10/4/19: How US Tax Inversions Affect Shareholder Wealth

Our article on how corporate tax inversions impact shareholders' wealth is now available on Columbia Law School blog: http://clsbluesky.law.columbia.edu/2019/04/10/how-u-s-tax-inversions-affect-shareholder-wealth/.

4/4/2019: Debt Relief for Households: It Turns Out to be a Great Idea, Folks

The question of debt relief for households during the periods of financial crises has been a pressing one in the aftermath of the 2008 Global Financial Crisis. I have written a lot on the topic in topic in the past, but to sum the arguments here in a brief format:

• Argument in favour of debt relief: households carrying unsustainable debt burden during the crisis are likely to substantially reduce current and future consumption and investment, including long term investment in education, health and other activities. The resulting decline in the aggregate demand is likely to be prolonged and extensive, with a positive correlation to the crisis-triggered recession. Thus, debt relief via direct debt forgiveness and/or generous bankruptcy writedowns can help ameliorate adverse shocks to employment, demand and investment during large scale crises;
• Argument against debt relief: debt relief can lead to the emergence of moral hazard (inducing greater leveraging by households post-crises), and adversely impact balancesheets of the lending institutions.

I favour the first argument, based on my view that the economy is crucially dependent on households' financial health, and that moral hazard consideration does not apply ex post the crisis, but only ex ante, which means that policymakers can tackle adverse effects of moral hazard after debt forgiveness in the wake of the structural crises.

A new paper by Auclert, Adrien and Dobbie, Will and Goldsmith-Pinkham, Paul S., titled "Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession" (CEPR Discussion Paper No. DP13598: https://ssrn.com/abstract=3360065) tries to settle the debate.

The paper argues that "the debt forgiveness provided by the U.S. consumer bankruptcy system helped stabilize employment levels during the Great Recession." The authors "document that over this period, states with more generous bankruptcy exemptions had significantly smaller declines in non-tradable employment and larger increases in unsecured debt write-downs compared to states with less generous exemptions. We interpret these reduced form estimates as the relative effect of debt relief across states,... [showing that] the ex-post debt forgiveness provided by the consumer bankruptcy system during the Great Recession increased aggregate employment by almost two percent."

More specifically, the model of debt forgiveness effects developed by the authors "implies that ex-post debt relief had positive effects on employment in ...sectors and in ...regions. Ex-post debt relief directly increases spending and employment in both sectors [tradables and non-tradables] in the high--[debt]-exemption region, which increases tradable employment in the low-[debt]-exemption region through a demand spillover effect. The increase in tradable employment in the low-exemption
region then increases non-tradable spending and employment in that region. Calibrating the model
to the observed path of debt write-downs during the financial crisis, we find that average employment across regions in the second half of 2009 would have been almost 2 percent lower in both the
non-tradable and the tradable sector in the absence of the ex-post debt forgiveness provided by the
consumer bankruptcy system."

Furthermore, the authors "conclude by using the model to conduct three policy counterfactuals.

• First, we ask how the effect of ex-post debt relief changes in normal times when the zero lower bound does not bind. We find that even with a relatively aggressive monetary policy response, debt relief continues to have positive effects in both regions and in both sectors. 
• Second, we ask how the effect of debt relief changes with the size of the relief provided to borrowers. We find that the debt relief multiplier is initially invariant to the size of the relief provided to borrowers, but eventually falls as the size of debt relief grows large due to the concavity of borrowers’ consumption functions. [see chart]
• Finally, we ask how the effect of ex-post debt relief changes with the location of the savers that pay for the relief provided to borrowers. We find that the debt relief multiplier is invariant to the location of these savers, as savers smooth consumption in response to wealth transfers no matter where they are located."

16/1/2015: Universal Basic Income v Unemployment Insurance

The idea of a universal basic income (UBI) has been in the news recently primarily because of the Swiss referendum on the topic, but also because it is gang traction as a functional substitute for the existent systems of social welfare provision.

An interesting recent paper by Fabre, Alice and Pallage, Stephane and Zimmermann, Christian, titled "Universal Basic Income versus Unemployment Insurance" (December 18, 2014, CESifo Working Paper Series No. 5106: http://ssrn.com/abstract=2540055) compared "…the welfare effects of unemployment insurance (UI) with an universal basic income (UBI) system in an economy with idiosyncratic shocks to employment."

On positive side, both policies "provide a safety net in the face of idiosyncratic shocks. While the unemployment insurance program should do a better job at protecting the unemployed, it suffers from moral hazard and substantial monitoring costs, which may threaten its usefulness." Much of these effects are addressed through rather disruptive and painful 'labour market activation reforms' that commonly coincide with periods of elevated unemployment, thus inducing even greater personal, social and economic hardship.

The authors conjecture, in line with much of theoretical and empirical literature, that "The universal basic income, which is simpler to manage and immune to moral hazard, may represent an interesting alternative in this context."

The study calibrates an equilibrium model with savings to data for the United States for 1990 and 2011. The results "…show that UI beats UBI for insurance purposes because it is better targeted towards those in need."

21/2/2014: Fed Transcripts, 2008: Icebergs, Titanic, Violins...

Marketwatch are running a live blog on Fed's release of 2008 transcripts

http://blogs.marketwatch.com/capitolreport/2014/02/21/the-feds-crisis-era-transcripts-of-its-2008-meetings-live-blog/

My comment: Fed transcripts from 2008 show a circus hit by a hurricane drowning in a surge of self-delusion.

Bernanke waffling on, in September 2008, about 'moral hazard' in a virtually academic exercise that is more about him being 'decidedly confused and muddled' shows the extent to which the Fed (and do keep in mind - this is the most competent Central Bank out there) was left completely unprepared for a systemic crisis. Forget the nature of the crisis or specific causes of it. The point is that some 14 months into huge pressure pilling up in the markets, the Fed was utterly unprepared to face a crisis.

Now, observe that having done the deed of acting outside any confidence about the impact of his actions, Bernanke subsequently defends his choices by saying that "I just don't believe that you can allow systemically critical institutions to fail in the middle of financial crises and expect it to be not a problem." Which, of course begs the question: does he believe that he should fail these institutions ex post after the crisis is over? And how the hell does he propose we go about that restoration of 'zero moral hazard' state? By sending in the FBI?..

In short, the man is still out of touch with reality. First, with the one he was thrown into in September 2008, second, with the one he constructed in response to September 2008 events.

Poor Ben... he goes on: "“We did not have—as the Europeans have or as we have FDICIA for banks—a system that was set up to allow a reasonable and responsible orderly resolution of nonbank systemically critical institutions. I think we now have made a lot of progress there. The TARP will provide a good interim solution.”"

Come again? What is that that 'the Europeans' have? "a system ...to allow a reasonable and responsible orderly resolution of nonbank systemically critical institutions"? Dear, oh dear... he needed retirement rest and relaxation back in 2008.

Still, the Fed transcripts show how the Central Bank did move to face the reality, unlike 'the Europeans' who basically used the Mongols' tactic for capturing Beijing - throw bodies against the walls. Even though Fed's 'data' included Yellen's quotes about plastic surgeons reporting customers delaying elective procedures... and she subsequently followed up on this pearl by expressing (in December 2008) concern about rising labour force participation...


In short, the transcripts make us, macroeconomists, look decidedly scientific and impossibly human, compared to the Central Bankers... And this before we get any transcripts from that bastion of surreality in Frankfurt, called the ECB...