Size of the Mortgage Subsidy: Update

Banks are often ridiculed for making home loans in the mid 2000s, when supposedly they should have known that housing prices would fall.

But banks were in a "heads: I keep all the winnings, and tails: I share the losses with taxpayers" situation, and it was rational to downweight the probability that housing prices would fall. This article quantifies some of the taxpayer help mortgage market participants expected in the contingency that housing prices fell.

Today that was updated by the TARP's Special Inspector General, who increased the subsidy estimate by $500 billion!.

Corporate Tax Revenue Comeback

The U.S. Treasury reported today that June 2010 federal corporate tax collections were the highest of any month since September 2008.

Quits vs Layoffs: Not the Same As Supply vs Demand

Employment sometimes falls, and in theory the fall could occur because of a change in supply, a change in demand, or both. The best way to determine which is more important is to examine labor productivity: productivity is pro-cyclical when the employment cycle is a result of a demand shift, and counter-cyclical when it is a result of a supply shift.

Some economists have proposed using quits and layoffs to make this distinction. When labor supply causes the employment reduction, supposedly quits will be high and layoffs low.

However, as JOLTS measure quits and layoffs, the two are often POSITIVELY correlated. Thus, there are sometimes supply shocks that increase both quits and layoffs, and there are sometimes demand shocks that increase both quits and layoffs.

Consider, for example, the seasonals of layoffs and quits in the JOLTS data, which I measure in the monthly data as the residual from a regression of either layoffs or quits on a smooth polynomial in time. The nationally quit and layoff residuals are POSITIVELY correlated, even if I exclude Oct-Jan which is the seasonal most obviously associated with a demand shift.

I found the same pattern for the southern region only, where the changes May-July and July-Sep should be more about supply (more workers are available when school is not in session) than demand (perhaps in the north cold weather in the spring or fall affects demand).

I found the same pattern for each of the 25 industries tracked by JOLTS, with only two exceptions: mining and construction. Even in those two industries, layoff spikes seem to be associated with quit spikes, its just that quits are somewhat above average when there are several consecutive months of low layoffs.

Flashback: Model of Zero Multiplier

Professor Krugman and Delong are again trying to perpetuate the myth that a multiplier less than one is inconceivable for today's stimulus and today's economy.

In fact, there is a very simple story of how the multiplier would be zero (and, of course, zero is less than one). Namely, in the model, the government buys things that are so useful that citizens would have purchased them on their own. Once the government comes along and buys such things on behalf of its citizens, the private sector stops buying them, and total spending is unchanged both in total amount and in terms of the types of goods purchased.

This is not the only model of fiscal policy that economists use, but it is used a lot, so I am surprised that Professors Krugman and Delong overlook it so often (I wrote about this earlier this year, when Professor Krugman also seemed to forget).

So it's clear that we have models with multiplier less than one. Moreover, the Obama administration claims that its stimulus really did purchase things that are useful. So the possibility that the multiplier is less than one cannot be dismissed solely on the basis of logic.

Article on Strategic Defaults

Here's an article with vivid evidence that many mortgage defaults are not because of unemployment, unless unemployment were (miraculously) to disproportionately hit people who were able to borrow a lot just a few years ago.

Employment Reducing Policy List Updated

This addition comes from MJ Perry:

• Means-tested health insurance benefits
• Extra taxes for multi-national corporations (see Wall Street Journal; HT Greg Mankiw)
• mandating the employers with large payrolls provide health insurance, but that employers with small payrolls do not,
• penalizing employers for providing the type of health insurance they did in the past,
• minimum wage hike
• means-tested mortgage modification (presenting millions of workers with implicit tax rates in excess of 100% (sic)),
• means-tested new home buyer credit,
• mean-tested student loan modification,
• unemployment insurance extensions,
• state income tax hikes,
• IRS means-tested enforcement of prior tax debts,
• planning for new-hiring-tax-credits,
• marginal federal tax rate hikes on the "rich"!

Rhetoric About Supply

The continues to be a plentiful supply of rhetoric that factor supply doesn't matter during a recession, yet no evidence. Take, for example,

"When the economy is booming, and lack of sufficient willing workers is limiting growth, generous unemployment benefits may keep employment lower than it would have been otherwise. But as you may have noticed, right now the economy isn’t booming — again, there are five unemployed workers for every job opening. Cutting off benefits to the unemployed will make them even more desperate for work — but they can’t take jobs that aren’t there."

To the contrary, there is plenty of evidence that supply during this recession mattered as much as ever: here, here, and here.

Not Supposed to Be This Accurate

Updates including consumption through May 2010 and labor usage through June 2010.

The yellow curve is the forecast I prepared almost a year ago, and have not changed since.

This time I changed the consumption display format -- made the "data" circles so that they might not be covered up by the forecast!

My model is a simple version of the neoclassical growth model, so there's some luck here that the labor forecasts are within tenths of a percent and the consumption forecasts within hundredths of a percent.





The May consumption spike comes from the May spike in Federal employment (I measure consumption of both private and nondefense public sectors, and estimate monthly public consumption from the monthly time pattern of government employment).

Size of the Mortgage Subsidy

Banks are often ridiculed for making home loans in the mid 2000s, when supposedly they should have known that housing prices would fall.

But banks were in a "heads: I keep all the winnings, and tails: I share the losses with taxpayers" situation, and it was rational to downweight the probability that housing prices would fall. This article quantifies some of the taxpayer help mortgage market participants expected in the contingency that housing prices fell.

Working Around Federal Mod Programs

Some information about that trend in this article.