Macro Roundup

New Mian and Sufi paper building on their “savings glut of rich” paper (attached) on the self-reinforcing relationship between weak demand and rising debt. Their theory is one of "indebted demand" the idea that large debt burdens by households and governments thus lowering aggregate demand, and in turn natural interest rates.

They are presenting this tomorrow (the 16th, will plan on watching)

"....In this paper, we proposed a new theory connecting several recent secular trends: the increase in income inequality, financial liberalization, the decline in natural interest rates, and the rise in debt by households and governments. The central element in our theory are non-homothetic preferences, which lead toricher households having greater saving rates out of a permanent income transfer. This gives rise to the idea of indebted demand: greater debt levels mean a greater transfer of income in the form of debt service payments from borrowers to savers, and thus depress demand….the top 1% experienced a significant decline in their net debt position from 1982 onward, which reflects the accumulation of a significant amount of household debt held as a financial asset. In contrast, the bottom 90% experienced a large increase in their net debt position, as gross debt owed increased substantially but household debt held as a financial asset was relatively stable. Thus, to a large degree, the rise in saving of the top 1% has not been transformed into investment or capital account surpluses; instead, it has been absorbed by an increase in borrowing by the bottom 90%...The fact that businesses have not been responsible for the rise in borrowing is consistent with the fact that investment to GDP ratios have actually declined during this period of rising debt and low interest rates….The rise in debt has not been associated with a traditional channel through which businesses and the government borrow from the household sector to boost investment and productivity growth. Instead, rising debt levels appear to have been used to finance personal consumption and government outlays. That is, it appears that the expansion of credit has been used to increase aggregate demand rather than supply. This is a key motivating fact behind the model of indebted demand below…that large debt levels weigh negatively on aggregate demand: as borrowers reduce their spending to make debt payments to savers, the latter, having greater saving rates, only imperfectly offset the shortfall in borrowers’ spending. We refer to a situation in which demand is depressed due to elevated debt levels as indebted demand..... We identified three main implications of indebted demand. First, secular economic shifts that raise debt levels (e.g. income inequality or financial liberalization) also lower natural interest rates, which then itself has an amplified effect on debt. Second, monetary and fiscal policy, to the extent that they involve household or government debt creation, can persistently reduce future natural interest rates. This means that there is only a limited number of such policy interventions that can be used before economies approach the effective lower bound. Finally, when the lower bound is binding, the economy is in a debt-driven liquidity trap with depressed output. In this “debt trap”, debt-financed stimulus deepens the recession in the future, whereas redistributive policies and policies addressing the structural sources of inequality mitigate it.Our results suggest that economies face a sort of “budget constraint for aggregate demand”. They can stimulate aggregate demand through debt creation, but that reduces future demand (and thus natural interest rates). This logic suggests a new trade-off for debt-based stimulus policies. We view an exploration of this trade-off in an optimal policy setting as a promising avenue for future research…”.

James Heckman and Rasmus Landersø, “Lessons from Denmark about Inequality and Social Mobility,” National Bureau Of Economic Research, March 2021, https://www.nber.org/papers/w28543

Conclusions, “…Many American policy analysts point to Denmark as a model welfare state with low levels of income inequality and high levels of income mobility across generations. It has in place many social policies now advocated for adoption in the U.S. Despite generous Danish social policies, family influence on important child outcomes in Denmark is about as strong as it is in the United States.More advantaged families are better able to access, utilize, and influence universally available programs. Purposive sorting by levels of family advantage create neighborhood effects. Powerful forces not easily mitigated by Danish-style welfare state programs operate in both countries….”

Note the increased spending had no impact on mobility btw cohorts in Denmark“….Fig. 4b shows cognitive test score ranks for the all males born in 1958 and 1988 in Denmark by their parents’ income percentiles,22 along with cognitive test score ranks across parents’ income percentiles for children from the CNLSY data. The figure illustrates two points: First, no striking differences appear when comparing the association between children’s test scores and parents’ income percentiles in Denmark and the U.S. Second, the association between children’s cognitive test scores and parents’ income is strikingly similar for Danish cohorts born 30 years apart. Although the 1988 cohort is born after the rapid welfare state expansion previously described and the 1958 cohort is born just before the expansion took off, the associations between test scores and parents’ resources are practically identical. Family influence retains its tight grip….”

