Macro Roundup

Klein, Matthew, "Debt is dangerous, part 245925028508,"FT Alphaville, April 16, 2015. Available at:http://ftalphaville.ft.com/2015/04/16/2126474/debt-is-dangerous-part-245925028508/"...The Greenspan and Kennedy estimates of the direct impact of the housing bubble on personal consumption almost exactly match what Atif Mian and Amir Sufi estimated more recently using abottom-up methodology.Both suggest that America’s GDP would have been about 1.5 per cent smaller at the end of 2006 in the absence of the bubble-supported spending on consumption and home improvement, and assuming that most other things in the US economy had unfolded in roughly the same way. (Big assumptions, but useful to get a sense of the magnitude of these numbers.)...Giroud’s and Mueller’s goal is to provide an explanation of how the collapse in house prices actually led to job losses. After all, workers don’t sack themselves. Their argument, which we will explain below, is that “all of the job losses associated with falling house prices during the Great Recession are concentrated among establishments” of firms that increased their leverage during the boom....Giroud and Mueller looked at 2,800 businesses, excluding financial firms and utilities, which, as of 2006, operated 284,000 “establishments” (think of a chain restaurant with multiple locations) and employed about 11.2 million people.....Giroud and Mueller sorted all these firms by the changes in their debt-to-asset ratios, based on book value, between 2002 and 2006. In the aggregate, the indebtedness of US non-financial businesses has been basically constant since 2000. But that aggregate masks very large changes within the broader sample: “about half of all establishments belong to firms "...As of 2006, the businesses that levered up since 2002 tended to be somewhat smaller than their more conservative brethren in terms of the number of establishments they operated (13 per cent), the number of people they employed (26 per cent), and the book value of their assets (5 per cent). During the boom, however, they grew more rapidly on all three dimensions. The debt gluttons were less profitable (around 0.6 per cent vs 4.4 per cent) and had worse returns on assets (2.6 per cent vs 6.6 per cent), perhaps because they paid their workers about 6 per cent more, on average. They also had much higher debt-to-asset ratios (38.3 per cent vs 19.5 per cent).You might reasonably think that job losses were worse among the firms that levered up during the boom because they grew too much and because they were less efficient users of capital. Giroud and Mueller, however, believe the real problem is that their high debt levels going into the recession prevented them from borrowing to sustain employment during the downturn. Their theory is that firms that were less indebted in 2006 were willing and able to borrow to sustain employment, while the highly-levered companies had no choice but to cut jobs..... As Giroud and Mueller put it, “whether firms tightened or freed up debt capacity in the run-up to the Great Recession is orthogonal to both the incidence and magnitude of household demand shocks during the Great Recession.”...The final step in the puzzle is to compare what the highly-indebted and less-indebted businesses did from 2007 through 2009:High-leverage firms indeed act like financially constrained firms in the Great Recession. When faced with household demand shocks, these firms do not (or cannot) raise additional external finance. Instead, high-leverage firms reduce employment, close down establishments, and cut back on investment. The opposite is true of low-leverage firms. When faced with household demand shocks, these firms do not reduce employment, close down establishments, or cut back on investment. Instead, low-leverage firms increase both their short- and long-term borrowing, consistent with these firms having freed up debt capacity in the run-up..."Debt is dangerous, part 245925028508Matthew C Klein | Apr 16 20:49

Moreover, the indebted businesses tried to spread the pain of house price declines in certain localities by cutting employment in other establishments. That doesn’t happen with the less indebted businesses, presumably because they aren’t facing the same set of financial constraints.

You may recall above that the more-indebted companies were slightly less productive than their less-indebted peers and also grew a bit more, on average, during the boom. In other words, it’s possible that the way indebted businesses in non-tradeable industries respond to local house price collapses is a symptom of something other than their high debt levels.

Giroud and Mueller first tested this by sorting firms by how much they grew, both in terms of employment and in assets. If excessive expansion during the bubble were the real problem, then fast-growing companies that had cut their indebtedness would have cut many more jobs than their slowly-growing peers in response to changes in local house prices, while slowly-growing but highly-leveraged firms should have cut far fewer jobs than their fast-growing but highly-indebted peers.

That isn’t what happened. Once you separate out the changes in indebtedness, differences in pre-crisis growth rates don’t predict a given businesses’s sensitivity to changes in local house prices. Similarly, unproductive businesses that had cut their leverage didn’t respond any differently to changes in local house prices than highly productive businesses that also cut their leverage. However, high levels of productivity wasn’t helpful to businesses that boosted their indebtedness during the boom. The debt was what determined which business sacked workers when house prices fell, not the fundamentals.

