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Macro Roundup


Monday, November 3, 2014

AI Summary. Analysis of financial crises across 24 advanced economies finds output declines are generally moderate and often temporary, with a moderate crisis associated with a 3.9% fall in industrial production that dissipates within two years. More persistent declines in overall output are largely attributable to Japan's prolonged slowdown.

Christina Romer and David Romer University of California
Date Posted:
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Financial crises in 24 OECD countries from 1967-2007 had moderate and often temporary impacts on output. A moderate crisis results in a 3.9% decline in industrial production, which dissipates within 2 years.

Are output losses from financial crises in advanced economies moderate and temporary?

Core argument: Analysis of 24 OECD countries from 1967 to 2007 finds that a moderate financial crisis cuts industrial production by 3.9%, an effect that dissipates within two years, challenging the view that crises bring severe, long-lasting output losses.

Analysis of financial crises in 24 OECD countries from 1967-2007 reveals that output declines are generally moderate and often temporary, challenging the conventional wisdom of severe and long-lasting impacts. For industrial production, a moderate crisis results in a 3.9% decline, which dissipates within two years. GDP declines are more persistent, but this is largely due to Japan's prolonged slowdown. Excluding Japan, GDP effects mirror those of industrial production. The 2008 crisis was an outlier due to its global nature and extreme severity, explaining the prolonged economic weakness observed post-crisis.

Takeaways by Macro Roundup® AI

  1. Analysis of 24 OECD countries from 1967 to 2007 finds that a moderate financial crisis cuts industrial production by 3.9%, an effect that dissipates within two years, challenging the view that crises bring severe, long-lasting output losses.
  2. GDP declines after financial crises are more persistent than industrial production declines, but that persistence is largely driven by Japan's prolonged slowdown; excluding Japan, GDP effects mirror those for industrial production.
  3. The 2008 crisis was an outlier because of its global nature and extreme severity, which explains the prolonged economic weakness observed after it.

