Hutchins Roundup: Racial disparities, the Phillips Curve, and more 

What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday. 

Black and Hispanic homeowners realize lower returns on homeownership than whites   

Black and Hispanic homeowners’ returns to homeownership are respectively, 3.7 and 2.0 percentage points lower than those of white homeowners, find Amir Kermani of UC Berkeley and Francis Wong of the NBER. The disparity explains about 40% of the Black-white gap in housing wealth at retirement. The authors find little difference in the rates of appreciation of non-white and white-owned properties; rather, the lower returns experienced by Black and Hispanic homeowners are driven almost entirely by higher prevalence of “distressed” home sales, like foreclosures, in which houses are sold at a steep discount. Lower liquid wealth and income stability among Black and Hispanic homeowners make them more likely to experience foreclosures and short sales – but even within these distressed sales, Black and Hispanic homeowners make 3.8 and 2.7 percentage points lower returns than white homeowners respectively. The authors attribute this to shallower real estate markets in predominantly non-white communities that make it harder to sell homes quickly without a discount. Increasing the availability of mortgage modifications for distressed homeowners could significantly narrow racial disparities in housing wealth, the authors say. Receiving a modification after three months of failing to make mortgage payments can reduce the likelihood of foreclosure by 37 percentage points and increase a homeowner’s annual returns by nearly 9 percentage points.  

The Phillips Curve is nonlinear when inflation levels are low  

The Phillips Curve – the sensitivity of inflation to labor market slack – has become flatter in recent years as changes in the unemployment rate have had a smaller impact on price levels than in the past. Kristin Forbes at MIT, Christopher Collins at Morgan Stanley, and Joseph Gagnon at the Peterson Institute suggest that this is because the Phillips Curve relationship is nonlinear during periods of low inflation. Using cross-sectional data on advanced countries, the authors find that, when inflation runs below 3% and economic output is below potential, the negative relationship between inflation and labor market slack becomes almost non-existent. As such, inflation can persist even when spare capacity increases, likely because firms and workers tend to resist cuts to wages and prices. In contrast, the Phillips Curve relationship is steep during periods of high inflation or when the economy is running above capacity, the authors find. “In countries where inflation has picked up to above 3%, it is possible that reductions in slack may begin to have more impact on inflation than in the past, even before output gaps close,” the authors conclude.  

Germany’s job retention program reduced unemployment during the pandemic  

Following the onset of the COVID-19 crisis in the second quarter of 2020, Germany suffered an output contraction greater than the U.S., but employment fell by only 1.4% in Germany versus more than 13% in the U.S. Shekhar Aiyar and Mai Chi Dao from the IMF investigate the stabilizing role of Germany’s Kurzabeit (KA), a job retention program which provides a government subsidy to employees working reduced hours; workers earn regular wages for hours worked, and a reduced wage for hours not worked. Using state-level variation in exposure to the pandemic and KA take-up, the authors find that in the second quarter of 2020 unemployment would have been 2.9 percentage points higher without the program. Given that the unemployment rate was 6.2%, this implies KA cut unemployment by about a third on average. Moreover, they estimate that the contraction in retail trade would have been 15% greater in the second quarter of 2020 absent the program.   

Chart of the week: After declining in mid-September, air travel has picked up in recent weeks   

Source: The Wall Street Journal

Quote of the week:  

“[W]e need to take a new, holistic, and pragmatic approach in our relationship with China that can actually further our strategic and economic objectives for the near term and the long term. As our economic relationship with China evolves, so too must our tactics to defend our interests. As the years go by, the stakes keep getting higher, and boosting American competitiveness becomes all the more important. Our strategy must address these concerns while also being flexible and agile to confront future challenges from China that may arise,” says Katherine Tai, U.S. Trade Representative. 

 “Our objective is not to inflame trade tensions with China. Durable coexistence requires accountability and respect for the enormous consequences of our actions. I am committed to working through the many challenges ahead in this bilateral process in order to deliver meaningful results. But above all else, we must defend to the hilt our economic interests. And that means taking all steps necessary to protect ourselves against the waves of damage inflicted over the years through unfair competition. We need to be prepared to deploy all tools and explore the development of new ones, including through collaboration with other economies and countries.”   

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