None of this would have mattered if the companies that had cut their debt during the boom snatched up the workers getting laid off by the financially reckless companies during the bust. Unfortunately, this didn’t happen, despite the fact that borrowing costs fell significantly in real terms. Those who had the misfortune of living in places with a relatively high concentration of debt-engorged businesses were more likely to lose their job than people who lived elsewhere, even after controlling for changes in house prices.

The dangers of excessive household debt, especially when debt ratios soar rapidly, are relatively well-known. Now there is increasing evidence that sudden upticks in corporate debt can be even more damaging. (That said, it’s dispiriting to imagine how slowly the US economy would have grown in the first half of the 2000s in the absence of the housing bubble and excessive corporate borrowing.) Something to bear in mind given what’s beenhappening in Chinaover the past few years…

High-leverage firms indeed act like financially constrained firms in the Great Recession. When faced with household demand shocks, these firms do not (or cannot) raise additional external finance. Instead, high-leverage firms reduce employment, close down establishments, and cut back on investment. The opposite is true of low-leverage firms. When faced with household demand shocks, these firms do not reduce employment, close down establishments, or cut back on investment. Instead, low-leverage firms increase both their short- and long-term borrowing, consistent with these firms having freed up debt capacity in the run-up.

The final step in the puzzle is to compare what the highly-indebted and less-indebted businesses did from 2007 through 2009:

After running the regressions, Giroud and Mueller find, unsurprisingly, that variations in local house price changes don’t affect employment at businesses in the tradeable sector. However, when they focus on non-tradeable industries, they find that all of the job losses associated with local house price conditions can be attributed to establishments of businesses that levered up during the boom. Moreover, to the extent that non-tradeable businesses shuttered establishments between 2007 and 2009 as a result of falling house prices, “the effect is entirely concentrated among establishments of high-leverage firms.”

That’s useful, since it means there are many places where Giroud and Mueller can compare lots of different establishments in the same industry that experienced the same exact local housing conditions, but whose parent companies had very different debt profiles. As they put it, “our specification forces comparison to be made between relatively small, local establishments in the same industry and ZIP code, e.g., a local Macy’s versus Nordstrom department store, a local Safeway versus Kroger supermarket, or a local Target versus Kmart discount retailer, where some establishments belong to high-leverage firms and others belong to low-leverage firms.”

There isn’t any meaningful difference in the geographical distribution of firms that levered up during the boom and those that cut their debt, which means that the two groups of companies experienced basically the same changes in house prices. As Giroud and Mueller put it, “whether firms tightened or freed up debt capacity in the run-up to the Great Recession is orthogonal to both the incidence and magnitude of household demand shocks during the Great Recession.”

Giroud and Mueller start by using the insight from Mian and Sufi that businesses in non-tradeable industries — retail, dining, healthcare, construction, etc — adjust their workforce in response to changes in local house prices, while other businesses don’t. Unlike Mian and Sufi, they focus on the financial characteristics of the specific businesses that were responsible for the changes in non-tradeable employment during the housing bust.

You might reasonably think that job losses were worse among the firms that levered up during the boom because they grew too much and because they were less efficient users of capital. Giroud and Mueller, however, believe the real problem is that their high debt levels going into the recession prevented them from borrowing to sustain employment during the downturn. Their theory is that firms that were less indebted in 2006 were willing and able to borrow to sustain employment, while the highly-levered companies had no choice but to cut jobs.

The debt gluttons were less profitable (around 0.6 per cent vs 4.4 per cent) and had worse returns on assets (2.6 per cent vs 6.6 per cent), perhaps because they paid their workers about 6 per cent more, on average. They also had much higher debt-to-asset ratios (38.3 per cent vs 19.5 per cent).

As of 2006, the businesses that levered up since 2002 tended to be somewhat smaller than their more conservative brethren in terms of the number of establishments they operated (13 per cent), the number of people they employed (26 per cent), and the book value of their assets (5 per cent). During the boom, however, they grew more rapidly on all three dimensions.

That’s why the dotted line in the chart below (from their paper) is so misleading:

Anyhow. Giroud and Mueller sorted all these firms by the changes in their debt-to-asset ratios, based on book value, between 2002 and 2006. In the aggregate, the indebtedness of US non-financial businesses has been basically constant since 2000. But that aggregate masks very large changeswithinthe broader sample: “about half of all establishments belong to firms that come into the Great Recession having just tightened their debt capacity, while the other half belong to firms that come into the Great Recession having just freed up debt capacity” by reducing their leverage.

We tend to think these differences probably don’t affect the overall conclusions of the paper, but it’s something to bear in mind.