First, “…. Intergenerational educational mobility is about the same in both countries for the most recent cohorts. Transmission of skills across generations is equally strong in both countries, despite stark differences in income inequality and offered public services….”
Second“….The traditional literature on the intergenerational transmission of economic status compares snapshots of lifetime incomes of parents and children. This approach gives only a limited picture of the transmission of lifetime well-being across generations. Using Danish register data on lifecycle income, we find that intergenerational elasticities of income (IGE) of lifetime well-being are much higher than those estimated using incomes measured over a small window of ages. Accounting for uncertainty and credit market restrictions increases estimated dependence across generations. Well-being is much more tightly linked across generations in Denmark than conventional snapshot measures of lifetime income indicate….”

Third, “….We expand the analysis of family influence beyond the traditional analysis of IGEs of income to include choices of neighborhood, peers, and schools as parental investments in their children. We present compelling evidence of purposive sorting by parents in making neighborhood choices. Our evidence calls into question the assumptions underlying the recent neighborhood influence literature – that timing of residential choice is random with respect to the lifetime gains for children….”
The key evidence, “…Despite the generosity of the Danish welfare state and equality in access for all citizens, substantial inequality of child outcomes remains across social and economic classes. Figure 1 documents these gaps and compares them to their U.S. counterparts. Children of college-educated women do substantially better than children of secondary school dropouts on many dimensions in both countries….”

Their core findings:

Likely very useful new Heckman demonstrates the limited utility of social policy to change mobility outcomes for children. Despite interventionist Danish social policy family influence on child outcomes in Denmark is ~ as strong as it is in the United States. Inequality of child outcomes remains across economic classes, for example children of college educated women do better in both Demark and the US. Their bottomline, “…However,if equal Danish provision of services does not eliminate inequality in many important life outcomes, the origins of inequality and social immobility lie elsewhere…”

good WSJ chart, uptick in home equity cash outs, highest level since pre-crisis.

Mian and Sufi bait (in terms of theirIndebted Demandpaper), "... Americans extracted more cash from their homes through cash-out refinancings in 2020 than in any year since the financial crisis.U.S. homeowners cashed out $152.7 billion in home equity last year, a 42% increase from 2019 and the most since 2007, according to mortgage-finance giant Freddie Mac. It was a blockbuster year for mortgage originations in general as well: Lenders churned out more mortgages than ever in 2020, fueled by about $2.8 trillion in refis, according to mortgage-data firm Black Knight Inc.....”

Worth noting, “…. Before the housing-market crash that followed the financial crisis, almost 90% of borrowers who refinanced chose to extract cash. Last year, about one-third of refinancers chose the cash-out option, according to Freddie Mac...."

Preliminary FBI numbers confirm major murder rate uptick last year“…the F.B.I. released preliminary statistics showinga major increase in murder last year, with a 25 percent rise in agencies that reported quarterly data. The F.B.I. did not receive data from several cities with known big increases in murder like New York, Chicago and New Orleans, but cities of all sizes reported increases of greater than 20 percent. A 25 percent increase in murder in 2020 would mean the United States surpassed 20,000 murders in a year for the first time since 1995.(The final official numbers for 2020 will not be released until late September.)…”

Jeff Asher, "Murder Rate Remains Elevated as New Crime Reporting System Begins,"New York Times, March 16, 2021, https://www.nytimes.com/2021/03/16/upshot/murder-rate-usa.html

And the rise is likely still ongoing, “…The big increase in the murder rate in the United States in 2020 has carried over to 2021. A sample of 37 cities with data available for the first three months of this year shows murder up 18 percent relative to the same period last year….”