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Hutchins Roundup: Consumer spending, pollution, and more

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Studies in this week’s Hutchins Roundup find another round of fiscal stimulus would be necessary to return consumer spending to pre-pandemic levels if the lockdown continues, demand for more environmental protections and policies increased in China following COVID-related pollution reductions, and more.

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CARES Act boost to consumer spending may not suffice to revive consumer spending

The lockdown during the pandemic depressed consumer spending consumption when people couldn’t or wouldn’t shop, leading to predictions that pent-up demand will spur spending when the lockdown ends.  Extending a model built on past experience to account for the unusual features of the COVID-19 episode, Christopher D. Carroll from Johns Hopkins and co-authors say that some of the increased spending will be offset by reduced spending by unemployed workers whose jobs never return. If the lockdown is short-lived, they say, then expanded unemployment benefits and stimulus payments in the CARES Act should be sufficient to allow consumer spending to return to pre-crisis levels by mid-2021. If the lockdown lasts longer – for a full year or more — an extension of enhanced unemployment benefits will be necessary for consumption spending to recover within a similar timeframe.

COVID-related reduction in pollution in China raises popular demand for cleaner skies

The sudden shutdown of economic activity in China due to the pandemic sharply reduced urban air pollution. Matthew Kahn of Johns Hopkins, Weizeng Sun of the Central University of Finance and Economics, and Siqi Zheng of MIT ask if pollution will return as the economy rebounds.  With data on 144 Chinese cities, they find that online discussion of environmental protection and online policy documents proposing green industrial stimulus have increased since the shutdowns; the effects are most pronounced in cities that had more pollution prior to the pandemic as well as greater sensitivity to pollution in their well-being as expressed on social media. They speculate that the experience of cleaner air and blue skies increased Chinese citizens’ demand for environmental improvement.

Immigrants start companies at higher rates

While economists and policymakers often emphasize the effects of immigration on labor supply, immigrants also expand labor demand through entrepreneurship. Pierre Azoulay of MIT and co-authors find that immigrants have about an 80% higher entrance rate into entrepreneurship as compared to the native-born. Using administrative and census survey data, as well as the Fortune 500, the authors find that immigrants found more firms at every firm size and that immigrant-founder firms created 42% more jobs than firms founded by natives. Limited employment opportunities may push immigrants to start businesses at higher rates and immigrants are disproportionately likely to hold STEM degrees, the authors speculate, but the exact mechanisms that drive this phenomenon are not known.

Chart of the week: Quarterly mortgage originations, by type

Quarterly mortgage originations, by type

Quote of the week:

“Operational risk is the risk of disruption from systems and processes, from human errors and management failures and from external events and external actors. Good operational risk management helps a firm to prevent and protect against disruption. Operational resilience on the other hand, is the ability of firms and the system as a whole to prevent, respond to, recover and learn from operational disruptions. Therefore, if operational risk is managed effectively, it will reduce the number of instances a disruption will occur. Managing operational risk and building operational resilience may sound like common sense, particularly in light of the COVID shock. However, the collective nature of the challenge means it is not always given proper priority on board agendas,” says Elisabeth Stheeman, External Member of the Financial Policy Committee at the Bank of England.

“The regulatory authorities are clear that operational resilience is not just about prevention. It is also about cure. Firms should start from the premise that an operational incident will occur and cause disruption to vital services. It is not a question of if, but when. Regulatory authorities expect that firms should have robust and reliable arrangements in place to deal with this inevitable disruption. In addition to this, as we saw during the financial crisis, accounting for the disruption experienced by individual firms is not enough to prevent a threat to wider financial stability and therefore disruption of the financial ‘pipes’ that serve the real economy. Therefore… it is also critical to think about how firms are interconnected, and where there may be dependencies between firms. We must build the operational resilience of the whole financial system, not just individual firms and the services they provide.”

Sophia Campbell

Research Assistant - Hutchins Center on Fiscal and Monetary Policy

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