The average firm in the Giroud and Mueller sample had 101 establishments and 4,005 employees as of 2006. As of 2012, there were about 102,000 American companies with at least 100 employees. These firms operated a little more than 1.5 million establishments between them, employing about 76 million people (two thirds of American workers), for an average of around 15 establishments per firm and 749 workers per business. Even among the 18,219 firms that had at least 500 employees, the average company only had around 66 establishments employing 3,286 workers.

We compared this sample to the universe of firms covered by the latestCensus dataand found that it is somewhat skewed toward larger businesses.

Giroud and Mueller looked at 2,800 businesses, excluding financial firms and utilities, which, as of 2006, operated 284,000 “establishments” (think of a chain restaurant with multiple locations) and employed about 11.2 million people.

If you combine this finding with the estimate from Mian and Sufi, you get the conclusion that rising business leverage in 2002-2006 made the downturn about twice as painful as it otherwise would have been. Or, put another way, the housing bust would have been far less painful if companies hadn’t borrowed so much during the go-go years.

Giroud’s and Mueller’s goal is to provide an explanation ofhowthe collapse in house prices actually led to job losses. After all, workers don’t sack themselves. Their argument, which we will explain below, is that “all of the job losses associated with falling house prices during the Great Recession are concentrated among establishments” of firms that increased their leverage during the boom.

When it came to measuring the impact of debt on employment, Mian and Sufi cleverly divided jobs into tradeable and non-tradeable ones, on the reasonable theory that cashiers, doctors, and construction workers are more sensitive to local economic conditions than people who work at call centres or auto assembly plants. After comparing changes in local non-tradeable employment against changes in local house prices, they concluded that “a 9.5% reduction in housing net worth (which is what the economy experienced between 2007 and 2009) leads to a reduction in overall employment of 2.9%, or 55% of the actual decline in total employment of 5.3%” The housing bust is what made the recent downturn more severe than the early 1990s and early 2000s recessions.

Mian and Sufi have also looked at how the growth in household debt during the boom exacerbated the downturn once house prices started falling, both by using granular data onauto purchases and credit card spendingas well as changes indifferent kinds of employment at the local level. They repeatedly found that the places (either postal codes or counties, depending on which measure they used) where households were the most leveraged suffered far more than the places with the least-indebted households.

The Greenspan and Kennedy estimates of the direct impact of the housing bubble on personal consumption almost exactly match what Atif Mian and Amir Sufi estimated more recently using abottom-up methodology. Both suggest that America’s GDP would have been about 1.5 per cent smaller at the end of 2006 in the absence of the bubble-supported spending on consumption and home improvement, and assuming that most other things in the US economy had unfolded in roughly the same way. (Big assumptions, but useful to get a sense of the magnitude of these numbers.)

Relative to the 1991-2001 average, US households spent an extra 2.2 per cent on home improvements and personal consumption — nearly $1 trillion, split about half and half between the two categories — from the start of 2002 through the end of 2006. (Technically, “improvements to residential structures” arecounted as investmentby the Bureau of Economic Analysis, but it isn’t obvious to us that buying a new refrigerator or television is fundamentally different from installing a hot tub, so we lumped them together.)

The chart below shows Greenspan’s and Kennedy’s estimate of the share of household spending on home improvements and personal consumption that was directly financed by home equity withdrawals:

During the peak of the bubble, Alan Greenspan and James Kennedy, a senior economist at the Fed, wrote a pair of papers explaininghow to measurethis home equity extraction and estimatingwhere that extra money went. Kennedy has updated these estimates through the end of 2008, availablehere.

American house prices rose by about70 per centbetween the start of 2002 and the end of 2006. Borrowers monetised a large portion of those gains by taking out home equity loans, by refinancing existing mortgages into new ones, and by getting capital gains when they sold their homes.

Before we dig into the Research, a quick summary of what we know about what happened household spending and employment during the boom and bust years.

A fascinating newpaperby Xavier Giroud and Holger Mueller argues that many US companies went through a similar experience, and that this made the downturn about twice as worse as it otherwise would have been.

