The income tax, then and now

Mark Perry entertains us with a comparison of the U.S. income tax form that filers were required to fill out in 1913: see all 4 pages here.  

Almost 100 years later, the instructions alone (1040 in total) take up 189 pages.

How will it look, I wonder, 100 years from now? 

What really constrains bank lending

Thought I would share an interesting article by John Carney: What Really Constrains Bank Lending. If anyone out there has worked in the business, I'd be interested to hear your thoughts.

Also, another interesting story today: Lenders Again Dealing Credit to Risky Clients.

Annette Alejandro just emerged from bankruptcy protection and doesn’t have a job, and her car was repossessed last year. Still, after spending her days job hunting, she returns to her apartment in Brooklyn where, in disbelief, she sorts through the piles of credit card and auto loan offers that have come in the mail. 

“Even I wouldn’t make a loan to me at this point,” Ms. Alejandro said.

Here we go again...

Labour Market Mismatch (Canadiana)

A reader of mine passed along a link to an article discussing some issues that firms and workers are facing in the Canadian labor market; see The widening gap in Canada's labour market.

A fault line is splintering Canada’s labour market into those who can’t find work and those who can’t find workers. 

There’s no shortage of people looking for work. Some 1.4 million Canadians are unemployed, the jobless rate is still above pre-recession levels and youth unemployment is nearly 14 per cent. Despite this, employers across the country say they can’t find the right workers for all kinds of available jobs.

... 

At the same time, employers from Newfoundland and Labrador to the Prairies say shortages are constraining their ability to grow, innovate and compete. The Canadian Chamber of Commerce cites a shortage of highly skilled labour as the top barrier for businesses, and the mismatch has recently landed on the radar of policy makers, including central bank Governor Mark Carney.

Structural shifts in the labour market mean “workers in declining industries may not have the skills or experience to match immediately the needs of employers in expanding industries,” Mr. Carney said in a speech last week. 

Unemployment is high, even as the number of job vacancies continues to rise, he noted. Indeed, as of December there were 222,000 vacancies across the country, according to Statistics Canada. The Bank of Canada’s business outlook survey, released Monday, showed a slew of employers are struggling to fill positions. The survey showed 27 per cent of firms reported a labour shortage this spring, near a three-year high, though below levels seen last decade.

This last sentence suggests that we've been here before. Ten years ago, Canada was emerging from a mild recession; see here: Cyclical asymmetry in the unemployment rate (a comparison of Canadian and U.S. unemployment rate dynamics). But is it really more of the same, or are things a little different this time?

In the tech hub of Waterloo, Ont., plenty of companies are expanding – or trying to. 

“It has always been difficult finding highly qualified scientific and technical personnel,” but the problem has become more acute in recent years, says Brian Doody, CEO of electronics firm Teledyne Dalsa Inc., a company that started as a spinoff from the University of Waterloo. 

“The lack of young people pursuing further education in engineering and science and technology, is definitely a strain on our ability to grow,” he said. There are some jobs in some microelectronics disciplines where “we have been looking for people for more than a year.”

It is interesting to see this employer suggesting that the problem has become more acute in recent years. Is this a cyclical or secular phenomenon? Maybe a bit of both?

“The lack of young people pursuing further education in engineering and science and technology, is definitely a strain on our ability to grow,” he said. There are some jobs in some microelectronics disciplines where “we have been looking for people for more than a year.” 

Other employers, such as Scott Calver, CFO of trucking firm Trimac Transportation Ltd., say the shortage is serious and getting worse. 

Young workers are not as motivated by money as older ones, Mr. Calver said. “The older generation considered that their success was based on the number of hours a week you worked, and how much money you made. The people in their 20s and 30s are not as motivated by money, and they value success on working fewer hours, not longer hours.” 

Trimac and other trucking firms are having trouble getting unemployed drivers to move to places where there are jobs. “What is disappointing is how limited Canadians are in their ability to relocate,” Mr. Calver said.

Their ability to relocate? Or their willingness to relocate? If the former, might some policy designed to facilitate mobility be in order?

In any case, does this sound like a problem that can be resolved by an increase in G?

PS. Prakash Loungani has an interesting post here pertaining to the U.S. labor market: Manufacturers Struggling to Find Skilled Workers. Oh, and here's David Altig with a good post on the subject: The structure of the structural unemployment question.

The Trend is the Cycle

Nir Jaimovich (Duke University) and Henry Siu (University of British Columbia) appear to have made a very interesting discovery. Evidently, there appears to be a very strong link between two much talked about phenomena: job polarization and jobless recoveries. Their paper is available here:  The Trend is the Cycle: Job Polarization and Jobless Recoveries. 

 

Job Polarization

 

Job polarization refers to the recent disappearance of employment in occupations in the middle of the skill distribution. To display this phenomenon, the authors decompose employment into occupational groups and then delineate occupations across two dimensions: cognitive vs. manual, and routine vs. non-routine. (These labels are largely self-explanatory, but refer to the paper for details.) 

 

Evidently, these classifications correspond to rankings in the occupational income distribution. Non-routine cognitive occupations tend to be high-skill jobs, and non-routine manual occupations tend to be low-skill jobs. Routine occupations--both cognitive and non-cognitive--tend to be middle-skill occupations. Here is what has been happening to employment shares across these categories:

Percent Change in Employment Shares by Occupation Group 

The figure above shows that across three decades, the share of employment in the middle of the skill distribution appears to be disappearing. Prime suspect: routine biased technological change (e.g., think of ATMs replacing bank tellers). 

