Quantifying the Lasting Harm to the U.S. Economy from the Financial - PowerPoint PPT Presentation

Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis Robert E. Hall Hoover Institution and Department of Economics Stanford University Lessons from the Financial Crisis and the Great Recession for Economic Modelling Jerusalem 20 June 2014 · 1

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Components of the Shortfall of Output, 2007 through 2013 Percentage points Output 13.3 Productivity 3.5 Capital 3.9 Population 1.3 Labor-force participation 2.4 Employment rate 2.2 Hours per week 0.8 Labor quality -0.3 Business fraction -0.5 3

Productivity Focus on total factor productivity 4

Productivity Focus on total factor productivity Combine utilization with TFP generally 4

Productivity Focus on total factor productivity Combine utilization with TFP generally Avoid duplication of Fernald’s paper at the Macro Annual conference · 4

Productivity Shortfall is not generally the result of low factor utilization 5

Productivity Shortfall is not generally the result of low factor utilization Fernald concludes that the shortfall arises from a return to normal, low TFP growth rates from the growth spurt 5

Productivity Shortfall is not generally the result of low factor utilization Fernald concludes that the shortfall arises from a return to normal, low TFP growth rates from the growth spurt The shortfall of 3.5 percentage points is not statistically surprising—the standard deviation of 6-year changes is 4.4 percent · 5

Investment Driven by demand for output and the discount rate applicable to the future marginal product of capital 6

Investment Driven by demand for output and the discount rate applicable to the future marginal product of capital Output demand fell and discounts rose, despite falling interest rates · 6

Capital wedge � k t � q t = κ − 1 + 1 k t − 1 7

Capital wedge � k t � q t = κ − 1 + 1 k t − 1 1 � π t � 1 + r k,t = + (1 − δ t ) q t +1 p k,t +1 q t p k,t k t 7

Capital wedge � k t � q t = κ − 1 + 1 k t − 1 1 � π t � 1 + r k,t = + (1 − δ t ) q t +1 p k,t +1 q t p k,t k t g t = r k,t − r f,t · 7

The Capital Wedge for Two Values of the Adjustment Cost κ 20 20 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 1990 1993 1996 1999 2002 2005 2008 2011 1990 1993 1996 1999 2002 2005 2008 2011 8

The Capital Wedge for Two Values of the Adjustment Cost κ 20 20 18 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 1990 1993 1996 1999 2002 2005 2008 2011 1990 1993 1996 1999 2002 2005 2008 2011 κ = 0 κ = 2 · 8

The S&P Risk Premium, 1960 through 2012 30 25 20 15 10 5 0 ‐ 5 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 9

Plant and equipment investment 1200 1200 1000 1000 800 800 600 600 400 400 200 200 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 10

Plant and equipment investment 1200 1200 1000 1000 800 800 600 600 400 400 200 200 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Plant Equipment · 10

IP and housing 1200 1200 1000 1000 800 800 600 600 400 400 200 200 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 11

IP and housing 1200 1200 1000 1000 800 800 600 600 400 400 200 200 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 IP Housing · 11

Capital/Output Ratio, with 1990-2007 Trend and CBO-Based Forecast 1.25 1.20 1.15 1.10 Trend, 1990 ‐ 2007 1.05 1.00 0.95 CBO ‐ based forecast 0.90 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 12

Unemployment and labor-market tightness Think of unemployment as an aspect of labor supply—unemployment is a negative factor for employment 13

Unemployment and labor-market tightness Think of unemployment as an aspect of labor supply—unemployment is a negative factor for employment DMP says unemployment depends on tightness—job-finding is faster in a tighter market and entry rates to unemployment are also somewhat lower 13

Unemployment and labor-market tightness Think of unemployment as an aspect of labor supply—unemployment is a negative factor for employment DMP says unemployment depends on tightness—job-finding is faster in a tighter market and entry rates to unemployment are also somewhat lower Look at tightness from the perspectives of employers, employed individuals, and jobseekers 13