The most recent US downturn was so painful because US households’ borrowing binge in the first half of the 2000s left them stuck repaying large debts (often against assets that had plunged in value) and unable to spend money on new goods and services that they actually wanted. Moreover, they weren’t in a position to take out new to debt to support consumption as they had before the crisis.

summery of the Putnam research that came out @ the time. I sent you the paper once before I worked for you. "...Putnam has struggled with how to present his work. He gathered the initial raw data in 2000 and issued a press release the following year outlining the results. He then spent several years testing other possible explanations....The results of his new study come from a survey Putnam directed among residents in 41 US communities, including Boston. Residents were sorted into the four principal categories used by the US Census: black, white, Hispanic, and Asian. They were asked how much they trusted their neighbors and those of each racial category, and questioned about a long list of civic attitudes and practices, including their views on local government, their involvement in community projects, and their friendships. What emerged in more diverse communities was a bleak picture of civic desolation, affecting everything from political engagement to the state of social ties....After releasing the initial results in 2001, Putnam says he spent time "kicking the tires really hard" to be sure the study had it right. Putnam realized, for instance, that more diverse communities tended to be larger, have greater income ranges, higher crime rates, and more mobility among their residents -- all factors that could depress social capital independent of any impact ethnic diversity might have....But even after statistically taking them all into account, the connection remained strong: Higher diversity meant lower social capital.In his findings, Putnam writes that those in more diverse communities tend to"distrust their neighbors, regardless of the color of their skin, to withdraw even from close friends, to expect the worst from their community and its leaders, to volunteer less, give less to charity and work on community projects less often, to register to vote less, to agitate for social reform more but have less faith that they can actually make a difference, and to huddle unhappily in front of the television."..." Jonas, Michael, "The downside of diversity,"The Boston Globe, August 2007. Available at:http://www.boston.com/news/globe/ideas/articles/2007/08/05/the_downside_of_diversity/The downside of diversity A Harvard political scientist finds that diversity hurts civic life. What happens when a liberal scholar unearths an inconvenient truth? By Michael Jonas | August 5, 2007 IT HAS BECOME increasingly popular to speak of racial and ethnic diversity as a civic strength. From multicultural festivals to pronouncements from political leaders, the message is the same: our differences make us stronger. But a massive new study, based on detailed interviews of nearly 30,000 people across America, has concluded just the opposite. Harvard political scientist Robert Putnam -- famous for "Bowling Alone," his 2000 book on declining civic engagement -- has found that the greater the diversity in a community, the fewer people vote and the less they volunteer, the less they give to charity and work on community projects. In the most diverse communities, neighbors trust one another about half as much as they do in the most homogenous settings. The study, the largest ever on civic engagement in America, found that virtually all measures of civic health are lower in more diverse settings. "The extent of the effect is shocking," says Scott Page, a University of Michigan political scientist. The study comes at a time when the future of the American melting pot is the focus of intense political debate, from immigration to race-based admissions to schools, and it poses challenges to advocates on all sides of the issues. The study is already being cited by some conservatives as proof of the harm large-scale immigration causes to the nation's social fabric. But with demographic trends already pushing the nation inexorably toward greater diversity, the real question may yet lie ahead: how to handle the unsettling social changes that Putnam's research predicts. "We can't ignore the findings," says Ali Noorani, executive director of the Massachusetts Immigrant and Refugee Advocacy Coalition. "The big question we have to ask ourselves is, what do we do about it; what are the next steps?" The study is part of a fascinating new portrait of diversity emerging from recent scholarship. Diversity, it shows, makes us uncomfortable -- but discomfort, it turns out, isn't always a bad thing. Unease with differences helps explain why teams of engineers from different cultures may be ideally suited to solve a vexing problem. Culture clashes can produce a dynamic give-and-take, generating a solution that may have eluded a group of people with more similar backgrounds and approaches. At the same time, though, Putnam's work adds to a growing body of research indicating that more diverse populations seem to extend themselves less on behalf of collective needs and goals. His findings on the downsides of diversity have also posed a challenge for Putnam, a liberal academic whose own values put him squarely in the pro-diversity camp. Suddenly finding himself the bearer of bad news, Putnam has struggled with how to present his work. He gathered the initial raw data in 2000 and issued a press release the following year outlining the results. He then spent several years testing other possible explanations. When he finally published a detailed scholarly analysis in June in the journal Scandinavian Political Studies, he faced criticism for straying from data into advocacy. His paper argues strongly that the negative effects of diversity can be remedied, and says history suggests that ethnic diversity may eventually fade as a sharp line of social demarcation. "Having aligned himself with the central planners intent on sustaining such social engineering, Putnam concludes the facts with a stern pep talk," wrote conservative commentator Ilana Mercer, in a recent Orange County Register op-ed titled "Greater diversity equals more misery." Putnam has long staked out ground as both a researcher and a civic player, someone willing to describe social problems and then have a hand in addressing them. He says social science should be "simultaneously rigorous and relevant," meeting high research standards while also "speaking to concerns of our fellow citizens." But on a topic as charged as ethnicity and race, Putnam worries that many people hear only what they want to. "It would be unfortunate if a politically correct progressivism were to deny the reality of the challenge to social solidarity posed by diversity," he writes in the new report. "It would be equally unfortunate if an ahistorical and ethnocentric conservatism were to deny that addressing that challenge is both feasible and desirable."... Putnam is the nation's premier guru of civic engagement. After studying civic life in Italy in the 1970s and 1980s, Putnam turned his attention to the US, publishing an influential journal article on civic engagement in 1995 that he expanded five years later into the best-selling "Bowling Alone." The book sounded a national wake-up call on what Putnam called a sharp drop in civic connections among Americans. It won him audiences with presidents Bill Clinton and George W. Bush, and made him one of the country's best known social scientists. Putnam claims the US has experienced a pronounced decline in "social capital," a term he helped popularize. Social capital refers to the social networks -- whether friendships or religious congregations or neighborhood associations -- that he says are key indicators of civic well-being. When social capital is high, says Putnam, communities are better places to live. Neighborhoods are safer; people are healthier; and more citizens vote. The results of his new study come from a survey Putnam directed among residents in 41 US communities, including Boston. Residents were sorted into the four principal categories used by the US Census: black, white, Hispanic, and Asian. They were asked how much they trusted their neighbors and those of each racial category, and questioned about a long list of civic attitudes and practices, including their views on local government, their involvement in community projects, and their friendships. What emerged in more diverse communities was a bleak picture of civic desolation, affecting everything from political engagement to the state of social ties. Putnam knew he had provocative findings on his hands. He worried about coming under some of the same liberal attacks that greeted Daniel Patrick Moynihan's landmark 1965 report on the social costs associated with the breakdown of the black family. There is always the risk of being pilloried as the bearer of "an inconvenient truth," says Putnam. After releasing the initial results in 2001, Putnam says he spent time "kicking the tires really hard" to be sure the study had it right. Putnam realized, for instance, that more diverse communities tended to be larger, have greater income ranges, higher crime rates, and more mobility among their residents -- all factors that could depress social capital independent of any impact ethnic diversity might have. "People would say, 'I bet you forgot about X,'" Putnam says of the string of suggestions from colleagues. "There were 20 or 30 X's." But even after statistically taking them all into account, the connection remained strong: Higher diversity meant lower social capital. In his findings, Putnam writes that those in more diverse communities tend to "distrust their neighbors, regardless of the color of their skin, to withdraw even from close friends, to expect the worst from their community and its leaders, to volunteer less, give less to charity and work on community projects less often, to register to vote less, to agitate for social reform more but have less faith that they can actually make a difference, and to huddle unhappily in front of the television." "People living in ethnically diverse settings appear to 'hunker down' -- that is, to pull in like a turtle," Putnam writes. In documenting that hunkering down, Putnam challenged the two dominant schools of thought on ethnic and racial diversity, the "contact" theory and the "conflict" theory. Under the contact theory, more time spent with those of other backgrounds leads to greater understanding and harmony between groups. Under the conflict theory, that proximity produces tension and discord. Putnam's findings reject both theories. In more diverse communities, he says, there were neither great bonds formed across group lines nor heightened ethnic tensions, but a general civic malaise. And in perhaps the most surprising result of all, levels of trust were not only lower between groups in more diverse settings, but even among members of the same group. "Diversity, at least in the short run," he writes, "seems to bring out the turtle in all of us." The overall findings may be jarring during a time when it's become commonplace to sing the praises of diverse communities, but researchers in the field say they shouldn't be. "It's an important addition to a growing body of evidence on the challenges created by diversity," says Harvard economist Edward Glaeser. In a recent study, Glaeser and colleague Alberto Alesina demonstrated that roughly half the difference in social welfare spending between the US and Europe -- Europe spends far more -- can be attributed to the greater ethnic diversity of the US population. Glaeser says lower national social