When IMF experts put the United States’ so-called “structural unemployment” under a microscope they find that the large majority of this is the result of the massive of wave foreclosures and underwater mortgages and only a small part is related to skills/education mismatch.
The real problems are far more likely issues of TARP not having created a cramdown provision, second-liens being over-valued on the stress test and community groups like ACORN fighting against foreclosures being under-funded and under attack, not that we aren’t ‘shocking’ teacher’s benefits or getting a pair of pliers and a blowtorch and getting medieval on the minimum wage’s ass or whatever feverish dreams constitutes our elite’s thoughts about the unemployed lucky duckies.
Let’s back up. Ryan Avent is disappointed. Disappointed that the discussion on unemployment, which includes Arjun Jayadev and I’s latest paper: The Stagnating Labor Market, isn’t sophisticated or taking structural unemployment seriously enough.
He would like us to address things like the IMF’s select paper on the United States, The Great Recession and Structural Unemployment. So let’s do that. This paper looks to analyze structural unemployment by regressing a “skills-mismatch index” (SMI), which quantifies mismatches on education level. as well as regressing foreclosure rates on unemployment rates.
They find that structural unemployment is 1%-1.75%, with skills being 0.5%. That means housing hurdles run from 0.5% to 1.25% of unemployment. So that means the large majority of structural unemployment is housing related.
In my defense, we already did this test at the blog here. We ran a regression on deeply underwater homes against unemployment, similar as the IMF but with what I think is a superior instrument but felt uncomfortable including the numbers in my paper (more on that in a second). The chart:
Now we had numbers, but I wasn’t comfortable including analysis larger than the MSA area. Also we had a problem with whether or not what we were testing was mobility rather than mobility bundled with other issues. Arjun and I constructed an ugly data-set trying to merge MSA-level moving van rentals (the IRS’ mobility data isn’t available yet for previous year) with county level housing data and it didn’t merge well.
The reason I liked deeply-underwater as opposed to foreclosures is that it deliberately blurs the line between can’t move (structural), neighborhood foreclosures (asset depreciation) and Koo-style balance-sheet recession (higher debt in higher LTV neighborhoods), which in practice blurs the line between rigidities, demand and debt.
But no, we ended up not putting this in our paper and instead saving it for a future paper, electing to throw a graph up at the website. Now since the IMF already did this, let’s go deeper. This paper shows that a large majority of structural unemployment is the result of underwater mortgages and foreclosures. In addition, when foreclosures are added into the regression alongside SMI, SMI loses some of its value, and when a cross term is added skills loses a bit more. Right now, the story is one of foreclosures.
So groups that fight foreclosures, say what many over-worked and under-paid community organizers do now, are groups that fight to reduce structural unemployment for everyone. Same with those trying to get cramdown and right-to-rent and better short sales. Which is a worthwhile thing to be doing.
Bonus: Let’s say that Bank of America drove a truck full of chemicals into a town square and proceeded to burn the chemicals. The toxic fumes of these chemicals caused a statistically significant number of workers to be so sick that they ended up not able to work and detached from the labor force and forced major costs onto municipalities. We’d tax the hell out of BoA for burning those chemicals, right? Externalities and all that.
So let’s replace “burning toxic chemicals” with “foreclosures.” It’s the same story. Especially foreclosures that haven’t been reviewed by a judge, or foreclosures where there wasn’t proper representation or where a right-to-rent or modification was available. So why aren’t we taxing the hell out of foreclosures?
“Bonus: Let’s say that Bank of America drove a truck full of chemicals into a town square and proceeded to burn the chemicals. The toxic fumes of these chemicals caused a statistically significant number of workers to be so sick that they ended up not able to work and detached from the labor force and forced major costs onto municipalities. We’d tax the hell out of BoA for burning those chemicals, right? Externalities and all that.
“So let’s replace “burning toxic chemicals” with “foreclosures.” It’s the same story.”
It’s not the same story, and the fact that you think that it is is a sign of how completely out of touch you are. If you want to make it the same story, you have to say something like “BofA drove a truck into town full of chemicals that made some people in the town able to enjoy a style of life well beyond their means — let them have far more space, a bigger yard, fancier furnishings, than they should have had. If we burn those chemicals, everyone will get hurt. But if we don’t burn them, the people who were living beyond their means will continue to be able to do so, while everyone else in the town continues to reap no benefit from it, and in fact will have to subsidize their more profligate neighbors.”
Now, even in this scenario, it may make sense to stop BoA from burning the chemicals (that is, foreclosing), since doing so will inflict damage on the community at large. But let’s not pretend that there isn’t something profoundly offensive about letting people earning $60K who have been living for years in $350K homes and who took out $50K in home equity stay in those homes while their more responsible neighbors continue to make their mortgage payments on much smaller and less fancy properties.
Through what channel does preventing foreclosures help the unemployment situation? You might think foreclosures would actually help by increasing labor mobility.
I imagine the mechanism at play is that if Person A is foreclosed on there’s going to be a vacant and foreclosed property which makes it much more difficult for other’s on the block to sell their home, even if they have a very reasonable LTV/DTI. Right now, especially in the high U3/foreclosure states, there’s a huge amount of quasi-abandoned properties, foreclosed properties sitting idle, and “shadow inventory” properties that are empty but not on the market. These attract crime, often don’t pay for upkeep (or taxes), etc.
So one family is better off, but the rest of the block is more marginally locked in in the short term and the breadth of their search is constrained.
Again, it’s a little difficult to detach that (though I’ve heard the 2009-2010 mobility numbers, even in-state, are going to be shockingly low).
For what it is worth, the IMF paper notes: “Measures to raise the number of mortgage modifications, and if
needed allowing mortgages to be renegotiated in courts (“cramdowns”), could also be
important, as they would help to clear the housing markets more quickly.”
So its not clear if preventing foreclosures is a clear-cut win for the labor market. But I’m glad we agree that mobility is a big problem.
I don’t think that that its that preventing foreclosures does nothing its the mentality or ripple effect it has on society of what the foreclosures are doing to the economy itself and the corruption that banks have and the govt weak attitude towards them
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