Hutchins Roundup: Mortgage debt, tax increases, and more

Studies in this week’s Hutchins Roundup find that mortgage debt rose at similar rates across income groups during the housing boom, the 2013 tax increases on upper-income Americans generated significant revenue despite some behavioral responses, and more.

Mortgage debt did not increase disproportionately for low-income borrowers in the early 2000s housing boom

It is commonly believed that the allocation of mortgage credit changed fundamentally during the housing boom preceding the Great Recession. However, Christopher Foote, Lara Loewenstein, and Paul Willen of the Boston Fed show that mortgage debt grew at similar rates across income groups during that time period. Also, because high-income borrowers tend to have higher mortgage debt than low-income borrowers, in dollar terms, most of the new debt originated in that period went to the wealthy. The authors note that the earlier studies that found higher mortgage credit growth among low-income households were based only on mortgage originations and failed to account for mortgage terminations.

The 2013 tax increases raised revenue despite some offsetting behavioral responses

In 2013, as the Affordable Care Act surtaxes went into effect and the 2001 Bush tax cuts for top earners expired, the top 1% of earners experienced the largest increase in tax rates since the 1950s. Studying the behavioral responses of the top earners to this tax increase, Emmanuel Saez of the University of California, Berkeley, finds large short-term effects, with affected taxpayers shifting about 11% of their 2013 incomes into 2012 to avoid paying higher taxes, but much smaller medium-term effects. Overall, he concludes that behavioral responses lowered revenues by at most 20%.

Basel recommendations on systemically important banks yield sizable macroeconomic benefits

The Basel Committee on Banking Supervision, the primary global standard-setter for regulation of banks, recently has developed a new framework to address weaknesses in the international banking system, especially those related to systemically important banks. Ingo Fender and Ulf Lewrick of the Bank for International Settlements find that the reforms, known as Basel III, would yield sizeable net macro-economic benefits, ranging from about 0.5% to 2.0% of GDP per year. These potential benefits are based on avoided output losses due to lower probability of a financial crisis.

Chart of the week:Only 13 percent of private industry workers had access to paid family leave in March 2016

Quote of the week: “More than any other advanced economy, the euro area has experienced how quickly trust in the sustainability of public debt can form and then transform, and with it perceptions of ‘creditworthiness’,” says European Central Bank Executive Board member Benoît Cœuré.

“In our case, it has shifted from one pole to the other. Public debt has been seen as both too safe and too risky. Too safe, because the widespread belief before the crisis that the debt of different euro area sovereigns was interchangeable fueled an unwarranted spread compression and contributed to major financial and macroeconomic imbalances. And too risky, because the rapid unwinding of those beliefs cascaded through the financial system and government finances, pushing the euro area into a deeper and more prolonged crisis than other advanced economies. Accordingly, there is a rift in Europe between those economists and politicians who want public debt to be safe again, and those who want it to be riskier.

But looking forward, neither extreme is sustainable. This is because we need public debt to be safe in the euro area. It is vital to the functioning of the financial system, analogous to the function of money in the real economy. And it allows governments to play their proper role in stabilizing the economy, which is essential in the institutional design of our monetary union. So if sovereign debt is too risky, it will place the full burden on other actors to provide safe assets for the financial sector and safe liabilities for governments…

Yet at the same time, we also do not want public debt to be perceived as too safe, since that would eliminate the role of market discipline in delivering sustainable policies and create a false belief that governments cannot fail. However strong our fiscal rules, our political systems cannot credibly deliver the promise that governments will never default on their debt – unless the central bank would commit to bailing them out no matter what, which the euro area by-laws have formally excluded.”