welfare spending in the US is a "macro" version of the decreased civic engagement Putnam found in more diverse communities within the country. Economists Matthew Kahn of UCLA and Dora Costa of MIT reviewed 15 recent studies in a 2003 paper, all of which linked diversity with lower levels of social capital. Greater ethnic diversity was linked, for example, to lower school funding, census response rates, and trust in others. Kahn and Costa's own research documented higher desertion rates in the Civil War among Union Army soldiers serving in companies whose soldiers varied more by age, occupation, and birthplace. Birds of different feathers may sometimes flock together, but they are also less likely to look out for one another. "Everyone is a little self-conscious that this is not politically correct stuff," says Kahn.... So how to explain New York, London, Rio de Janiero, Los Angeles -- the great melting-pot cities that drive the world's creative and financial economies? The image of civic lassitude dragging down more diverse communities is at odds with the vigor often associated with urban centers, where ethnic diversity is greatest. It turns out there is a flip side to the discomfort diversity can cause. If ethnic diversity, at least in the short run, is a liability for social connectedness, a parallel line of emerging research suggests it can be a big asset when it comes to driving productivity and innovation. In high-skill workplace settings, says Scott Page, the University of Michigan political scientist, the different ways of thinking among people from different cultures can be a boon. "Because they see the world and think about the world differently than you, that's challenging," says Page, author of "The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies." "But by hanging out with people different than you, you're likely to get more insights. Diverse teams tend to be more productive." In other words, those in more diverse communities may do more bowling alone, but the creative tensions unleashed by those differences in the workplace may vault those same places to the cutting edge of the economy and of creative culture. Page calls it the "diversity paradox." He thinks the contrasting positive and negative effects of diversity can coexist in communities, but "there's got to be a limit." If civic engagement falls off too far, he says, it's easy to imagine the positive effects of diversity beginning to wane as well. "That's what's unsettling about his findings," Page says of Putnam's new work. Meanwhile, by drawing a portrait of civic engagement in which more homogeneous communities seem much healthier, some of Putnam's worst fears about how his results could be used have been realized. A stream of conservative commentary has begun -- from places like the Manhattan Institute and "The American Conservative" -- highlighting the harm the study suggests will come from large-scale immigration. But Putnam says he's also received hundreds of complimentary emails laced with bigoted language. "It certainly is not pleasant when David Duke's website hails me as the guy who found out racism is good," he says. In the final quarter of his paper, Putnam puts the diversity challenge in a broader context by describing how social identity can change over time. Experience shows that social divisions can eventually give way to "more encompassing identities" that create a "new, more capacious sense of 'we,'" he writes. Growing up in the 1950s in a small Midwestern town, Putnam knew the religion of virtually every member of his high school graduating class because, he says, such information was crucial to the question of "who was a possible mate or date." The importance of marrying within one's faith, he says, has largely faded since then, at least among many mainline Protestants, Catholics, and Jews. While acknowledging that racial and ethnic divisions may prove more stubborn, Putnam argues that such examples bode well for the long-term prospects for social capital in a multiethnic America. In his paper, Putnam cites the work done by Page and others, and uses it to help frame his conclusion that increasing diversity in America is not only inevitable, but ultimately valuable and enriching. As for smoothing over the divisions that hinder civic engagement, Putnam argues that Americans can help that process along through targeted efforts. He suggests expanding support for English-language instruction and investing in community centers and other places that allow for "meaningful interaction across ethnic lines." Some critics have found his prescriptions underwhelming. And in offering ideas for mitigating his findings, Putnam has drawn scorn for stepping out of the role of dispassionate researcher. "You're just supposed to tell your peers what you found," says John Leo, senior fellow at the Manhattan Institute, a conservative think tank. "I don't expect academics to fret about these matters." But fretting about the state of American civic health is exactly what Putnam has spent more than a decade doing. While continuing to research questions involving social capital, he has directed the Saguaro Seminar, a project he started at Harvard's Kennedy School of Government that promotes efforts throughout the country to increase civic connections in communities. "Social scientists are both scientists and citizens," says Alan Wolfe, director of the Boisi Center for Religion and American Public Life at Boston College, who sees nothing wrong in Putnam's efforts to affect some of the phenomena he studies. Wolfe says what is unusual is that Putnam has published findings as a social scientist that are not the ones he would have wished for as a civic leader. There are plenty of social scientists, says Wolfe, who never produce research results at odds with their own worldview. "The problem too often," says Wolfe, "is people are never uncomfortable about their findings."

