Macro Roundup

“…As a cosmologist, I can say that if we retracted all the papers in cosmology that we felt were misrepresented by journalists, there would hardly be any papers left….”

Lawrence Krauss, "The Ideological Corruption of Science,"Wall Street Journal, July 12, 2020, https://www.wsj.com/articles/the-ideological-corruption-of-science-11594572501

Holman W. Jenkins, Jr., "How to Show That Black Lives Really Matter,"Wall Street Journal, July 10, 2020, https://www.wsj.com/articles/how-to-show-that-black-lives-really-matter-11594417916

NBER finds that college graduates who entered the labor force during/after the Great Recession have seen lower employment rates and wages, but that in terms of wages scarring eventually fades by the workers early 30s; however the workers employment rates seems to be permanently affected.

However the paper also (more interestingly) a dramatic and ongoing negative break in employment rates (3 or 4 points lower versus what it would be under previous trend) for new college grads starting pre-crisis in 2005. “…Starting with those who entered the labor market around 2005, each successive cohort has had lower employment rates, relative to older workers in the same labor market, than those before. These cohort effects layer on to other changes in the labor market that are common to workers of different ages. During the Great Recession, overall employment rates were falling, but the employment rates of new entrants fell by more than did those of cohorts already established in the labor market. This is perhaps unsurprising; 100% of new graduates had to find jobs in a historically weak labor market, where most older workers were able to remain in their old jobs. What is more surprising is that the decline in employment rates continued after the recession ended, not just for those who entered during it but for successive cohorts as well….”

To me this is consistent with the lower value of a college degree from more marginal college graduates, he doesn’t control for institutional selectivity.

“….I study cohort patterns in the labor market outcomes of recent college graduates, examining changes surrounding the Great Recession. Recession entrants have lower wages and employment than those of earlier cohorts; more recent cohorts’ employment is even lower, but the newest entrants’ wages have risen. I relate these changes to "scarring" effects of initial conditions. I demonstrate that adverse early conditions permanently reduce new entrants’ employment probabilities. I also replicate earlier results of medium-term scarring effects on wages that fade out by the early 30s. But scarring cannot account for the employment collapse for recent cohorts. There was a dramatic negative structural break in college graduates’ employment rates, beginning around the 2005 entry cohort, that shows no sign of abating…. First, employment rates fell precipitously. The cohort that entered the labor market in 2010 has had an employment rate that, averaged over its experience to date, is two percentage points lower than what would have been expected based on prior cohorts’ age profiles and the state of the economy. The decline began with cohorts that started their careers before the Great Recession, and has only continued for more recent cohorts.Employment rates for 2015 entrants, who faced strong labor markets for the first four years of their careers, are three percentage points lower than projections based on pre-recession trends. Although more recent cohorts have only a few years of data, each is thus far posting lower employment rates than the one before. Second, wages for those who are employed show a different pattern. The cohort that entered the labor market in 2009 has lower wages than those who entered earlier, by about two percent. However, there were no further declines for post-recession entrants - in my main specifications they returned to the pre-recession trend, though this is not entirely robust. For the most recent entrants, we have only a few years of very early career earnings, but thus far wages are several percent higher than the pre-recession trend. Third, both employment and wages are subject to scarring effects of early career conditions. The form of scarring is quite different for the two outcomes, however. I replicate past findings that those who face high unemployment rates at the start of their careers have lower wages through their first several years in the labor market, but that the scars gradually fade and by the tenth year the effects of initial conditions have faded. Scarring effects on employment, by contrast, are permanent: Cohorts that face high unemployment when they enter the labor market have statistically and substantively lower employment rates throughout their careers, not just at the beginning. Fourth, these scarring effects, while quantitatively important,are not large enough to account for the employment outcomes of the Great Recession entrants. Projections based on earlier business cycles account for only about half of the observed downturn in employment rates for the 2009-2012 cohorts. Moreover, these cannot help explain poor outcomes for the most recent entrants, who encountered historically low unemployment rates at the outset of their careers (at least until the coronavirus pandemic in 2020, which is outside the scope of my data). Again, the evidence for wages is different: Early career scarring effects account for all of the decline in wages for Great Recession entrants, and subsequent cohorts have earned higher wages than past patterns would suggest. Last, there was a dramatic structural break in the employment rate of young college graduates, beginning with the cohorts that entered the labor market around 2005, well before the Great Recession. Although employment rates rose dramatically following the Great Recession for incumbent workers, new entrants did not share in this improvement. The new, dramatically negative trend shows no sign of letting up in the most recent data. The most recent cohorts have relative employment rates three to four percentage points lower than what one would have anticipated based on the pre-2005 trend…. Something dramatic has happened to the employment prospects of recent college graduates. Starting with those who entered the labor market around 2005, each successive cohort has had lower employment rates, relative to older workers in the same labor market, than those before. These cohort effects layer on to other changes in the labor market that are common to workers of different ages. During the Great Recession, overall employment rates were falling, but the employment rates of new entrants fell by more than did those of cohorts already established in the labor market. This is perhaps unsurprising; 100% of new graduates had to find jobs in a historically weak labor market, where most older workers were able to remain in their old jobs. What is more surprising is that the decline in employment rates continued after the recession ended, not just for those who entered during it but for successive cohorts as well….”

