My AFR column today summarises a handful of fascinating new papers on the US slump.
US Recession Hits Home, Australian Financial Review, 18 October 2011
Empirical economists are a perky bunch. Give us a badly-designed policy, a natural disaster or an economic calamity, and we’ll use it to learn something about human behaviour.
And so it is with the latest recession in the US. While Tea Party Republicans force America to repeat the policy mistakes that prolonged the Great Depression of the 1930s, a spate of fascinating new research papers have analysed the current slump.
Some have set about documenting the human impact of the crisis. Michael Hurd and Susann Rohwedder argue that what made this latest crisis so severe was the simultaneous shock to the sharemarket, housing market and labour market. They point out that the impact of the 1981-82 and 2001 recessions was muted by the fact that house prices still rose.
For Americans, the 2008-09 recession brought a triple-whammy. The US sharemarket almost halved in value at its worst point. Average house prices fell by more than a tenth (more than a third in California and Florida). Unemployment doubled to over 10 percent (it is now 9 percent).
The impact was particularly felt by men, who accounted for 71 percent of the job losses. This had the effect of speeding up a long trend towards the feminisation of the labour market. In late-2009, there were equal numbers of men and women in the US labour market (most likely for the first time in history). Wags call this the ‘mancession’.
But regardless of demographics, the US recession has spread its tentacles across society. Thirty-nine percent of households experienced unemployment, had negative equity in their house, or were in arrears in their house payments. Real median household income in 2010 was 6 percent lower than it had been before the crisis.
The wounds will take a long time to mend. Rajashri Chakrabarti and colleagues at the New York Federal Reserve find that a fifth of Americans withdrew money from shares when the market bottomed out, locking in their losses. And in an exhibition of Keynes’ ‘paradox of thrift’, US households are now focused on paying down mortgage debt, hampering the prospect of a consumer-led recovery.
One result of a ghastly labour market is that the average American is working 2 hours less per week than before the recession. With time use surveys, Mark Aguiar and coauthors ask the question: what did Americans do with the additional hours? They find that about one-third of the time went to household chores. More than half has gone to leisure activities, such as socialising, reading and watching television.
If you’re looking for an upside to the downturn, it’s that recessions are on average good for population health. For example, the share of Americans reporting poor health or trouble sleeping has fallen during the recession. With shorter hours and fewer jobs to go around, it’s not surprising that work-related illness has declined.
But for those handing over their house keys, it’s a different story. Combining postcode-level data on foreclosures and hospital visits, Janet Currie and Erdal Tekin show that in places where more homes are repossessed, there is a spike in suicide attempts and admissions for anxiety-related conditions such as hypertension. Given that 1 in 45 US homes received a foreclosure filing in 2010, this suggests that the housing crisis is one of the nastiest communicable diseases to hit America in a long time.
What impact has the crisis had on the attitudes of Americans? In a short paper, Betsey Stevenson and Justin Wolfers show that trust in politicians tracks the business cycle. Not surprisingly, then, a Gallup survey that has been running since 1972 shows voters’ confidence in the US Congress at an all-time low. Americans have never loved their legislators, but now they loathe them.
Finally, Angus Deaton regards the financial crisis as a chance to ‘stress test’ the idea of happiness as a measure of wellbeing. Since 2008, Gallup has been polling 1000 Americans daily. Deaton finds that happiness responds more to the state of the sharemarket than to fundamental measures such as income and unemployment. From this, he concludes that happiness is too sensitive to ‘short term ephemera’, and serves as a poor proxy for the state of the aggregate economy.
If there’s a silver lining out of the US recession, it’s that it’s raised plenty of interesting questions for academics to answer. Many economists would prefer a second fiscal stimulus package; but for now, the research findings will have to be our solace.
Andrew Leigh is the federal member for Fraser.
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