Unemployment and labor-market tightness Think of unemployment as an aspect of labor supply—unemployment is a negative factor for employment DMP says unemployment depends on tightness—job-finding is faster in a tighter market and entry rates to unemployment are also somewhat lower Look at tightness from the perspectives of employers, employed individuals, and jobseekers Study role of UI benefits · 13

Average Time to Fill a Job Vacancy, JOLTS, 2001 through 2012 1.0 0.9 0.8 0.7 0.6 Months 0.5 0.4 0.3 0.2 0.1 0.0 2000 2002 2004 2006 2008 2010 14

Average Weekly Hours of Work, Current Population Survey, 1948 through 2013 42 41 40 39 38 37 36 35 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 15

Job-Finding Rate among the Unemployed, 1990 through 2013 35 30 25 20 15 10 5 0 1990 1993 1996 1999 2002 2005 2008 2011 16

Indexes of the Job-Finding Rate by Duration of Unemployment 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 17

Indexes of the Job-Finding Rate by Duration of Unemployment 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Low duration High duration · 17

Unemployment Exit Rates and Change in Composition of Unemployment, 2007-2009 Change in Normal exit percent of Source rate, percent unemploy- per month ment, 2007 to 2009 Layoff 64.7 -2.2 Permanent loss 41.4 17.7 Temp job 51.1 -0.9 Quit 55.7 -5.0 New entrant 49.2 -1.6 Reentrant 48.7 -8.0 18

Matching Efficiency for Unemployed Jobseekers 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 2001 2003 2005 2007 2009 2011 2013 19

Overall matching efficiency (from Hall and Schulhofer-Wohl (2013)) 1.75 1.50 1.25 1.00 0.75 0.50 fixed component weights 0.25 fixed distribution of observables 0.00 2001 2003 2005 2007 2009 2011 20

Inflows to unemployment from lost jobs 50 45 40 Percent of unemployment 35 30 Permanent job loss 25 20 15 Layoff 10 5 0 1994 1997 2000 2003 2006 2009 2012 21

Other inflows to unemployment 50 50 45 45 40 40 Reentrant Percent of unemployment Percent of unemployment 35 35 30 30 25 25 20 20 Quit 15 15 Temp job ended 10 10 5 5 New entrant 0 0 1994 1997 2000 2003 2006 2009 2012 1994 1997 2000 2003 2006 2009 2012 · 22

Chodorow-Reich and Karabarbounis (2013) 12 UI, before adjustment 10 Percent of trend productivity 8 6 4 UI, after adjustment 2 Other benefits 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 23

High unemployment following the crisis By far the most important factor is the shift among inflows to unemployment toward jobseekers with low normal job-finding rates 24

High unemployment following the crisis By far the most important factor is the shift among inflows to unemployment toward jobseekers with low normal job-finding rates These are losers of permanent jobs and workers on layoff, waiting for possible recall 24

High unemployment following the crisis By far the most important factor is the shift among inflows to unemployment toward jobseekers with low normal job-finding rates These are losers of permanent jobs and workers on layoff, waiting for possible recall Decline in inflows from quits and reentry, with high normal job-finding rates 24

High unemployment following the crisis By far the most important factor is the shift among inflows to unemployment toward jobseekers with low normal job-finding rates These are losers of permanent jobs and workers on layoff, waiting for possible recall Decline in inflows from quits and reentry, with high normal job-finding rates No much evidence that UI benefits extensions had more than a modest role · 24

Standard and Fixed-Weight Measures of Labor-Force Participation, 1990 through 2013 75 85 70 80 Overall labor ‐ force participation rate (left scale) 3.0 65 75 percentage points 60 70 Fixed ‐ weight average of labor ‐ force participation rates by sex and age (right scale) 1.9 percentage 55 65 points 50 60 1990 1993 1996 1999 2002 2005 2008 2011 25