Brokebank USA: Living Paycheck to Paycheck

Gillian Tett of the FT has an interesting article that seemingly contradicts all of the happy talk about how "America is back" with stock markets hitting all-time highs. There is no particular difficulty understanding stock market speculation and bubbles: with the Federal Reserve practically giving money away, those who still have access to credit have parked the proceeds in stocks. With the last two rounds of all-time highs coming right before the dot-com bubble burst and the subprime crisis, let's say its implications may not be welcome.

Outside of the casino economy, however, there appears to be a new way to measure the desperation of Americans living in and with the real economy. When people are strapped for cash--and American personal savings rates are once more headed to zero--it is only to be expected that business activity peaks during paydays. That is, quite a lot of these Brokebank Yanks Americans are living, as the saying goes, from paycheck to paycheck:

“Consumers are living pay check by pay check, and they tend to spend accordingly. Then you have 50 million people on food stamps and that has cycles too. So for our business it has become critical to understand the cycle – when pay [and benefit] checks are arriving.” Sadly, it does not yet seem possible for outsiders (or journalists) to crunch the numbers across the entire economy. Large companies are very secretive about their big-data projects (this particular company, which produces many of America’s best-loved snacks, would not let me reveal its name). And though economists monitor macro trends in retail spending, they have not traditionally analysed micro spending swings.
Nevertheless, this story is not unique. Executives at Walmart, for example, have recently noted the rising impact of the “pay check cycle”; Kroger, another retailer, notes that the proportion of customers using food stamps has doubled, creating additional swings. And as these anecdotal tales mount up, they are interesting for at least two reasons. First, and most obviously, they should remind us of the silent, dark underbelly of economic pain that is stalking America’s current “recovery”. Most notably, it seems that the financial fragility of the poorer section of US society has risen sharply in recent years, as unemployment remains high and real incomes and household wealth fall. (A revealing survey published last week, for example, suggested that the wealth of Hispanic and black families declined by 44 per cent and 31 per cent respectively between 2007 and 2010.)

Measuring this financial fragility – like measuring micro-level spending swings – is tough, since it is not an issue that economists have traditionally tracked. But one in seven Americans (about 50 million) are now thought to be living in poverty and a similar number in “food insecure” households. Meanwhile, six million are using food banks and 47 million are on food stamps. And when the Brookings Institution tried to look at this fragility issue a couple of years ago, by analysing how many households could find $2,000 in a hurry, it concluded that a quarter of families had no access to ready, rainy-day funds. “Although financial fragility is more severe among low-income households, a sizeable fraction of seemingly middle-class Americans are also at risk,” the study concluded. 

Make no mistake: Americans are worse off now than they were under Bush, and in turn worse off under Bush than they were under (Bill) Clinton. Althoug retailers are naturally wary of disclosing the timing of their sales based on paycheck cycles, it could be gathered anonymously by an impartial entity alike the Bureau of Economic Analysis. Summing it up merely solidifies an image of growing discontent as income and wealth slide and cause changes in consuming habits as a reflection.

Once massive Fed purchases of bonds are discontinued, who knows how far down this entire edifice of casino economy will fall. Certainly, there is no foundation of a real economy to fall back on. 

Blog mentions: are they citations?

RePEc is putting up for vote some modifications to its rankings, including whether blog mentions should be counted as citations. The blog mentions are taken from EconAcademics, to which the present blog seems to be the largest contributor. So my opinion may matter whether I consider my mentioning of a paper to be equivalent to a citation.

Sometimes, I point out bad papers, and this should obviously not count as a citation. Of course, people often cite rather bad works because they want to improve on them, so nothing unusual here. Also, people often cite other works for strategic reasons, because the cited author is the editor, a potential referee, or otherwise powerful. Yet we still count that as a citation. A blog post, however, is entirely dedicated to a paper. I do not discuss it because I somehow want to gain favors with someone, as I am incognito. For other bloggers that may be different, though. What you get from my confused statements is that I am not quite sure blog mentions should count as citations. What I observe, though, is that authors do treat them differently. Never do you see an author listing a particular citation on a CV or homepage, but they sometimes do it for blog mentions. For this last reason, I tend to think a blog mention is even more than a citation, as long as there is some control over which blogs count, something EconAcademics does.

Preventing the Next Catastrophe

Wisdom from David Romer.

Is better rewarding experience the solution to Third World development?

We all know that developing countries lag far behind developed ones, and that the usual factors of production are not sufficient to explain this difference. Hence the emphasis in policy circles on "institutions" and other vaporous concepts. Incentives for the accumulation of capital mysteriously do not seem to work either, as first highlighted by Lucas. What about incentives for accumulation of human capital?

David Lagakos, Benjamin Moll, Tommaso Porzio and Nancy Qian do not quite address human capital as in education, but rather experience. They document with micro-data from 36 countries that returns to experience are high in developed economies, but essentially flat in developing ones. With a growth accounting exercise, they then show that this difference accounts for a third of the remaining gap after having factored in human and physical capital differences. The question is then, why is experience not rewarded in developing economies? The classical explanation of why seniority pays revolves around job-worker match quality that improves over time, job-specific human capital accumulation, and the nature of dynamic job contracts. Why would this not apply? The authors this this is because total factor productivity and experience accumulation are complements. Some literature points out this may be true: Andrés Erosa, Tatyana Koreshkova and Diego Restuccia and Rodolfo Manuelli and Anand Sheshadri.

The elderly are not decumulating their wealth fast enough

According to the standard life-cycle model, you are supposed to accumulate assets while working and then decumulate them once retired. The optimal outcome is to die with nothing left, but bequest motives and uncertain lifetimes make that difficult. Still, assets should get reduced over time. Does this square with the data? No it does not, as the elderly cling to their wealth, especially their illiquid wealth such as housing, for which they make little attempts to extract any cash from, for example through reverse mortgages or annuities (previous posts I, II).

Agnese Romiti and Mariacristina Rossi try to understand why using European data on retirees. It turns out that financial literacy is a major factor here. Financially sophisticated households (identified by numeracy tests in the survey) have a more balanced portfolio, in particular with less illiquid real estate. They also make ends meet more easily, which the authors interpret as having a consumption path closer to optimal. Finally, they are actually decumulating their housing wealth, thus more likely to actively doing something about the illiquid wealth they are sitting on. As the paper is exploiting a data set that has several cohorts, it would be good to see whether the situation is actually improving, that is, whether younger cohorts do better.

German (Randian?) Solution: No Minimum Wage

Sometime ago, I remember watching former Fed Chairman Alan Greenspan testifying before the US Congress when he was asked about his views about the minimum wage. "There should be none," I reflexively blurted out. Knowing that Greenspan was a libertarian former acolyte of Ayn Rand, the answer was obvious and, true to form, that's what he said to the surprise of this congressman. This same debate is being played out in Europe as those championing reform of ossified economies point out that one of the features that makes German unemployment comparatively low to other European nations is its lack of a minimum wage. To be exact, there is no general minimum wage but sector-specific minimum wages arrived at through collective bargaining in the German corporatist system.

That is, would Portugal, Italy, Greece and Spain which are all suffering from very high unemployment be better off if they moved to a German-ish system? Many conservative commentators certainly think so, but it's important to point out that even Germans themselves are considering a EUR 8.5/hour minimum wage as pushed by the opposition Social Democratic Party (SPD). Indeed, it has already been passed in the upper house (Bundesrat):

The SPD is in favour of introducing a statutory minimum wage. On the official SPD website, they talk about the introduction of “humane” minimum wages. Indeed, after the regional elections in Lower Saxony in January, the changed majority situation in the Bundesrat permitted, according to the SPD website, to present a law proposal together with the Green Party for a minimum wage. It has been passed on 1 March 2013. This proposal demands € 8.5 for every employee in each industry sector – as enforceable right. They argue that this minimum wage is necessary in a social market economy and is, moreover, one essential element of human dignity. A minimum wage, according to Malu Dreyer, Prime minister of Rhineland-Palatinate (SPD), would bring both flexibility to the employers and security to the employees. It is now up to the Bundestag to approve this law proposal. 

In the FT, Alexander Privitera further argues that there is remorse on the social democrats' part for having pushed employment reforms that many cite for making Germany more competitive post-unification.: 

Mr [Gerhard] Schröder’s reforms helped this process. Limiting unemployment benefits pushed many to look for jobs. But the unintended consequence was that, today, the low-wage sector accounts for a remarkably high 20 per cent of all jobs. Germany’s victory in the battle against unemployment came at the cost of creating a two-tiered labour market – it has a flexible, low-wage sector and a higher-skilled, better-paid one that continues to be extremely rigid to this day.

Despite the fact that the Germans are promoting their reforms as a model to follow abroad, at home political parties still debate their benefits. Mr Schröder’s Social Democrats are convinced that the reduction in welfare benefits led to rising inequality, and argue that they should be partially reversed. Even some Christian Democrats now admit that a minimum wage might be necessary. One of the main lessons of the Schröder reforms is that timing matters. Pushing Europeans too hard, too quickly and all at the same time will not make them stronger. It could drive them over the cliff. 

Given what's happening in Germany, you have to wonder if the current CDU/FDP advocacy for the rest of Europe holds water. Not economically--you can have an endless debate on that, and people do--but politically insofar as left-leaning parties seem keen on introducing a "wage floor" that definitely is not in tune with the "Germany is a model for Europe--no pain, no gain" line of reasoning.

Is an imperfect monetary union leading to more volatility?

The theory of optimal currency areas initiated by Robert Mundell states that a monetary union should be beneficial between regions that have labor and capital mobility, fiscal transfer mechanisms and synchronized business cycles, or at least something approaching these conditions. In the case of Europe, this is clearly not met, but I guess the hope was that these conditions would eventually be met. The literature has been been rather superficial on what it means to not quite meet these criteria and what the consequences are. Yet, we have now techniques to model this better and test policies that could improve outcomes.

Philipp Engler and Simon Voigts do this with a DSGE model where they explicit the market structure, following the situation in the current European Monetary Union: no labor mobility, imperfect goods market integration, incomplete financial markets, no fiscal transfers at business cycle frequency, and asymmetric shocks. They find that adding a monetary union to the mix increases the volatility of consumption and employment significantly, essentially because country-specific monetary policy cannot be enacted. What can be done then? Engler and Voigts show that area-wide fiscal policy can do a lot of good, and much more than isolated fiscal policy would. And this is exactly what is missing in Europe. Absent this, one could imagine increasing labor mobility, but the trend in Europe right now seems to go the other way, with several countries thinking about restricting immigration from member countries. European integration is hard.