Hall on secular stagnation Hall, Robert, "Secular Stagnation in the US,"Center for Economic and Policy Research, April 22, 2015. Available at:http://www.voxeu.org/article/secular-stagnation-us"...Despite the resumption of normal conditions in the US labour market and the consensus that slack is gone, the US economy is stagnated in the sense that the standard of living stopped growing around 2000. Family purchasing power today is just the same as in that year.......Four factors account for the stagnation of purchasing power in the US economy: 1) declining labour share; 2) depleted capital; 3) reduced productivity growth; and 4) declining labour-force participation.....Most importantly, there is no sign suggesting a departure from the decline in labour-force participation shown in Figure 6. Some commentators have declared a turnaround in participation based on recent monthly data, but Figure 9 suggests this is wishful thinking.Participation has declined along a straight line during the period of improving conditions in the labour market, suggesting a complete disconnect between participation and the state of the labour market.....Thus a consensus is forming that inadequate demand will no longer be a factor in whatever US stagnation occurs in coming years...." Secular Stagnation in the USEuropean versus US secular stagnation: Demand versus supply factorsCauses of US secular supply stagnation

• Labour’s declining share of income.
  • Slow overall productivity growth.
    • Depleted capital per household.
      • Low labour-force participation.Why hours worked declined
        • Figure 6 shows an index of participants per household.
          • Figure 7 shows an index of the fraction of participants who were actually working - the remainder were unemployed and actively looking for work.
            • Figure 8 tracks hours of work per week for the average household.Work versus other time uses
              • For men, the biggest change by far is the decline of 2.5 hours per week at work, a big drop relative to a normal 40- hour work week.
                • The decline for women is much smaller, at 0.8 hours per week.Is there hope for a return to normal growth of household purchasing power?ReferencesFootnotes

3 See Foote and Ryan (2015).

2 See Fernald (2014) for a discussion of the evidence.

1Complete backup for all of the calculations is available from my website, stanford.edu/∼rehall

Lawrence H. Summers, “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound”Business EconomicsVol. 49, No. 2 National Association for Business Economics

Fernald, John (2014). “Productivity and Potential Output Before, During, and After the Great Recession”, NBER Macro Annual, 2014, forthcoming.

I reiterate that these conclusions apply to the United States. In continental Europe, the case is strong that demand has far from recovered. In Japan, unemployment is at low levels but the performance of the economy is substandard.

One possibility for growth in purchasing power is that unemployment may dip below 5.5% -- the level that some believe defines full employment. The unemployment rate reached 3.8% in 2000 and 4.4% in 2007, in both cases at the ends of long expansions, without triggering inflation much above the Fed’s target of around 2%.

Figure 9.

Most importantly, there is no sign suggesting a departure from the decline in labour-force participation shown in Figure 6. Some commentators have declared a turnaround in participation based on recent monthly data, but Figure 9 suggests this is wishful thinking. Participation has declined along a straight line during the period of improving conditions in the labour market, suggesting a complete disconnect between participation and the state of the labour market.

Capital seems likely to continue to return to its historical growth path, as Figure 4 suggests. For the three other major categories, forecasting is a challenge. There has been no sign of a reversal of the decline in labour’s share of total income and no body of research that supports the idea that it will. Productivity growth is definitely under way, at rates similar to those in the 1970s and 1980s, but well below the rates of the 1950s, 1960s, and 1990s. In particular, there is no sign that a burst of productivity growth will make up for the complete stall in productivity growth around the crisis, as Figure 3 shows.

For both sexes, the big increases were in personal care (including sleep) and leisure (mainly video-related activities). Essentially no change occurred in time spent in education. Women cut time spent on housework.

A small part of the decline is attributable to higher unemployment—the unemployment rate was 6.0% in 2003 and 7.4% in 2013.

Table 1.

Some indication about the changing balance between work and other uses of time comes from the American Time Use Survey, which began in 2003. Table 1 shows the change in weekly hours between 2003 and 2013 in a variety of activities.

Figure 8.

It was quite constant over most of the period, but fell sharply during the Great Recession and recovered only about half of the decline since. It is too early to judge whether hours per worker will return soon to its earlier level or remain as an element of the stagnation of earnings.

Figure 7.

This factor was flat on average, falling in recessions and rising in the ensuing recoveries. It has risen recently, as unemployment has fallen to the upper-five-percent range. It is not an important element of the stagnation of earnings as of today.

Economists have been working hard on trying to understand the surprising decline in participation, which exceeds forecasts that were made in earlier years. Most research agrees that the slack labour market had a relatively small discouraging effect. Another suspect that has been found to have at most a small role is changes in the composition of the working-age population - the negative effect of aging of the population on participation just offsets the positive effect of higher educational attainment. A large increase in the fraction of households subject to taxes imposed on families benefiting from food stamps, disability, and other safety-net programs may be a factor.

As the chart illustrates, participation rose during the 1990s, especially in the second half of the decade, but has fallen since. The Great Recession depressed participation only slightly and does not appear to have been an important determinant of the overall decline in involvement in the labour market. Of course, the recession was a time when fewer participants were actually working and more were looking for work.

Figure 6.

Because declining hours account for the biggest part of the stagnation of earnings, I will dig deeper, by breaking them down into three components: Labour-market participants per household; fraction of participants working; and hours per worker.

Figure 5.

