit risk increase the demand for skills in financial jobs. Computers and information technology play a more limited role. Our analysis also shows that wages in finance were excessively high around 1930 and from the mid 1990s until 2006. For the recent period we estimate that rents accounted for 30% to 50% of the wage differential between the financial sector and the rest of the private sector.
SSRN-Superstars and Mediocrities: Market Failure in the Discovery of Talent by Marko Tervio
The basic problem facing most labor markets is that workers can neither commit to long-term wage contracts nor can they self finance the costs of production. I study the effects of these imperfections when talent is industry-specific, it can only be revealed on the job, and once learned becomes public information. I show that firms bid excessively for the pool of incumbent workers at the expense of trying out new talent. The workforce is then plagued with an unfavorable selection of individuals: there are too many mediocre workers, whose talent is not high enough to justify them crowding out novice workers with lower expected talent but with more upside potential. The result is an inefficiently low level of output but higher wages for known high talents. This problem is most severe where information about talent is initially very imprecise and the complementary costs of production are high. I argue that high incomes in professions such as entertainment, management, and entrepreneurship, may be explained by the nature of the talent revelation process, rather than by an underlying scarcity of talent.
Pew Research Center: American Mobility: Movers, Stayers, Places and Reasons
As a nation, the United States is often portrayed as restless and rootless. Census data, though, indicate that Americans are settling down. Only 11.9% of Americans changed residences between 2007 and 2008, the smallest share since the government began tracking this trend in the late 1940s.
The Compensation Kings : Rolling Stone : National Affairs Daily
a mashup of top CEO pay and Sports Illustrated - Fortunate 50
'Just World News' with Helena Cobban: Milanovic: 'The crisis of maldistribution'
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But the richest people and the
hundreds of thousands somewhat less rich, could not
invest the money themselves. They needed intermediaries, the financial sector.
Overwhelmed with such an amount of funds, and short of good opportunities to
invest the capital, as well as enticed by large fees attending each
transaction, the financial sector became more and more reckless, basically
throwing money at anyone who would take it. Eventually, as we know, the bubble
exploded.
FT.com / Comment / Opinion - How bank bonuses let us all down
Here you can see that this mismatch between the bonus payment frequency (typically, one year) and the time to blow up (about five to 20 years) is the cause of the accumulation of positions that hide risk by betting massively against small odds. As traders say, they have the “free option” on their performance: they get the profits, not the losses. I hold that this vicious asymmetry is the driving factor behind investment banking.
Growing Unequal? Income Distribution and Poverty in OECD Countries
Growing Unequal? brings together a range of analyses on the distribution of economic resources in OECD countries. The evidence on income distribution and poverty covers, for the first time, all 30 OECD countries in the mid-2000s, while information on trends extending back to the mid-1980s is provided for around two-thirds of the countries.
The Ticket to Easy Street? The Financial Consequences of Winning the Lottery
This paper addresses whether receiving large cash prizes of up to $150,000 reduces bankruptcy. While one might hope that additional resources help individuals avert bankruptcy, there are reasons why this may not be the case. For example, if recipients have high discount rates, engage in mental accounting, become accustomed to a more expensive lifestyle, or consciously consume the winnings in the expectation that they will later file for bankruptcy anyway, then receipt of large lump sums may not reduce future bankruptcy filings. To address this question, we exploit a unique dataset of Florida lottery winners from 1993 – 2002 linked to bankruptcy records. Under the identifying assumption that the magnitude of the cash prize is random conditional on winning one time, we isolate the effect of large lump-sum payments from the effects of potential confounding factors by comparing the bankruptcy rates of large winners to those of small winners. Results show that although recipients of $50,000 to $150,000 are 50 percent less likely to file for bankruptcy in the two years after winning than are recipients of less than $10,000, they experience a statistically significant increase in bankruptcy rates of similar magnitude three to five years after winning. This suggests that winning the lottery only postpones bankruptcy rather than reducing it despite the fact that the median large winner received enough money to pay off all of her unsecured debts. Furthermore, among those who filed for bankruptcy in the five years after winning we find that there is no difference in either net assets or unsecured debt between large and small winners. This suggests that policymakers ought to use considerable caution in giving additional resources to heavily indebted individuals with the hope of increasing their longer-term financial well-being.
Federal Reserve Bank: Survey of Consumer Finances
The Survey of Consumer Finances (SCF) is a triennial survey of the balance sheet, pension, income, and other demographic characteristics of U.S. families. The survey also gathers information on the use of financial institutions. The links to the surveys provide summary results, codebooks and other documentation, and the publicly available data.
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