Why so many debt defaults?

In the United States, declaring personal bankruptcy is an appealing way to get out of a bad debt situation and start with a clean slate because previous debts are set to zero. One would thus expect to see bankruptcy seen rather frequently used when people are unemployed. Yet, it appears that defaulting on debts is much more frequent and is used as an informal way to get unemployment insurance.

Kyle Herkenhoff established this and finds also that the many reason for default is not negative equity, but job loss and facing a borrowing constraint while debt payments constitute a large fraction of income. But when a person is cornered in this way, why not declare bankruptcy? Herkenhoff shows with a labor search model with individually priced debt that using default as unemployment insurance is worth more than the subsequent higher cost of credit. Mortgage relief measures are thus welfare enhancing, even though they lead to higher and more persistent unemployment.

PS: The paper title page says "Preliminary, do not cite." Then why put it in a widely distributed working paper series? Leave it hidden on your web page.

ASSA Humor Session

Many of the world's professional economists are spending the next few days in San Diego for the annual ASSA meeting, where economists network, get some publicity for themselves, and learn what other economists are up to. I am skipping this year's meeting to spend more time with family.  You might think that is lazy of me.  But heck, my marginal tax rate just went up.  A bit of extra laziness is optimal.

If I were there, one event I would certainly attend is the annual humor session.  Here is some information about it, in case you are interested:  It is 8 pm on Saturday January 5 in the Manchester Foyer of the Manchester Grand Hyatt. Unlike most of the sessions at the meeting, the humor session is free and open to the public. And best of all: the benefit of attending is entirely nonpecuniary, so it won't be reduced by the new higher tax rates!

Why are prices sticky?

Why are prices sticky? I think it is crucial to understand this as it is the defining assumption of the whole New-Keynesian literature. Understanding this may have important implications on those models, as this can lead to differing rates of stickiness with changing circumstances, something the New-Keynesians conveniently choose to ignore. Oh, and there needs to be evidence of relevant stickiness, which is far from being firmly established.

Arthur Fishman finds one way to create price stickiness. Suppose that costs vary from time to time, the exact moment being random. Consumers must search for goods and learn about prices. Sellers can advertise, but it is costly. With some heterogeneity across consumers, some are going to be uninformed. Price rigidity then arises for two reasons: first, some sellers may forgo advertising if the expected duration of the current cost is too short; second, it is not worth advertising if a sufficient number of consumers does not search. This means that for price rigidity to arise, one needs cost flexibility. Kind of strange, isn't it? Even though there is some evidence that costs are more flexible than prices, the model has the implication that when costs become more flexible, prices become more rigid. Find that in the data.

The Dearth of Bestselling Economists

Last October, Amazon introduced a new feature: a list of bestselling authors, aggregating across all books an author has written. Here is the list of the top 100 authors.

For an economist, perusing the list is a humbling experience. As far as I can tell, not a single member of our profession made the list.  I wonder whether Galbriath might have made it in his day, as he had written a large number of books accessible to general audiences. But these days, not a single one of us has wide enough readership to make it onto the list. The next time you are tempted to lament the sad state of the public discussion of economic policy, remember that we economists are probably not doing enough to educate the public. We just don't write things that people want to read.

If you want to know what economists come closest, you can look at this list of bestselling authors in business and investment, a category that includes economics. Several of us make this less selective list.

Tax Progressivity: Update

Here are the effective federal tax rates (total taxes as a percentage of income) for 2013 under the new tax law, as estimated by the Tax Policy Center, for various income groups:

Bottom fifth: 1.9
Second fifth: 9.5
Middle fifth: 15.6
Fourth fifth: 19.0
Top fifth: 28.1

80-90 percentile: 21.5
90-95 percentile: 23.4
95-99 percentile: 26.3
Top 1 percent: 36.9

Top 0.1 percent: 39.6

Strange facts about inequality over the business cycle

The last recession has renewed interest about the distributional impact of business cycles. Clearly, not everyone is affected in the same way by a recession, and the massive policy interventions of the last few years also affected people differentially. For example, what what do we really know about the dynamics of inequality?

Virginia Maestri and Andrea Roventini use the database from a special issue of the Review of Economic Dynamics (which I discussed before). While the sample length is unavoidably short, including only a couple of recessions for every considered country, some general lessons can be learned: income inequality is counter-cyclical while consumption inequality is pro-cyclical. That is going to be tough to replicate in a theory. Imagine a recession. I can imagine that inequality becomes more severe because the people how typically have low incomes are more likely to lose their job. But why would consumption inequality be reduced? Unemployed workers do have lower consumption, and may in fact be more severely affected due to the lack of appropriate savings. So it must be that the consumption of the richer ones drops like a stone, and I do not see a model delivering this.

PS: I realize there was a large drop in income for the richest ones in this recession, and they recovered quickly. But this was not a typical recession.

PS2: And I still hate it when a paper starts on page 9, and the six last pages are back-cover material. What a waste.

Anne Pringle

All ec 10 students know David Johnson, the course's charismatic head teaching fellow.  What they likely do not know is that David's lovely wife, Anne Pringle, is also on the Harvard faculty.  Today's NY Times has an article about Anne and her research.