The Evolving U.S. Economy and Household Debt

Transcription

1 The Evolving U.S. Economy and Household Debt Remarks for Household Debt Tipping Points Research Symposium Karen Dynan Harvard University and Peterson Institute for International Economics June 22, 2017 Notes for the slides can be found at the end of the presentation.

2 PART 1 MACRO TRENDS AND HOUSEHOLD DEBT TIPPING POINTS 1

3 Some trends that may have made U.S. households more vulnerable to hitting tipping points 2

4 Income growth has been limited across much of the distribution P e r c e n t 125 G r o w t h i n R e a l H o u s e h o l d I n c o m e s, ( s o l i d l i n e s = m a r k e t i n c o m e ; d a s h e d l i n e s = a f t e r - t a x - a n d - t r a n s f e r i n c o m e ) T o p q u i n t i l e M i d d l e q u i n t i l e % % % % S o u r c e. C o n g r e s s i o n a l B u d g e t O f f i c e. 3

5 Changes in the workplace imply less predictable incomes I n d i v i d u a l s w i t h A l t e r n a t i v e W o r k A r r a n g e m e n t s P e r c e n t o f t h o s e e m p l o y e d I n d e p e n d e n t c o n t r a c t o r s O n - c a l l w o r k e r s T e m p o r a r y h e l p a g e n c y w o r k e r s S o u r c e. K a t z a n d K r u e g e r ( ) ; f i g u r e s a r e t h e " a l t e r n a t i v e w e i g h t s " e s t i m a t e s. W o r k e r s p r o v i d e d b y c o n t r a c t f i r m s 4

6 More students are borrowing to attend colleges that tend to add little to earnings prospects Source. Brookings (2015). 5

7 Why these trends potentially matter for households vulnerability to tipping points Limited income growth More borrowing to keep up with the Jones s? More political incentive to favor easy credit policies Less predictable incomes More dependence on short-term credit Growth in enrollment at colleges with poor outcomes: More people likely to struggle to pay off student debt 6

8 Some trends that make it more difficult for policymakers to mitigate the immediate macro fallout from reaching tipping points 7

9 Nominal interest rates have trended down P e r c e n t 20 I n t e r e s t R a t e s y e a r T r e a s u r y r a t e S o u r c e. F e d e r a l R e s e r v e B o a r d. E f f e c t i v e f e d e r a l f u n d s r a t e 8

10 Government debt has risen (and is projected to rise further) F e d e r a l D e b t H e l d b y t h e P u b l i c P e r c e n t o f G D P A c t u a l P r o j e c t e d S o u r c e. C o n g e r s s i o n a l B u d g e t O f f i c e. 9

11 Why these trends make it harder to mitigate the short-run harms of reaching tipping points Lower nominal interest rates Fed will hit the zero lower bound more often Inflation falls short of Fed target more often, so less scope for inflation to erode nominal debt burdens High levels of government debt Limits scope for countercyclical fiscal policy 10

12 Some trends that mean the longer-term effects of hitting tipping points are more consequential than in the past 11

13 Productivity growth has been low P r o d u c t i v i t y G r o w t h ( p e r c e n t c h a n g e, a n n u a l r a t e ) N o t e : N o n f a r m b u s i n e s s s e c t o r. T i m e r a n g e s c o r r e s p o n d t o d i f f e r e n t " e r a s " o f p r o d u c t i v i t y g r o w t h ; w i d t h o f e a c h b a r c o r r e s p o n d s t o t h e d u r a t i o n o f t i m e. S o u r c e. B u r e a u o f L a b o r S t a t i s t i c s. 12

14 Business dynamism has fallen A c t i v i t y M e a s u r e s f o r Y o u n g F i r m s ( A g e 5 o r L e s s ) P e r c e n t S h a r e o f f i r m s t h a t a r e y o u n g ( l e f t a x i s ) S h a r e o f e m p l o y m e n t f r o m y o u n g f i r m s ( l r i g h t a x i s ) P e r c e n t S o u r c e. D e c k e r, H a l t i w a n g e r, H a r m i n, a n d M i r a n d a ( ). 13

15 Why these trends mean that the longer-term effects of hitting tipping points are more consequential Hitting tipping points causes households and businesses to lose access to credit Access to credit is a key determinant of productivity growth and business dynamism People need to borrow to invest in human capital People need to borrow to invest in new businesses 14

