Tuesday, May 5, 2015

Today's Links

1. My good friends Daniel Yu and Jason Kang are up to amazing things. Yu runs Reliefwatch, a tech startup that helps clinics in the developing world avoid shortages of medical supplies. Kang helped to design Highlight, a powdered bleach additive that makes decontamination against infectious disease much easier.

2. The IMF has released a new dataset on capital controls. And here's an amazing resource that explains how to use basically any major survey dataset.

3. Graph: How the market value of tech firms has evolved from 1980 to present.

4. When the State Speaks, What Should It Say? There is a lot that this book (by Corey Brettschneider) can bring to bear on recent debates about if and how the government should intervene against private discrimination.

Saturday, May 2, 2015

Student Loans and the Next Crisis

These are boom times for student debt. Now 10 percent of all household debt, it has nearly doubled in the past five years. That growth comes entirely from new lending by the federal government.

Recent federal efforts to shut down for-profit colleges, a major source of demand for student loans, may not be enough. The federal takeover of the student-loan industry in 2010 was a shock to the supply of student loans, just like the boom in private securitization was to residential mortgages during the 2000s. We have seen this movie before. If the government is to prevent either another debt-driven economic downturn or large write-offs at the taxpayer's expense, the supply of student loans must pull back.

This will be difficult, and not only because students are a sympathetic bunch. The more meaningful obstacle will be government itself. If the Fed is to regulate the supply of student loans -- which, since the financial crisis, is responsible for such regulation -- it will have to knock on the Department of Education's door. And the Department of Education doesn't think of itself as a source of macroeconomic risk, even though it should.

The worry is that government does this sort of self-regulation badly. Think of Fannie Mae and Freddie Mac, which enjoyed government backing in the boom and then imploded in the bust. A more apt analogy may be the many developing countries where the state and state-run institutions are a large and direct source of credit and not merely of loan guarantees, as were Fannie and Freddie.

Without careful thought to the design of institutions, state-run lending has a tendency toward unpleasant endings. Inattentive to risk, the government starts a credit boom. It then fails to rein it in, because prudence never attracts a political constituency. When the bust comes, government faces an unattractive choice: It can forgive debts at great cost to taxpayers, or it can leave the borrowers saddled and plunge the economy deeper into distress.

Why are student loans a danger? More than a third of young families now have student debt and carry a median balance of $17,000, according to the 2013 Survey of Consumer Finances, up from a fifth of households with a median balance of $10,000. Those with bachelor's degrees pay 6.5 percent of their annual income in student-debt service. Student loans surpassed auto loans as a source of debt in 2010, but it remains less than mortgages. And delinquency rates are up. If the level of student debt does not make it major risk today, its explosive growth guarantees it will be in a few years.

The good news, say the defenders of the student-loan boom, is that government does not face any credit risk. They are correct in that student loans are not dischargeable in bankruptcy but wrong in a more substantive sense. If student-loan defaults were to soar, they would be the first ones calling for government to forgive the loans so that the economy avoids a recession. So the option of collecting on federally-owned student debt via the tax system -- the final recourse that the government has -- may not be a viable one if the debt boom continues.

A stronger defense is that young people are swapping student debt for other forms of debt, such as auto loans and mortgages. In fact, more detailed data from the Survey of Consumer Finances show that debt burdens for young households are down since 2010. Those with student debts also tend to be pretty well off -- for the most part, they have college degrees -- and so maybe they can handle it. Yet much of the decline in home and auto loans is cyclical. It's not clear whether the growth in student loans will look so much like a "swap" when these other forms of borrowing return.

Better to get the institutions right, then, when we can. To its credit, the Obama administration has worked hard to establish rules that prevent the government from financing educations at institutions that don't improve their students' job prospects. Yet these rules are "microprudential," in the regulatory terminology that has so far been limited to banks. Student lending is fast becoming a macroprudential concern.