Figure 5 displays the average household’s involvement in the workplace as measured by an index of annual hours of work of household members. Hours per household grew rapidly until 2000, fell as usual during the recession of 2001, flattened but did not grow during the boom of 2002 through 2007, unlike previous booms, collapsed in the Great Recession, and have risen during the recovery that is still underway. The decline in hours since 2000 is the single biggest factor in the decline in household earnings.3 Recent growth in hours per household offers some hope for the return of earnings growth in coming years.

Figure 4 shows the third factor - the amount of capital available to equip the average worker. With more plant, equipment, and software, workers earn more. Capital per household rose rapidly during the 1990s, but more slowly after 2000. Capital per household actually fell during the Great Recession, and its more recent growth has not come close to placing capital per household where it would have been if the trend of the 1990s had continued.

Figure 4.

Figure 3.

Figure 3 shows that productivity grew rapidly from 1989 to 2007. The Great Recession caused a dip in productivity, as did past recessions (due mainly to idle facilities). Though productivity grew at normal rates during the recovery, it did not make up for the shock of the crisis, so the average growth since 2006 has been below par.2 Household earnings suffered proportionately. See Fernald (2014) for further discussion of productivity.

Figure 2.

Figure 2 shows an index of labour’s share (including fringe benefits) of total US income. It tends to be level in recessions, fall during the first half of ensuing expansions, then rise back to a high level at the next recession. But superimposed on that pattern is a general decline that cumulates to about 10% over the period. Like the general declining trend in earnings, the decline in the share seems to have started around 2000. Economists have pursued multiple explanations of the decline, but no consensus has formed.

Four factors account for the stagnation of purchasing power in the US economy: 1) declining labour share; 2) depleted capital; 3) reduced productivity growth; and 4) declining labour-force participation. I will discuss indexes that capture each of these factors in turn using indices that all start at unity in 1989. An index of total purchasing power from earnings is the result of multiplying the four indexes together.

Two episodes of low purchasing-power growth despite a growing economy appear in the figure. From 2002 through 2007 (recovery from the 2001 recession), and 2010 to 2013 (the recovery from the 2008-09 Great Recession). The unemployment rate reached 4.8% in 2007 - well below the long-run average rate of 5.8% and is right at that long-run rate today. The evidence is strong that inadequate demand is not behind the general stagnation of purchasing power, though it was a factor in the period immediately following the Crisis. As of 2014, the US has had a decade and a half of a new kind of secular stagnation, one associated with declining supply.

Figure 1.

Despite the resumption of normal conditions in the US labour market and the consensus that slack is gone, the US economy is stagnated in the sense that the standard of living stopped growing around 2000. Family purchasing power today is just the same as in that year. Figure 1 shows that it grew briskly during the 1990s, slowed markedly prior to the crisis, dropped below its 2000 level as a result of the crisis, and grew slowly in recent years.

Thus a consensus is forming that inadequate demand will no longer be a factor in whatever US stagnation occurs in coming years. In Japan and Europe, on the other hand, the case for boosting demand is strong and inadequate demand is almost surely a main cause of the stagnation.

Extreme slack persists in continental Europe and Japan, but in the US, several labour-market indicators, such as low short-term unemployment and high levels of unfilled job openings, indicate the end of the period of slack that followed the crisis, while others, such as long-term unemployment and involuntary part-time work, still show slack but are declining and will probably reach normal levels in the coming year.1 Forecasters believe that the Fed will unpin the short-term interest rate in the middle of 2015 or a bit later in the year. Markets for forward rates agree.

One important factor in stagnations is the inability or reluctance of the central bank to lower interest rates as low as would seem to be appropriate, given the ability of low rates to stimulate output and employment. The Federal Reserve and the Bank of Japan have kept rates slightly positive since the crisis, while the ECB did the same until recently, when it pushed the rate just slightly negative. All three economies had combinations of high unemployment and substandard inflation that unambiguously called for lower rates, according to standard principles of modern monetary economics.

The disappointing post-crisis performance of the US economy and even more disappointing performance of continental Europe and Japan have revived interest in the possibility of secular stagnation. Under stagnation, real incomes fail to grow or even shrink, and the economy’s output falls farther and farther below its earlier upward trend. Rising unemployment may also occur. Summers (2014) ignited interest in the possibility of secular stagnation.

The disappointing post-Crisis performance of the US economy and even more disappointing performance of continental Europe and Japan have revived interest in the possibility of secular stagnation. This column argues that a consensus is forming that inadequate demand will no longer be a factor in whatever US stagnation occurs in coming years. In Japan and Europe, on the other hand, the case for boosting demand is strong and inadequate demand is almost surely a main cause of the stagnation.

Robert E. Hall22 April 2015