headshot @ Reinhart and Rogoff. the Romer's basically find that if you only look at advanced economics almost all the decline in output measured by GDP/industrial production was moderate (greater impact on GDP then IP) and often short-term (and much of the GDP impact is driven by Japanese experience) they hypothesis that the hangover from 2007/08 is largely a function of the crisis being worldwide rather then isolated to a single country.
"...This paper revisits the aftermath of financial crises in advanced countries in the decades before the Great Recession. We construct a new series on financial distress in 24 OECD countries for the period 1967-2007. The series is based on narrative assessments of the health of countries’ financial systems that were made in real time; and it classifies financial distress on a relatively fine scale, rather than treating it as a 0-1 variable.We find little support for the conventional wisdom that the output declines following financial crises are uniformly large and long-lasting.Rather, the declines are highly variable, on average only moderate, and often temporary.One important driver of the variation in outcomes across crises appears to be the severity and persistence of the financial distress itself: when distress is particularly extreme or continues for an extended period, the aftermath of a crisis is worse….We create a new, semiannual measure of financial distress in a sample of 24 advanced economies from 1967 to 2007. This measure is derived from real-time narrative accounts of country conditions prepared by the Organisation for Economic Co-Operation and Development (OECD). Our measure of financial distress is designed to capture a reduction in the supply of credit resulting from a rise in the cost of credit intermediation….These panel regressions show more complicated results than the simple summary of the 4 existing literature that the real effects of crises are severe and long-lasting. For industrial production, we find that a moderate crisis (a 7 on our scale from 0 to 15 of financial distress) is associated with a contemporaneous fall in output that is highly statistically significant, but quite modest in absolute size. Moreover, the effect starts to recede after six months, and is completely gone after two years.For GDP, a moderate crisis is associated with a contemporaneous fall in output that is again only moderate, but in this case very persistent. However, this persistence is driven entirely by the experience of Japan, which had a very prolonged slowdown in GDP growth starting around the same time as its financial crisis. When Japan is excluded from the sample, the results for GDP mimic those for industrial production. Taken together, these results suggest that in the forty years before the 2008 global financial crisis, the output declines following financial crises in advanced countries were on average moderate and largely temporary. Our source and approach do not allow us to separate financial distress arising from a decline in output from financial distress due to more exogenous factors. When we examine the behavior of the financial distress variable itself, we find that it is moderately predictable based on lagged output—suggesting that omitted variable bias may be present. Thus, our estimates are, if anything, likely to be an overestimate of the impact of financial distress. Consistent with this, we find that the results, though quite robust to most differences in specification, are much weaker when distress is not allowed to affect output contemporaneously….Figure 3 shows the impulse response functions for the two output series estimated over the full sample of 24 advanced countries, together with the two-standard-error bands. Panel (a) shows the results for industrial production, and panel (b) for real GDP. Industrial production falls noticeably at the time of the impulse to the financial distress variable. The t-statistic on the contemporaneous relationship is over 4 (in absolute value). Thenegative effect increases slightly in the half-year after the impulse. However, the absolute size of the decline following a moderate crisis is modest: the peak effect is a decline of 3.9 percent (t = -3.2). To put this number in perspective, Romer and Romer (1989) find that industrial production fell roughly 12 percent following relatively exogenous shifts to contractionary monetary policy in the United States in the postwar period. Another noteworthy feature of the response of industrial production is how quickly the negative impact of a financial crisis dissipates. The effect is a decline of just 1.7 percent (t = -1.2) within a year after the impulse and zero within two years. Real GDP also appears to decline contemporaneously with the impulse to the financial 25 distress variable. The immediate impact of a moderate crisis is a decline in GDP of 3.0 percent (t = -6.1). This negative effect grows slightly over the 3½ years following the impulse, peaking at 4.2 percent (t = -2.6). Since industrial production is normally substantially more volatile than GDP, the fact that the percentage decline in the two series following a financial crisis is roughly similar suggests that the impact on GDP is stronger. The more striking difference between the responses of industrial production and GDP is that the effects of a crisis on GDP appear to be much more persistent. Though the standard errors increase substantially at longer horizons, the point estimate of the impact of a moderate crisis is strongly negative for the full five years that we consider. …This persistence, however, is driven almost entirely by the special case of Japan. Japanese real GDP growth slowed from over 4 percent per year to under 2 percent around the time that its financial troubles began in the early 1990s, and then remained low. As a result, Japan’s experience points strongly in the direction of financial distress having large negative long-run effects….The bottom line of the focal empirical results is that the relationship between output and financial crises is not as dire as the modern conventional wisdom would lead one to believe. Using our new, real-time measure of financial distress and sensible time-series estimation methods, we find that the impact of a financial crisis on output is quite small.And, with the exception of Japan, the impact does not appear to be very long-lasting.Indeed, for industrial production, one would have to say that the negative effects are remarkably transitory….Panel (a) of Figure 5 shows the impulse response function of the distress variable to itself, estimated over the full sample of 24 countries. As with the impulse response function for output, we simulate the impact of an innovation of 7 in the distress variable (a moderate crisis). The figure shows that there is important serial correlation in the financial distress variable. An impulse of 7 is followed by a value of the new measure of 5.9 a half-year later. After two periods (1 year), the rate of decay speeds up noticeably, so that by 2½ years after the impulse any effect of distress on itself is almost gone….The small response of output in advanced countries that we find using the Reinhart and Rogoff crisis series stands in stark contrast to the usual summary of Reinhart and Rogoff as showing that the recessions following financial crises are particularly severe. Indeed, Figure 14.4 of This Time is Different (2009, p. 230) shows that the average peak-to-trough decline in real GDP per capita in a sample of crises is 9.3 percent. Some of the smaller effect we find using Reinhart and Rogoff’s crisis dates in our empirical framework is surely due to the fact that we are only considering crises in advanced economies in the post-1967 period. Most of the large declines behind that 9.3 percent average come from postwar crises