Friday, April 17, 2015

Today's Links

1. Resource conflicts of the future.

2. This is what looks like when some of the world's best development economists spar off in a blog post comment section.

3. Congress will grant trade promotion authority, conditional on labor and environmental standards. My sense has always been that economists are pretty unsure as to whether such standards actually help the developing world. Here, for example, is the first real piece of research on the effects of child-labor bans -- and the result is that the ban actually caused child labor to increase and child wages to fall. On the other hand, Nancy Birdsall argues that developing countries end up "importing" the environmental standards of their richer trading partners -- which makes you think that maybe these standards don't undermine developing countries.

4. I did not realize that Alan Greenspan wrote papers on how to measure mortgage-equity withdrawals. Makes you wonder how he missed the housing bubble, given that those withdrawals rose to 8 percent of disposable income in the 2000s.

Notes on Fukuyama and Walzer

Political Order and Political Decay
by Francis Fukuyama
Farrar, Strouss and Giroux, 672 p.p., $22.00

The Paradox of Liberation
by Michael Walzer
Yale University Press, 192 p.p., $18.00

*   *   *

Frank Fukuyama and Michael Walzer came to Princeton in the last few days to give talks. Both were great: Fukuyama brought historical insights into the process of building effective state institutions, and Walzer compared trends in the post-colonial world. Here I've tried to pull together my notes and recollections on both.

The question of how to build a political order, Fukuyama argues, ought be divided into three. First, is there a central state with control over the territory it claims? Second, does that state obey rule of law -- that is, does the political authority see its role as one of an impartial agent, or does it use its role for corruption and extraction? Third, does real democratic accountability exist?

Fukuyama contends that far too much time has been spent thinking about the first and the third and the West is at a loss when asked to help achieve the second. The result is that Western advice is counterproductive and ahistorical. Fukuyama pointed to the historical transformations of rule of law in the U.S., beginning with the establishment of the spoils system under Andrew Jackson and then the switch into a professionalized civil service under the Pendleton Act of 1883.

Making institutions non-extractive and neutral, Fukuyama suggested, is where the pressure of a burgeoning economic middle class might actually matter -- as opposed to democracy, where the middle-class argument has struggled as of late. He named Ukraine, India, and Brazil as examples here.

Ukraine, he thought, faced a choice not just between Russia and the West, but also between the extractive institutions embodied by Yanukovych and backed by Russia and the liberal institutions that Yatsenyuk, Poroshenko, and European Union trade connections all seemed to promise. In India, a new professional class had tossed the long-incumbent Congress Party out of power for the BJP, whose platform on the issue of corruption sounds so much like the historical Western civil-service movements as to be eerie. And Fukuyama suggested that Brazil may be on the edge of a similar change, as the middle class has had enough with the Dilma Rousseff government's extractive management of Petrobras, the oil giant.

Why, Walzer asks, did secular national liberation movements fail and give way to religious reaction? His book is as a set of three case studies: Israel, India, and Algeria.

The early left-wing Zionism that had been so hostile to Judaism had capitulated to a right that saw Israel as a Jewish religious state, not a secular democratic state for the Jewish people. In India, progress for women under Nehru stalled out under pressure from Hindu nationalism. And, in Algeria, the secular socialist FLN was overthrown by the Islamist FIS.

Walzer's answer begins by pointing to the oddity that the liberators often seem to be at war with the people they are supposed to be liberating. That is, in the desire of the national liberation movement to modernize their countries, they branded too much of their nation's cultural and religious heritage as outmoded -- and were left with a cultural husk that they were unprepared to fill.

He points to the tight bond of religious and social ritual to crucial life events -- coming of age, marriage, birth, death -- and asks how a social system that offered no substitute for these gatherings could ever be fulfilling. The secularists, in modernizing, failed to build a new cultural structure. A cheap commercial Westernism often filled the void. Yet this was unsatisfying. Dissatisfaction led to its replacement by the return of the religious forces the socialist movement had discarded.

