Explaining the Rise of Unemployment

Discussion in 'Politics & Religion' started by Ricter, May 29, 2012.

  1. Ricter


    Stimulating business "confidence" is of considerably lesser importance.

    "Explaining the Rise of Unemployment: Mostly lack of Demand
    Mark Thoma

    "Via the NBER, evidence from Atif Mian and Amir Sufi that "Weak household balance sheets and the resulting aggregate demand shock are the main reasons for historically high unemployment in the U.S. economy." This is also evidence for the "balance sheet recession" characterization of the downturn that many of us have been advocating (and it points toward balance sheet repair type policies that go along with this perspective as a key component of attempts to help the economy recover):

    " Explaining the Rise of Unemployment, by Laurent Belsie, NBER Digest: Unemployment rose dramatically during the Great Recession because highly indebted consumers slashed their spending, according to Atif Mian and Amir Sufi writing in What Explains High Unemployment? The Aggregate Demand Channel (NBER Working Paper No. 17830). They find that shocks to household balance sheets account for 4 million of the 6.2 million jobs lost in the United States between March 2007 and March 2009.

    " The stage was set for a substantial shock to household balance sheets during the housing bubble. Housing prices rose sharply, but homeowners borrowed even more aggressively. Between 2001 and 2007, household debt doubled from $7 trillion to $14 trillion. Homeowners' debt-to-GDP ratio rose sharply, from 0.7 to 1.0, during the same period. When housing prices collapsed, households were stuck with much higher debt, forcing them to cut back spending, which has shaped the depth and length of the economic slump that followed.

    " Earlier research by these authors and others had already demonstrated the link between dramatically weaker household balance sheets and plummeting consumer spending. In high-debt U.S. counties, housing prices fell by nearly 30 percent from 2006 to 2010. Households in those counties slashed consumption of durable goods and even cut back grocery spending. In the 10 percent of U.S. counties with the lowest debt-to-income ratios, house prices didn't fall and the fall in consumption wasn't as dramatic. Consumption of durable goods fell 20 percentage points more in high-debt counties than in low-debt counties.

    " The high-debt counties got that way, at least in part, because of the housing bubble. During the boom, housing prices didn't rise uniformly: the biggest increases came in counties with terrain or regulatory environments that made it more difficult to build new homes. In turn, homeowners in those counties were more apt to boost their debt to unprecedented levels. This finding is important not only because it explains the variability of debt, but also because it points out the absence of a construction boom and bust in many of the most indebted counties.

    " Mian and Sufi find that employment losses in the non-tradable sector were greater in the U.S. counties with the most highly indebted households than in other counties. In the tradable sector, however, employment losses were more uniform across the United States. The relationship between high debt-to-income ratios and the sharp decline in non-tradable goods purchases allows the authors to estimate the impact of shocks to balance sheets, and therefore on aggregate demand and on nation-wide employment.

    "Our main insight is that the relation between demand shocks and employment losses in industries catering to local demand can be used to estimate the effect of aggregate demand on aggregate unemployment," the authors conclude. "We believe that weak household balance sheets and the resulting aggregate demand shock are the main reasons for historically high unemployment in the U.S. economy."

    As I've said before, no one out here is turning down sales because they're "worried" about the future, which is what you'd observe if demand was up but confidence was down. At the very best for the supply siders is the circumstance that both demand and confidence are down. Is confidence down? What are business owners and managers saying?
  2. I don't care that Obama inherited the worst economic crash since the great depression and a five trillion dollar bill for the wars and unsustainable tax breaks. I want more money and a better lifestyle NOW !! Dammit !!
  3. Unemployment rose dramatically during the Great Recession because highly indebted consumers slashed their spending,


    I'm confused here, consumers slashed spending?

    If the consumer was spending $2 a gallon for gas back then and now spending $4 for a gallon of gas, can't see how the household budget for gasoline got slashed.

    Ditto on heating and other energy costs for the home.

    Now property/school taxes went up, how has the consumer slashed his household spending budget for taxes?

    Paying more for energy or taxes is not going to increase employment.

    Not sure on any of this though....:cool:
  4. this cant be true. every card carrying right wing fox listening republican just knows that all busines needs is more tax cuts and they will hire everyone in sight.
  5. Tsing Tao

    Tsing Tao

    You're absolutely correct, nutmeg. The spending portion of the household budget (not personal savings) has simply been reallocated towards higher inflation items (food and energy). As a result, discretionary spending has flat lined as consumer credit is both shunned and not nearly as widely available as banks have cut back in lending practices. Because if you don't have it to spend, then you have to borrow it. But if you don't want to borrow or can't borrow, then you can't spend it. It's just a math equation, right?

    Monetary policy is to blame for most of the inflation (to protect the banks), and fiscal policy is to blame for higher costs to business entry and poor regulation (as it is not regulation itself that prevents spending, but poor regulation).

    But the argument that unemployment rose because demand suffered is a rather big "duh". It's like saying the street and sidewalk are wet because we had a rainstorm.
  6. Throw in the housing prices dropping to new lows again as well.

    Less money = less spending. Period.
  7. Tsing Tao

    Tsing Tao

    Yes, but the housing prices dropping just goes with the denial of additional credit, as consumers using their houses for HELOCs can no longer get the equity they need to continue spending the way they were.