Hutchins Roundup: Online surveys, mortgage-backed securities, and more

Finn Schüle and
Finn Schuele - Senior Research Assistant
Finn Schüle PhD candidate - Brown University, Former Senior Research Assistant - Hutchins Center on Fiscal & Monetary Policy, The Brookings Institution
David Wessel

April 19, 2018

Studies in this week’s Hutchins Roundup find that online surveys may help assess value of free services, mortgage-backed securities weren’t incorrectly rated prior to the financial crisis, and more.

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How much is Facebook really worth to consumers?

Changes in gross domestic product (GDP) are generally viewed as measures of changes in living standards. But because GDP only captures market transactions, it can miss some economic changes that affect well-being. For example, many digital goods, like Google and Wikipedia, are free, and are not captured by GDP even though they improve peoples’ lives. Erik Brynjolfsson and Avinash Gannamaneni of MIT and Felix Eggers of the University of Groningen propose supplementing GDP with online surveys. By asking respondents how much they would have to be paid to give up, say, Facebook for a month, the authors estimate the value of free digital goods to consumers. The median respondent would have to be paid about $50 in order to be willing to give up Facebook for a month and nearly $18,000 to give up search engines for a year. The authors argue that, because online surveys are cheap and fast to implement, this method can be scaled up to include a wide range of goods and services.

Mortgage-backed securities weren’t incorrectly rated prior to the financial crisis

A common narrative of the 2008 financial crisis blames ratings agencies for inappropriately assigning AAA ratings to subprime mortgage-backed securities, leading to substantial losses to investors who wrongly trusted the ratings. Challenging this view, Juan Opsina of the Central Bank of Colombia and Harald Uhlig of the University of Chicago construct a data set of all the mortgage-backed securities issued up to 2008 that weren’t backed by Fannie Mae, Freddie Mac, or Ginnie Mae guarantees. They find that defaults and missed monthly payments led to accumulated losses of only 2.3 percent on AAA mortgage-backed securities by the end of 2013.  AAA subprime mortgage-backed securities did even better than prime mortgage-backed securities, losing only 0.4 percent by 2013. These losses, while substantial for AAA-rate securities, aren’t consistent with the standard narrative, which implies that mortgage-backed securities collapsed completely. Furthermore, since about 75 percent of AAA mortgage-backed securities had almost no losses, the authors argue that most were correctly rated.

High underemployment is slowing wage growth

Although unemployment has fallen significantly across the OECD since 2008, wage growth hasn’t picked up. David Bell of the University of Sterling and David Blanchflower of Dartmouth attribute the slow wage growth to a rise in underemployment. In particular, they find that, since the financial crisis, a greater share of part-time workers would prefer full-time employment and more workers overall report wanting to increase the number of hours they are working. In other words, the labor market isn’t as tight as the unemployment rate suggests, and that, in turn, is reducing pressure to raise wages. The authors also argue that workers now have less bargaining power because of weaker unions and globalization and, as a result, the relationship between unemployment and inflation is weaker than it was before the financial crisis. They suggest that the unemployment rate would likely have to fall below 3 percent in advanced economies before wage growth strengthens.


Chart of the week: Teen labor force participation hasn’t changed lately, but more of those who want to work are finding jobsteen labor

Quote of the week:

“The first shots in a potential trade war have now been fired. Conflict could intensify if fiscal policies in the United States drive its trade deficit higher without action in Europe and Asia to reduce surpluses. The multilateral rules-based trade system that evolved after World War II and that nurtured unprecedented growth in the world economy needs strengthening. Instead, it is in danger of being torn apart,” says Maurice Obstfeld, Chief Economist of the International Monetary Fund.

“The renewed popularity of nationalistic policies is another aftereffect of the financial crisis and its prolonged aftermath. Diminished prospects for household income growth in advanced economies, coupled with trends of higher polarization in jobs and incomes, have fueled a widespread political backlash hostile to traditional political modalities. If policymakers are complacent and do not tackle the challenge of strengthening long-term growth, political risks could intensify, possibly reversing some of the progress that economic reforms and integration have achieved to date.”