“…We quantitatively evaluate the role of supply and demand of safe assets in determining neutral interest rates. …First, we construct a measure of global net supply of safe assets available to the private sector: the supply of sovereign safe assets net of foreign government holdings and assets never traded in secondary markets. In our benchmark series, we focus on U.S. Treasury securities because of the central role of the U.S. dollar in the global trade, financial, and monetary systems…The net supply of U.S. Treasury securities (red line in Figure 1) correlates well with realized safe real interest rates, especially up to 2008. This correlation (not shown before) is consistent with the view that a higher demand for safe assets during the mid-1990s-2008 period was not met by a corresponding increase in their supply, thus pushing down neutral interest rates….We find that the net supply of safe assets is an important driver of neutral rates. We estimate that changes in the net supply of safe assets account for an average of 20% of the variance of neutral rates across countries. Moreover, net safe assets contributed to the path of neutral rates in important periods of our sample: the first wave of decline in the 1970s, a rebound in the early 1980s, and the steady decline during the 2000s. Since 2008 the increase in net safe assets has prevented neutral rates from declining further because of other factors, especially demographics. These results are consistent with the idea that while larger debts from advanced countries have boosted the supply of safe assets after 2008, higher demand for these assets due to, for instance, an older population, has pushed down neutral rates. We also find that most of the determinants of neutral rates explored in this paper help explain not only the time series of these rates, but also their co-movement…. Using an empirical cross-country state-space model, we find that the net supply of sovereign safe assets available to the private sector in secondary markets is an important driver of neutral rates for 11 advanced economies in the period 1970-2018. We also find that the global accumulation of international reserves in sovereign safe assets since the 1990s (the global savings glut) lowered the net supply of these assets and, thus reduced neutral rates by up to 50 basis points in our sample….”

Thiago Ferreira and Samer Shousha, “Scarcity of Safe Assets and Global Neutral Interest Rates,” Federal Reserve Board, July 2020, https://www.federalreserve.gov/econres/ifdp/files/ifdp1293.pdf

"...Standard mortgage contracts include periodic debt repayment plans (amortization schedules) designed to build-up illiquid savings in the form of home equity, which can be substantial even from a macroeconomic standpoint. For example, U.S. households invest hundreds of ($) billions each year in mortgage amortization plans - comparable in size to pension program contributions. We provide the first empirical evidence on the causal effects of mortgage amortization on wealth accumulation. Ex-ante, effects are unclear. If increased debt repayments crowd-out households’ non-mortgage savings, rather than alter their consumption/labor supply, there would be no effect on wealth. We use individual administrative data and plausibly exogenous variation in the timing of home purchases surrounding an interest-only mortgage reform in the Netherlands. We find little-to-no change in the accumulation of non-mortgage savings, even four years later, despite a significant increase in debt repayment. This lack of crowding-out implies a surprising near 1-for-1 rise in net worth and little savings-debt fungibility, financed via increased labor supply and reduced expenditures. Results hold using life-events (ex. birth of a child) as an instrument for the timing of home purchase, and appear unaffected by potential selection or confounded treatment concerns. Effects also hold focusing on buyers with substantial liquid savings and across the spectrum of ages, suggesting general applicability beyond just non-savers and the young. Our findings suggest that homeownership, when coupled with amortizing mortgages, is a key driver of household wealth building and inequality, and that the amortization-wealth elasticity is a crucial consideration for macroprudential policies..... Our findings hold looking at households with substantial liquid assets, suggesting results are not caused by just non-savers, and across a broad range of ages, suggesting a general applicability of our estimated elasticity. Our results can either be consistent with a relatively atypical rational model of household liquidity preferences or behavioral models that have been shown to help drive wealth accumulation in other settings (such as pension contributions), including commitment devices, mental accounting, and default settings. Regardless of the underlying mechanism, the finding of a substantial effect of mortgage amortization and debt repayment on wealth accumulation has important economic implications. Our estimated elasticity suggests that ex-ante macroprudential polices aimed at building up household home equity through faster amortization are effective and do not significantly reduce household liquidity. Ex-post macroprudential policies that reduce principal repayments during recessions are also likely to have larger effects than might be expected in more standard models of the household. More broadly, our results suggest that homeownership can be a critical driver of household wealth accumulation when financed with an amortizing mortgage. Therefore, variation in homeownership and amortization rates across time and groups, are likely important factors drivers of differential wealth accumulation. For many households, the home is the single largest asset they have available in retirement. It may not be surprising then that our findings suggest that mortgage design may play a key role in our understanding of household retirement savings and long-run wealth accumulation...."

Asaf Bernstein and Peter Koudijs, "Mortgage Amortization and Wealth Accumulation," Social Science Research Network, July 7, 2020, https://papers.ssrn.com/sol3/papers.cfm

They also didn’t find a change in the characteristics of mortgage holders:“…Second, we findno systematic differences in the underlying characteristics of households purchasing a home before or after the reform. House purchase values and origination LTVs vary smoothly across the reform. In addition, we do not find a sudden jump in other observable differences between those who bought before or after….”

new Bernstein/Koudijs paper using evidence from the Netherlands finds if households are forced to pay back their mortgage (regulations restricted interest only mortgages to force more/faster principal repayment) back on an accelerated schedule it resulted in a net increase in total savings, non-home wealth (orange line) didn’t rise but the new principal payments resulted in a net increase (in granted illiquid savings) just sending this as I’m sure Mian and Sufi will be all over it. “…We find little-to-no change in the accumulation of non-mortgage savings, even four years later, despite a significant increase in debt repayment. This lack of crowding-out implies a surprising near 1-for-1 rise in net worth and little savings-debt fungibility, financed via increased labor supply and reduced expenditures…”

Reviewed a few of the authors previous paper that were cited, this one from five years ago seemed most relevant (by 2/3 of them), pretty well cited (178 times) it takes a higher level view looking at the decline of agriculture, rise and decline of manufacturing and ongoing rise in services (Table 1) and finds that income effects are the main contributor to structural transformation

“…we turn to the analysis of the drivers of structural change. We use our model to decompose the within-country evolution of relative sectoral employment into income and price effects. We find that income effects are the main contributors to structural transformation. They account for over 73% of the within-country sectoral reallocation in employment predicted by the estimated model…..The empirical evidence suggests that the relationship between relative sectoral expenditure shares and income is stable,and the slopes of relative Engel curvesdo not level off rapidly as income grows.Using aggregate data from a sample of OECD countries,Figure 1 plots the residual (log) expenditure share in agriculture (Figure 1a) and services (Figure 1b) relative to manufacturing on the y-axis and residual (log) income on the x-axis after controlling for relative prices. The depicted fit shows that a constant slope captures a considerable part of the variation in the data and that it does not appear that the relationship levels off as aggregate consumption grows.…..If relative sectoral demand shows a strong and stable dependence on income, the demand channel can readily explain the reallocation of resources toward sectors with higher income elasticities. For instance, rising demand for services and falling demand for agriculture, when both are compared against manufacturing, may give rise to sizable shifts of employment from agriculture toward services….As discussed below, in this paper we complement this aggregate-level evidence with micro-level household data from the Consumption Expenditure survey (CEX) from the US and the National Sample Survey (NSS) from India. We analyze the relationship between relative shares and expenditure in these data, and show that sectoral differences in the estimated slopes do not level off and remain stable across households with different expenditure levels….This paper presents a tractable model of structural transformation that accommodates both long-run demand and supply drivers of structural change. Our main contributions are to introduce the nonhomothetic CES utility function to growth theory, show its empirical relevance and use its structure to decompose the overall observed structural change into the contribution of income and price effects. These preferences generate nonhomothetic Engel curves at any level of development, which are in line with the evidence that we have from both rich and developing countries. Moreover, for this class of preferences, price elasticities are independent from nonhomotheticity parameters, and they can be used for an arbitrary number of sectors. We argue that these are desirable theoretical and empirical properties. We estimate these preferences using household-level data for the U.S. and India, and aggregate data for a panel of 39 countries during the post-war period. We argue that nonhomothetic CES preferences provide a good fit of the data despite their parsimony. Armed with the estimated price and nonhomotheticity parameters, we then use the demand structure to decompose the broad patterns of reallocation observed in our cross-country data into the contribution of nonhomotheticities and changes in relative prices. We find that the majority of the within country variation is accounted for nonhomotheticities in demand. To conclude, we believe that the proposed preferences provide a tractable departure from homothetic preferences. They can be used in other applied general equilibrium settings that currently use homothetic CES and monopolistic competition as their workhorse model, such as international trade. These preferences can be nested in the same manner as homothetic CES. Also, as we discuss in Appendix A, it is possible to generalize nonhomothetic CES to generate variable nonhomotheticity parameters. These properties may be useful in some applications. Even in this case, nonhomothetic CES remains a local approximation (with constant nonhomotheticity parameters) and can be used to guide how the varying elasticities should be parametrized, e.g., by estimating nonhomothetic CES across sub-samples…..”