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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

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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 ·

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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

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Productivity

Focus on total factor productivity

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Productivity

Focus on total factor productivity Combine utilization with TFP generally

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Productivity

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

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Productivity

Shortfall is not generally the result of low factor utilization

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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

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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 ·

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Investment

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

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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 ·

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Capital wedge

qt = κ kt kt−1 − 1

  • + 1

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Capital wedge

qt = κ kt kt−1 − 1

  • + 1

1 + rk,t = 1 qtpk,t πt kt + (1 − δt)qt+1pk,t+1

  • 7
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Capital wedge

qt = κ kt kt−1 − 1

  • + 1

1 + rk,t = 1 qtpk,t πt kt + (1 − δt)qt+1pk,t+1

  • gt = rk,t − rf,t

·

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The Capital Wedge for Two Values of the Adjustment Cost κ

2 4 6 8 10 12 14 16 18 20 1990 1993 1996 1999 2002 2005 2008 2011 2 4 6 8 10 12 14 16 18 20 1990 1993 1996 1999 2002 2005 2008 2011

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The Capital Wedge for Two Values of the Adjustment Cost κ

2 4 6 8 10 12 14 16 18 20 1990 1993 1996 1999 2002 2005 2008 2011 2 4 6 8 10 12 14 16 18 20 1990 1993 1996 1999 2002 2005 2008 2011

κ = 0 κ = 2 ·

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The S&P Risk Premium, 1960 through 2012

‐5 5 10 15 20 25 30 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 9

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Plant and equipment investment

200 400 600 800 1000 1200 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 200 400 600 800 1000 1200 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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Plant and equipment investment

200 400 600 800 1000 1200 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 200 400 600 800 1000 1200 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Plant Equipment ·

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IP and housing

200 400 600 800 1000 1200 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 200 400 600 800 1000 1200 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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IP and housing

200 400 600 800 1000 1200 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 200 400 600 800 1000 1200 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

IP Housing ·

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Capital/Output Ratio, with 1990-2007 Trend and CBO-Based Forecast

0.90 0.95 1.00 1.05 1.10 1.15 1.20 1.25 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023

Trend, 1990‐2007 CBO‐based forecast

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Unemployment and labor-market tightness

Think of unemployment as an aspect of labor supply—unemployment is a negative factor for employment

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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

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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

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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 ·

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Average Time to Fill a Job Vacancy, JOLTS, 2001 through 2012

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 2000 2002 2004 2006 2008 2010

Months

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Average Weekly Hours of Work, Current Population Survey, 1948 through 2013

35 36 37 38 39 40 41 42 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 15

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Job-Finding Rate among the Unemployed, 1990 through 2013

5 10 15 20 25 30 35 1990 1993 1996 1999 2002 2005 2008 2011 16

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Indexes of the Job-Finding Rate by Duration of Unemployment

0.0 0.5 1.0 1.5 2.0 2.5 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 0.0 0.5 1.0 1.5 2.0 2.5 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

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Indexes of the Job-Finding Rate by Duration of Unemployment

0.0 0.5 1.0 1.5 2.0 2.5 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 0.0 0.5 1.0 1.5 2.0 2.5 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

Low duration High duration ·

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Unemployment Exit Rates and Change in Composition of Unemployment, 2007-2009

Source Normal exit rate, percent per month Change in percent of unemploy- 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

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Matching Efficiency for Unemployed Jobseekers

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 2001 2003 2005 2007 2009 2011 2013 19

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Overall matching efficiency (from Hall and Schulhofer-Wohl (2013))

0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2001 2003 2005 2007 2009 2011 fixed component weights fixed distribution of observables

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Inflows to unemployment from lost jobs

5 10 15 20 25 30 35 40 45 50 1994 1997 2000 2003 2006 2009 2012 Percent of unemployment

Layoff Permanent job loss

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Other inflows to unemployment

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

·

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Chodorow-Reich and Karabarbounis (2013)

2 4 6 8 10 12 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Percent of trend productivity UI, before adjustment UI, after adjustment Other benefits 23

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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

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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

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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

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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 ·

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Standard and Fixed-Weight Measures of Labor-Force Participation, 1990 through 2013

60 65 70 75 80 85 50 55 60 65 70 75 1990 1993 1996 1999 2002 2005 2008 2011

Overall labor‐force participation rate (left scale) Fixed‐weight average of labor‐force participation rates by sex and age (right scale)

3.0 percentage points 1.9 percentage points 25

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Contributions of Sex-Age Groups to Participation Shortfall, 2007 through 2013

Age Men Women Sum 16-19 0.06 0.17 0.23 20-24 0.18 0.05 0.24 25-34 0.20 0.11 0.31 35-44 0.04 0.13 0.17 45-54 0.19 0.35 0.53 55+ 0.27 0.43 0.70 All 0.95 1.24 2.19

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Conventional and Extended Measures of the Labor Force

50 52 54 56 58 60 62 64 66 68 70 1994 1997 2000 2003 2006 2009 2012

Percent of population Standard measure Add marginally attached Add discouraged

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Increments to the Labor-Force Participation Rate from Inclusion of Marginal and Discouraged Individuals

Year Marginal Discouraged Both 2008 0.05 0.02 0.08 2009 0.30 0.16 0.46 2010 0.41 0.32 0.73 2011 0.43 0.24 0.67 2012 0.39 0.20 0.60 2013 0.32 0.18 0.50

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Five Quantiles of the Distributions of Real Weekly Earnings, 2000 through 2012

5.0 5.5 6.0 6.5 7.0 7.5 8.0 2000 2002 2004 2006 2008 2010 2012 90th 75th 50th 25th 10th 5.0 5.5 6.0 6.5 7.0 7.5 2000 2002 2004 2006 2008 2010 2012 90th 75th 50th 25th 10th

·

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Joint Distribution of Market and Reservation Wages

‐4 ‐3 ‐2 ‐1 1 2 3 ‐4 ‐3 ‐2 ‐1 1 2 3

Market wage Reservation wage Participate Do not participate

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Participation Reductions from 11-percent Tax on Low-Wage Workers Compared to Actual Declines in Participation

Participation rate, percent

  • f population

Men Women Base parameters 72.9 59.2 With tax 70.1 57.2 Decline, based on model 2.8 1.9 Actual, 2007 73.2 59.3 Actual, 2012 70.2 57.7 Actual decline 3.0 1.6

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Number of Recipients of Social Security Disability Benefits Aged 18 through 64, in Millions

2 4 6 8 10 12 14 1996 1998 2000 2002 2004 2006 2008 2010 2012 Millions of people 32

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Medicaid Recipients

10 20 30 40 50 60 70 80 1990 1993 1996 1999 2002 2005 2008 2011 Millions of beneficiaries 33

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Beneficiaries Receiving Food Stamps

10 20 30 40 50 60 1990 1993 1996 1999 2002 2005 2008 2011 Millions of beneficiaries 34

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Summary of Sources of Decline in the Labor-Force Participation Rate, Percentage Points of Population

Total decline in participation relative to trend 3.0 Sex-age mix effect 1.1 Marginal and discouraged individuals 0.5 Increase in disability benefit recipients over trend 0.4 Residual (rising primary wages, rising tax rates) 1.0 Sum of components 3.0

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Effects of Boost to Product Demand

Comnponent Contribution to shortfall Immediately Within a few years Ultimately Productivity 3.5 No No Possibly Capital 3.9 No A little Yes Unemployment 2.2 Partly Mostly Yes Participation 2.4 Partly Partly Partly

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