UPDATED at end.
Let’s flesh out the relationship the IMF found between foreclosures and “structural unemployment”, where education-mismatch were estimated to account for 0.5% of unemployment and foreclosures estimated to account for 1.0% to 1.25% of unemployment. I think it’s important to check the relationship between foreclosures and state budgets.
This is with California removed, because with it’s $45.5bn dollar deficit and 250,000 foreclosures it dwarfs the scale and values of the results. The result is highly statistically significant. (These results are robust with outliers included and removed, as well as with log-scale of both varaiables.)
So foreclosures are closely linked with what Ezra Klein calls the anti-stimulus, and what Bruce Bartlett summarizes as: “When the history of the current crisis is written, much of the blame will be placed on the sharp fiscal contraction of state and local governments…I think economists will view this as a preventable error equivalent to the Fed’s passive shrinkage of the money supply in the early 1930s.” I can’t find how the IMF report would have corrected for this, so even at the highest estimates of structural unemployment it is likely that we are still seeing a demand story.
How would this mechanism work? Foreclosures could work as a proxy for states relying on the housing bubble for budgeting purposes. And foreclosures themselves also have extensive municipality costs associated with them. As we discussed here:
At $20K a pop, every third vacant and unsecured property a bank leaves behind is a teacher’s salary. Think about that when you think about bank’s mega-bonuses and the slashing local budgets. This is one of the most fascinating ongoing backdoor bank bailouts.
Is the debate really about the degree to which structural versus deficient aggregate demand factors are driving unemployment? Shouldn’t it be about which policies would do the most to help the labor market?
Suppose 1/10th of 1% of unemployment is due to structural issues but fixing those problems would cost $0.01 but fixing ag demand would cost $10^100. Does it matter in this extreme case if “most” of unemployment is not structural? No, you choose the policies that give the most bang for the buck.
The real worry, as I tried to get at in the recent paper, is that the unemployment we see now will become structural as an increasing amount of people drop out of and become detached from the labor force. That people under 25 have the highest nominal growth in unemployment is very worrisome, because their lifetime careers are being damaged and it is their arcs that will bring the growth over the next decades.
But sure, I have no problem attacking this as best we can. But let’s look at what the IMF concluded was driving structural unemployment. Updating the education system is outside the expertise and purview of this blog, but I’m all for it and I would note that the state budget problem mentioned above is being solved in part by slashing our high quality public universities and educational system, which is going to be damaging for our long-term human capital formation.
But for foreclosures, what would you have us do? We can, with one page, adjust the bankruptcy rules to allow lien-stripping of mortgages. There’s all kinds of clever plans coming out every month – here’s yet another voxeu plan – for how to monetize and share the potential upsides as well as arguing over who would carry this out and how, but it all comes back to a lien-stripping (“cramdown”) mechanism.
And the banks hate this. It didn’t even get 50 votes, much less the 60 you would need, in the Senate. This battle is what caused Dick Durbin to say “the banks own the place” about the relationship between financial sector and the Senate. Second-liens could be written-down overnight, but that would cause bondholders and owners of financial assets to take a hit. So that’s not going to happen either.
What’s left? People could take up a campaign encouraging those underwater who want to move to get a new job to simply walk away from their homes. Just bringing up the topic will get Peterson types to call for bringing back debtor’s prisons.
Back in February I ran an email from a person who did that, who, after their bank wouldn’t negotiate a principal writedown or a short sale, stopped paying their mortgage and moved to a new city in order to pursue a better job. The commenters, who at this site are normally pretty polite people, were vicious. And I didn’t see any comments from freshwater types running to defend the family on doing the necessary work of fighting structural unemployment and reducing geographic rigidities in their search function (though comments are still open). Given how viciously the wolves came out for that single person, could you even imagine how ugly it would get for a real organized campaign?
So what is there to do, besides doing nothing and watching the labor market implode into itself?
JW Mason is correct, I should have included a percentage graph instead of raw numbers. Here’s percentage of households in a foreclosure event (see the link for data above for more specifics) as well budget deficit gap as percentage of general funds (also same data source as above). The link is very significant with or without the four outliers identified in the graph: