Thursday, March 19, 2015

America: Is There a Problem with Your Rich People?

Here's two interesting bits of research.

Let me lay out some stylized facts:
  • There's a broad feeling across Democrats and Republicans that there's something wrong with America.
  • Republicans tend to view this as a combination of Democratic policies holding back the rich and encouraging the poor.
  • Democrats tend to view this as "the game is rigged in favor of the rich".
  • America has a problem with the appropriate valuation of housing.
  • America has a problem with not enough people being interested in working.
I think that's a set that most would think form a reasonable description. So what do we make of these two bits of research?

1) Adelino, Schoar and Severino have a new NBER working paper entitled "Changes in Buyer Composition and the Expansion of Credit During the Boom". The story we've been telling the last 5 years is that the financial crisis was brought on by making mortgage loans to poor people who couldn't afford the payments. This is known as decoupling (of income from ability to make payments). Adelino et al. provide evidence that this is false: decoupling is an artifact of analyzing the data by zip codes. Instead, if you look at individuals, you see no evidence of decoupling.
... There were no severe distortions towards poor or low-income people in the way banks allocated capital at loan origination.
Instead, what we see is rich people borrowing too much because the bubble looked too good to pass up:
... Lenders and borrowers bought into high house price expectations and ignored potential equilibrium effects from a large fraction of borrowers being levered to their maximum ...
The paper includes a chart showing that the portion of mortgage delinquencies among the rich increased from 7% to 32% from 2003 to 2006.

2) Robert Hall, one of the senior generation of macroeconomists on everyone's medium list for an eventual Nobel Prize reported to a Republican Congress that, now that the Great Recession is a memory, the problem in the labor market is the participation of ... the rich. Check it out:
Of course, this is showing that lack of labor force participation has been a consistent reason why the poor are poor. But what is new is that this problem is distinctly not getting worse. Instead what we are seeing is roughly a 5% decline in labor force participation across the top half of the income spectrum over the last generation. That roughly explains all of the decline in U.S. labor force participation over this period. The raw numbers are ridiculous: labor force participation by teenagers from the top quartile (the blue and green at the top) is down by 16%.
In particular, the data do not seem to support the view that the social safety net is discouraging participation ...
Note that these numbers are over the course of a generation, so we're not seeing business cycle effects (in fact it's pretty hard to see the two recessions in this chart). Further, this is participation. That includes people who are unemployed: so this isn't about a lack of jobs but rather a lack of interest in working at all.

Let me summarize: rich adults made stupid real estate purchases, and are raising kids who aren't interested in work. So, the problem with America is ... the OC.

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