Brookings Papers on Economic Activity

Spring 2014 Brookings Panel on Economic Activity

The Spring 2014 Brookings Panel on Economic Activity took place March 20–21, 2014 at the Brookings Institution's Falk Auditorium in Washington, DC. The panels were live-tweeted under the Chatham House rule using hashtag #BPEA.

New research findings at the Spring 2014 BPEA conference by leading academic and government economists include: the effects of the Federal Reserve's unconventional policies on financial stability; an assessment of "Abenomics," Japan's aggressive monetary and fiscal stimulus; how American stimulus spending was allocated after the Great Recession; the "wealthy hand-to-mouth" who own illiquid assets; the long-term unemployed; and why the Fed should pursue a policy of targeting nominal GDP.

Majority of Americans Who Live Hand-to-Mouth are Not Technically Poor
“Wealthy hand-to-mouth” have illiquid assets; spend what comes in immediately, like those with no assets

About one-third of American households—around 38 million—live hand-to-mouth, although a majority of them are not technically poor because they have assets, albeit illiquid ones, and they respond to stimulus policies in much the same way as those with no assets, consuming all of their disposable income every period. The findings are important for policymakers, given the question of which demographic groups to target in order to obtain the biggest bang-for-the-buck from fiscal stimulus programs designed during economic contractions. The wealthy-hand-to-mouth choose to weather income fluctuations rather than dipping into their assets to smooth shocks, because smoothing shocks would entail holding large balances of cash and foregoing the high return on their illiquid assets.
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Fed’s Unconventional Crisis Policies Have Not Made Banks, Life Insurers Riskier
But some money market funds and pension plans did take more risks

The unconventional monetary policies that the Federal Reserve has pursued since 2008 – pushing short-term interest rates to zero, promising to keep them there for a long time and buying trillions of dollars in bonds in its quantitative easing – have not resulted in life insurers becoming riskier despite the widespread belief to the contrary. But Fed policies did prompt higher cost money market mutual funds to take on more risks in 2009-2011, though not subsequently, and defined benefit pension plans with larger unfunded liabilities or an older average age of beneficiaries to seek riskier investments after 2009. However, those same Fed policies also make the overall economy stronger, boosting the value of financial institutions’ portfolios and making them less risky.
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Stimulus Funds not Laden with Pork Projects
But funds also weren’t targeted to high unemployment areas

Members of Congress don’t appear to have successfully used their influence to send stimulus-funded projects to their districts, but targeting areas with high local unemployment rates did not play much of a role either. The research found no consistent evidence that members in positions of influence, including committee leaders, long-serving representatives, and ideological moderates (potential “swing-voters”) received more funds, and neither Democrats nor Republicans sent more money to swing districts where the money might be considered most effective in obtaining an electoral advantage. Democrats on average did receive $95 more per capita than Republican districts, which could reflect an attempt by the party in power to send more money to their own constituents. Overall, the stimulus amounted to $469 per capita, with the average Republican district receiving $416 per capita as compared to $510 per capita in the average Democratic district. However, Democratic districts tend to be different from Republican districts in many ways, and Democratic districts with the same amount of employment and poverty received only $19 more than similar Republican districts, with the difference not being statistically significant.
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Long-term Unemployed on the Margins of the Labor Market, Exert Little Pressure on Inflation or Wages, Have Difficulty Regaining Employment
Only 11 Percent in Steady, Full-Time Jobs One Year Later

The short-term unemployment rate is a much stronger predictor of inflation and real wage growth than the overall unemployment rate in the US. Even in good times, the long-term unemployed are on the margins of the labor market, with diminished job prospects and high labor force withdrawal rates, and as a result they exert little pressure on wage growth or inflation.  Even after finding another job, reemployment does not fully reset the clock for the long-term unemployed, who are frequently jobless again soon after they gain reemployment: only 11 percent of those who were long-term unemployed in a given month returned to steady, full-time employment a year later. The long-term unemployed are spread throughout all corners of the economy, with a majority previously employed in sales and service jobs (36 percent) and blue collar jobs (28 percent), they find. In addition, the authors find that when long-term unemployed workers do return to work, there is a tendency to return to jobs in the same set of industries and occupations from which the workers were displaced.
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Abenomics Working Now, Future Effects Likely Positive but Modest
Aggressive monetary policies and fiscal stimulus increased 2013 GDP growth by 0.9-1.7 percentage points; Better, but not yet good enough

Japan’s great economic experiment known as Abenomics appears to be increasing the country’s immediate economic growth, accounting for 0.9 to 1.7 percentage points of the nation’s 2013 GDP growth, but its long-term effects appear likely to be modest relative to what some had hoped, in part because Japan’s new monetary policy is not yet fully credible. The success or failure of Japan’s policies is being closely watched by central bankers and other policymakers in both the US and Europe as their tools to stimulate the economy continue to be limited. While the Bank of Japan is achieving its intermediate objective of higher expected inflation, the inflation target of 2 percent – which would be the highest Japan has had since 1991 – “remains imperfectly credible,” with long-run inflation expectations below 1.5 percent. Thus the modest estimates of Abenomics’ effects reflect in part that the Bank of Japan has not yet fully convinced the public that inflation will hit the target.
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Monetary Policy Should Target Nominal GDP to Facilitate Efficient Risk Sharing
The Federal Reserve should pursue a policy of targeting nominal GDP. The starting point is to note that most debt contracts--such as your mortgage--specify fixed nominal repayments. In turn, this implies that the repayment burden from taking on a mortgage is uncertain, both because changes in inflation may render future real repayments either higher or lower, and also because your ability to pay depends on unknown productivity shocks that shape your future real income. One efficient way to mitigate this risk is for the central bank to target nominal GDP, effectively providing insurance against the risk that your mortgage payments become too burdensome. Whereas the usual argument for an activist Federal Reserve rests on offsetting those distortions due to sticky prices preventing markets from adjusting rapidly, in this case the motivating idea is that monetary policy can play a role in offsetting the incompleteness of financial contracts.
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