Tuesday, April 7, 2015

Today's Links

1. From this month's Journal of Finance: "This paper offers the first empirical investigation of the influence of credit default swaps (CDS) on subprime mortgage defaults during the financial crisis...we find that CDS coverage significantly increased the probability of loan delinquency."

2. Robert Putnam, E.J. Dionne, and Richard Reeves have a great podcast discussion of Putnam's new book.

3. Susan Dynarski on how to close the education gap between rich and poor.

4. Is economic history dead? The Economist asks. I would say no, and that important works in a new vein of economic history have been published quite recently. See the work of Richard Hornbeck and Dave Donaldson, Nathan NunnMelissa DellNathaniel Baum-SnowHans-Joachim Voth and Nico Voigtlander. And that's just for starters. They are tackling questions that it is sometimes hard to believe economics can answer -- deep historical questions -- and doing so convincingly.

The Pain in Spain, Part 2

All of Spain's housing bubble, I showed last week, can be explained by the boom-and-bust in mortgage debt. Had there been no bubble, real home prices would have risen 30 percentage points less than they did at their peak and would not have declined at all since the peak.

Today, we look at another major piece of the fallout of Spain's housing bubble -- unemployment -- and the distortionary effects that mortgage debt had on the Spanish labor market.

In February, 23.2 percent of the Spanish workforce was unemployed, down from a high of 26 percent in 2013, and the highest of any Eurozone economy except Greece.

Those numbers are astonishingly high, at least from an American perspective. It is important to remember, however, that a "normal" rate of unemployment for Spain is high. The average unemployment rate from 1985 to 2007 was about 15 percent. That doesn't make 23-percent unemployment any less painful, but it does give a more realistic view of the kind of output gap it implies.

The data I use, to review what was in the first post, come from several Spanish government agencies and are measured at the province level. Importantly, the data for employment only go back to 2002 and on sector-level employment to 2008, so intuitively, most of the analysis will be driven by the bust rather than the boom. (If earlier data exist, please email me.)

Here's what I find.

First, the effects of mortgage debt on the labor market are large. For every 10-percent increase in monthly mortgage debt issuance, the employment rate rises 0.2 percentage points and the unemployment rate drops 0.2 percentage points. (For reference, mortgage debt issuance rose about tenfold during the boom.)

These labor-market effects are distortionary. A 10-percent increase in mortgage debt issuance leads to a 5-percent increase in construction employment, a small increase in services employment, and small decreases in agricultural and industrial employment, as workers reallocate between industries in response to relative demand for labor.

With the labor market -- especially construction -- so dependent upon mortgage debt, it's easy to see that the collapse of the Spanish housing bubble plays a key role in explaining high Spanish unemployment.

Had had the Spanish housing bubble never popped, I estimate the unemployment rate would currently be 14 percent, about 10 percent lower than it is today. Put differently, Spain's housing bubble fully explains why its downturn was so much worse than those of, say, France or the United Kingdom.

How can we say that? We've already seen mortgage debt affected the labor market through construction employment. We can use that knowledge -- it helps to know what instrumental variables (IV) are here -- to estimate a counterfactual scenario in which Spain's housing bubble didn't pop. The first counterfactual, labeled "OLS", is more crude -- it tries to look at the direct link between mortgage debt and employment.

Now, it's naive to think that Spain's problems would be solved had the bubble not popped. It would have had a gigantic, distortionary housing bubble! The better idea is not to have one at all.

What would have unemployment looked like in that case? Due to the limitations of my data, I'm not able to run the IV estimate in green any further back. From the OLS estimate, we can see that the portion of housing boom between 2003 and 2008 probably pulled down the unemployment rate. Notably, Spain's unemployment rate declined substantially between 1995 to 2008, which is the time period of the housing bubble.

So we can't really say where Spain would be in terms of unemployment had the bubble never happened. But the bust had a devastating effect.