in emerging economies (such as Argentina, Thailand, and Indonesia, where the declines in output were well over 10 percent) and from one crisis before World War II (the U.S. Great Depression, where the peak-to-trough decline in per capita GDP was close to 30 percent). Some of the difference also reflects the fact that we are considering the full universe of crises that Reinhart and Rogoff identify in the 24 OECD countries after 1967. The 9.3 percent is the average decline in a selected set of severe episodes. Finally, some of the difference reflects our regression-based empirical approach. Reinhart and Rogoff’s measure of the peak-to-trough decline in GDP around crises often includes output falls that predate the crisis.In contrast, the regression procedure only looks at the behavior of output following the crises.16 A third feature of the impulse response functions for output using the alternative chronologies involves the persistence of the decline in GDP. Recall that for the new series using the full sample, the decline in GDP following a crisis is highly persistent. The same is true following a crisis in the Reinhart and Rogoff series. In contrast, using the Laeven and Valencia series, there is a substantial amount of bounce back: two-thirds of the output decline is reversed within five years after the start of the crisis. In the results using the new series, the persistence of the effect of a crisis on GDP is due entirely to the special case of Japan. Japan is a large outlier in our scaled crisis series, and so the prolonged slowdown in GDP growth in Japan after 1990 gets tremendous weight in the estimation. When Japan is excluded, the GDP effects disappear within two years. In contrast, the results using the Reinhart and Rogoff series are not very sensitive to the inclusion of Japan. In their non-scaled series with many crises, Japan gets only a small weight, so excluding it matters relatively little. For the Laeven and Valencia series, excluding Japan lessens the maximum GDP decline in the impulse response function by about 20 percent, and causes the effect to go away entirely after five years. This happens even though the series is not scaled because there are only eight crises in advanced economies in the period 1970 to 2006 in their chronology—so the experience of Japan is still getting substantial weight in the full-sample estimates. The bottom line of the results using alternative crisis chronologies is that for no crisis measure is the estimated impact of severe financial distress very large. Using sensible empirical techniques on the same sample of advanced economies since 1970 shows quite minor effects on output. Financial crises just do not seem to be followed by large declines in output in advanced economies in the modern period, whichever chronology is used.17…The conventional wisdom is that financial crises are followed by large downturns and weak 44 recoveries. Yet at least for advanced countries, the prior evidence supporting this conclusion is limited. It is based on chronologies for crises that are closely related to one another; that were constructed after-the-fact by researchers who were aware of subsequent outcomes; that simplify a continuum of possible degrees of financial distress to a 0-1 variable or just a handful of categories; that combine many crises in developing countries with just a few in advanced countries; and that are often examined using very simple empirical techniques, such as comparisons of recessions with and without crises….This paper therefore revisits the aftermath of financial crises in advanced countries. We construct a new financial distress series for 24 advanced countries from 1967 to 2007 using the real-time accounts of countries’ conditions prepared twice a year by the OECD. Our new series classifies financial distress into numerous gradations, which we scale from 0 to 15. The new series displays both important similarities and important differences with previous crisis chronologies. There is agreement about the presence and approximate timing of many of the most severe crises. But we find that real-time awareness of financial distress sometimes did not come until well after the dates identified by earlier chronologies. And a few episodes that previous series identify as important crises do not show up at all in our new measure. Analysis of two other real-time sources largely confirms the accuracy of the new series. Studying the aftermath of crises using our new series and conventional regression techniques leads to a view that is very different from the conventional wisdom. Crises in advanced countries are associated with falls in output, but the falls are only moderate. When measured using industrial production, output then quickly rebounds and returns to its pre-crisis path. When measured using GDP, output does not bounce back, but this pattern is driven entirely by the experience of Japan. Interestingly, these findings are due only partly to our new measure of financial distress.…Using conventional regression techniques with standard chronologies of financial crises in advanced countries also does not provide strong support for the view that the aftermaths of crises are persistently grim. We also find considerable variation in the aftermath of significant crises. In some cases, there was hardly any departure of output from its pre-crisis path. In others, output fell below the pre-crisis path but was soon noticeably above it. And in the case of Japan in the late 1990s, output fell further and further below the pre-crisis path. One factor that appears to be important to the variation is the severity and persistence of the crisis itself. Cases where the financial distress was more limited and resolved quickly were associated with more favorable outcomes....Why was the downturn in 2008-2009 so extreme and the subsequent recovery so anemic in many advanced countries?Our finding that the fall in output following financial crises in such countries is typically modest suggests that the easy explanation for the poor economic performance—this is what always happens after financial crises—is unlikely to be true. Rather, factors specific to the 2008 episode are likely to have been key.The factor most directly linked to our results involves the severity and persistence of the recent financial distress. The 2008 crisis was the worst in nearly a century in the United States and Europe. And, although it has been over half a decade since the acute phase of the crisis, banks in many European countries are still viewed as troubled and as constraining the availability of credit. Since we find that greater severity and persistence of financial distress is associated with worse performance following a crisis, the extreme nature of the recent distress is one likely reason for the continuing economic weakness.A related factor is that the recent financial crisis was essentially worldwide, while most other postwar episodes of severe financial distress were limited to individual countries or narrow regions. When a crisis is confined to a single country or to just a few, healthy financial institutions abroad may offset some of the reduction in credit supply from domestic lenders. A worldwide crisis means that there are few healthy lenders to step into the void. More generally, a crisis in one country may have adverse spillovers to others. One would therefore expect a given rise in domestic financial distress to be associated with worse outcomes when distress also increases in other countries...."Romer, Christina and David Romer, “New Evidence on the Impact of Financial Crises in Advanced Countries,” University of California, October 14, 2014. Available at:http://www.parisschoolofeconomics.eu/en/news/d-romer-and-c-romer-new-evidence-on-the-impact-of-financial-crises-in-advanced-countries/