16 PART 2 SOME BETTER NEWS 15

17 The current state of household balance sheets 16

18 The traditional indicators show enormous improvement H o u s e h o l d D e b t t o I n c o m e R a t i o H o u s e h o l d D e b t S e r v i c e R a t i o P e r c e n t o f d i s p o s a b l e i n c o m e S o u r c e. F e d e r a l R e s e r v e B o a r d. P e r c e n t o f d i s p o s a b l e i n c o m e S o u r c e. F e d e r a l R e s e r v e B o a r d. 17

19 The share of underwater mortgages has fallen substantially P e r c e n t S h a r e o f M o r t g a g e s w i t h N e g a t i v e E q u i t y S o u r c e. Z i l l o w. 18

20 Delinquencies rates (broadly speaking) have largely normalized 1 0 O v e r a l l H o u s e h o l d D e b t D e l i n q u e n c y R a t e P e r c e n t o f b a l a n c e s t h a t a r e 9 0 o r m o r e d a y s d e l i n q u e n t S o u r c e. F e d e r a l R e s e r v e B a n k o f N e w Y o r k. 19

21 But one area to watch is student loans P e r c e n t S t u d e n t D e b t a s a S h a r e o f O v e r a l l H o u s e h o l d D e b t S o u r c e. F e d e r a l R e s e r v e B a n k o f N e w Y o r k. S t u d e n t D e b t D e l i n q u e n c y R a t e P e r c e n t o f b a l a n c e s 90 + d a y s d e l i n q u e n t S o u r c e. F e d e r a l R e s e r v e B a n k o f N e w Y o r k. 20

22 To summarize, the current state of household balance sheets is, on the whole, good The odds of reaching a household debt tipping point in the near future are low We should be concerned about some aspects of student loans, but the immediate risk to the macroeconomy is limited There are a few problem areas (e.g. subprime auto lending) but they are not large by macro standards 21

23 More good news there has been important progress in regulation and other areas Banks are lending more prudently and they are better capitalized The Consumer Financial Protection Bureau should better protect households from reaching debt tipping points In conducting mortgage interventions in the last crisis, the federal government learned valuable lessons about how to best design such programs 22

24 CONCLUSION AREAS WHERE MORE WORK NEEDS TO BE DONE 23

25 Important unfinished policy business Mortgage finance reform Better regulation for student loans: top priority should be taking steps to hold higher education institutions more accountable for the quality of the services they deliver 24

26 Other agenda items Potential for fintech innovations to improve household debt management Scope to develop new mortgage products that better protect households from tipping points More publicly available data for researching and tracking household debt tipping points 25

27 Endnotes Slide 3: Source Congressional Budget Office, The Distribution of Household Income and Federal Taxes, Market income consists of labor income, business income, capital gains (profits realized from the sale of assets), capital income excluding capital gains, income received in retirement for past services, and other sources of income. Shaded vertical bars denote recessions. Slide 4: Source Data from table 2 of Katz, Lawrence F. and Alan B. Krueger (2016), The Rise and Nature of Alternative Work Arrangements in the United States, , National Bureau of Economic Research Working Paper No , Slide 5: Source Brookings (2015) Media Summary of Students loan debt a selective crisis; Majority of recent borrowers and defaulters attend for-profit and non-selective schools by Adam Looney and Constantine Yannelis. Slide 8: Source Federal Reserve Board. Slide 9: Source Congressional Budget Office (2017), The Budget and Economic Outlook: 2017 to Slide 12: Source Bureau of Labor Statistics. Data for the last bar go through 2017:Q1. Slide 13: Source Data from figure 4 of Decker, Ryan, John Haltiwanger, Ron Jarmin, and Javier Miranda (2014), The Role of Entrepreneurship in US Job Creation and Economic Dynamism, Journal of Economic Perspectives 28(3). Slide 17: Source Federal Reserve Board. The last data point for the household debt to income ratio is 2017:Q1, and the last data point for the household debt service rate is 2016:Q4. Slide 18: Source Zillow. The last data point is 2016:Q4. Slide 19: Source Federal Reserve Bank of New York. The last data point is 2017:Q1. Slide 20: Source Federal Reserve Bank of New York. The last data point is 2017:Q1. 26