Monday, November 10, 2014

AI Summary. Savings rates diverge by education: college graduates saved 10.9% of income versus 5.4% for those with some college and negative rates for high school graduates and dropouts. Median family income was $80,000 for college graduates versus $37,000 for high school graduates, a gap that widens wealth differences within the middle class.

Josh Zumbrun Wall Street Journal
Date Posted:
Is Database:
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College graduates save 10.9% of their income, compared to 5.4% for those with some college & negative savings for high school graduates & dropouts.

Do college graduates save more than less-educated households?

Core argument: College graduates saved 10.9% of their income in the second quarter of 2014, compared with 5.4% for those with some college and negative savings rates for high school graduates and dropouts.

Recent data highlights a growing disparity in savings rates by education level, with college graduates saving significantly more than high school graduates. As of Q2 2014, college graduates saved 10.9% of their income, compared to 5.4% for those with some college, and negative savings for high school graduates and dropouts. Over the past decade, college graduates' savings behavior has outpaced others, with an average savings rate of 10% post-recession, compared to 4% for high school grads. This trend is exacerbating wealth gaps within the middle class, as the median family income for college graduates was $80,000 in 2013, more than double that of high school graduates at $37,000. The implications for wealth inequality are significant, as the ability to save is closely tied to income levels, and the compounding effect of savings over time will likely widen the wealth divide further.

Takeaways by Macro Roundup® AI

  1. College graduates saved 10.9% of their income in the second quarter of 2014, compared with 5.4% for those with some college and negative savings rates for high school graduates and dropouts.
  2. College graduates averaged a 10% savings rate after the recession, versus 4% for high school graduates, outpacing other education groups over the past decade.
  3. Median family income for college graduates was $80,000 in 2013, more than double the $37,000 for high school graduates, a gap tied to the ability to save that is widening wealth divides within the middle class.

check out the second chart One Lesson People Increasingly Learn in College: SavingByJosh Zumbrun

Zumbrun, Josh, "One Lesson People Increasingly Learn in College: Savings," The Wall Street Journal, November 10, 2014. Available at:http://blogs.wsj.com/economics/2014/11/10/one-lesson-people-increasingly-learn-in-college-saving/tab/print/

These numbers strongly suggest that college graduates are saving more—and high school graduates saving less—than would be explained by their incomes alone.

On the whole, Moody’s estimates that even people in the bottom 40% of the income distribution currently are, on average, setting asidesomemoney. The most recent savings rate for the bottom 40% is 3%, and for the middle of the income distribution it’s 3.8%. The disparity in savings by education is currently greater than the disparity by income.

It can be tempting to ignore savings, or to view it as a secondary issue when it comes to wealth inequality. For one thing, many people genuinely do not have the income to save, and lecturing them about setting aside a nest egg can be both condescending and pointless. However many peoplecouldsave more but don’t (the mere existence of Las Vegas basically proves this). This is affirmed by a look at savings rates by income.

The college graduate saving $8,000 a year (10% of income) is socking away nearly six times as much money each year as the median high school graduate who sets aside $1,400 (4%). Take the existing wealth disparity, add some modest assumptions about compounding, and the wealth gaps within the middle class are poised to grow tremendously.

The longer this continues, the more significant the implications for the wealth divide. According to theFederal Reserve‘s Survey of Consumer Finances, the median family headed by a college graduate earned $80,000 in 2013 while the median family headed by someone who finished with a high school diploma earned $37,000.

As of the second quarter of 2014, college graduates were saving about 10.9%, compared with 5.4% for people with some college, and negative savings for high school graduates and high school dropouts, according to data fromMoody’s Analytics. In the five years since the recession ended, college grads have been saving an average of 10%, compared to 4% for high school grads.

It’s not surprising that college graduates can save more than high school graduates. (Just as it’s not stunning that older workers could save more than the young.) On average, their earnings are much higher. And the more money you have, the easier it is to save some of it. But over the past 10 years, the savings behavior of college graduates has significantly outpaced everyone else.

Savings rose for everyone during the recession. But in the years since, savings rates are again diverging.

What a difference a decade and a recession make.

In 2002, savings rates for people of all education levels was hovering between 1% and 3%. Your education didn’t have much to say about how you saved money. In early 2003, college graduates even briefly had negative savings rates, while everyone else was dutifully setting some cash aside.