 

Jobless Recoveries

 

Jobless recoveries refer to the unusually slow rebound in the employment dynamic following the end of a recession (when GDP is growing). Here is the typical pattern one would have observed 30 years ago (and before): 

The x-axis is centered at "0," which represents the trough of the recession (using NBER dating). The data is plotted for 2 years around the trough date. The shaded region represents peak-to-trough. The y-axis plots the percent change in employment relative to its value in the trough. The figure above shows the rapid recovery in employment following the trough of the recession.

The dynamic above is to be contrasted with what has happened in the previous 3 recessions (early 90s, early 00s, and most recent). Here is what the picture looks like following the most recent recession:

Yes, but what's the link?

 

So far, this all very interesting, but not very new. What is new is how the authors link the two phenomena. 

 

The following diagram depicts the same employment dynamic, except with employment decomposed along three dimensions: [1] non-routine cognitive, [2] routine, and [3] non-routine manual (same as the polarization graph above). Here is what we see for the 1982 recession:

 

In this episode, the recovery in employment was strong across all occupation groups. In fact, the non-routine  occupations appear to have grown throughout the recession! The key is the strong recovery in the non-routine class of occupations. Roughly the same pattern is evident in the 1970 and 1975 recession as well. 

 

But now let's take a look at the more recent employment dynamic: 

 

 

Here, we  see hardly any movement at all in the non-routine occupations, but a significant and persistent decline in routine occupations. The relative weakness in routine occupations is evident in the 1991 and 2001 recessions as well. 

 

The conclusion is that jobless recoveries are due entirely to jobless recoveries in routine occupations. In this group, employment never recovers beyond its trough level, nor does it come anywhere near its pre-recession peak. This is in stark contrast to earlier recessions. 

 

The Trend is the Cycle

 

Consider now how the employment ratio behaves across these 3 occupational groups over the sample period 1967-2011. Here is the non-routine cognitive group:

 

 Here is the non-routine manual group:

And here is the routine group:

 

This last figure is quite dramatic. It shows how, prior to 1990, routine employment rebounded strongly following a recession. But since 1990, it appears not to rebound at all. Indeed, the pattern appears to be one of a precipitous decline in recession, followed by a period of relative stability in the subsequent expansion. 

 

Moreover, because these routine jobs are associated with the middle of the income distribution, the data here suggest that job polarization is not a slow, secular phenomenon--it is intimately tied with the business cycle. 

 

Theory

 

The authors employ a Diamond-Mortensen-Pissarides model to show how routine biased technological change can lead to job polarization, and how recessions can accelerate this process. The modeling framework is a good choice, in my view. (In particular, I have a hard time imagining how an IS-LM or NK model can be used to understand this phenomenon--but maybe I just lack imagination!) 

The work here is still very preliminary, of course, but the results look promising. Needless to say, it is hardly the last word on the subject. But I am confident that talented young economists, like Nir and Henry, will continue to shed light on the matter. Well done, gentlemen. Keep up the good work! 

Bloggers in St. Louis

Another eventful week at work (last week). Two coauthors in town (Fabrizio Mattesini and Randy Wright) and three seminars (Nicolas Trachter, Mario Crucini, and Fatih Guvenen). Well, four seminars, I guess. Narayana Kocherlokota was in town to deliver the Hyman P. Minsky lecture at Washington University. Oh, and Mark Thoma also gave an interesting seminar on how bloggers have helped (or possibly harmed) the nature of economic discussions/debates (see here). Fascinating stuff all around.

Mark was visiting the St. Louis Fed all last week (at my invitation). Of course, I knew that keeping him away from Steve Williamson was going to be a problem. And I was right. Here they are at the Kocherlakota event, with me trying to break up their fight:

My two favorite bloggers coming to blows

Things calmed down after I agreed to buy them both a beer; see here:

Best Buds

Ah, good times. But now...back to work! 

Turning wine into liquidity

The bible credits Jesus with having once turned water into wine. Nowadays, we get to witness the "miracle" of seeing wine turned  into liquidity: Wine Cache Rescues Those Short of Cash.

Some pretty interesting tidbits of information here. For example,

"You'd be amazed by how many wealth individuals have terrible credit ratings. And besides, if you go to a bank, it can take weeks or months to get a loan. When we make a loan, it's usually the same day,'' said Joran Tabach-Bank, head of Beverly Loan Co. 

It seems hard to believe that the wealthy individuals he refers to apparently do not have good relationships with their local bank (he includes bankers in this set!). But there you have it.

"Most people have a vision of pawn shops as sad sites. But that's not the case here," Taback-Bank said. "I have a lot of people who come in who have a business opportunity and they need an infusion of cash for business purposes," he said. 

Like the banker who can't get the cash loan he needs from his own bank?!

Of course, the business of transforming "illiquid" assets into "liquid" securities is as old as...well, it's as old as banking; see here. And now that pawnshops are muscling into the shadow banking sector, I wonder how long it will be before they too will be subject to regulatory oversight? After all, standard monetary theory predicts that assets that suddenly emerge as good collateral objects will be valued above their "fundamental" value; i.e., they will trade a a liquidity premium (which resembles a price bubble).

And, lo and behold! Do I detect a wine price bubble emerging out there?! (source)

I wonder if the Fed might consider expanding the set of securities acceptable at the discount window to include...um, no...probably won't happen.

Anyway, just having a little fun here before cutting out for the weekend.
Cheers!

Fiscal Policy Ineffectiveness in the Interwar Period

Gregor Smith forwards me this paper (coauthored with Nicolas-Guillaume Martineau) that estimates the impact of government spending growth on real GDP growth, using data from a cross-section of countries during the interwar period 1920-1939. Here is their abstract:

Differences across countries or decades in the countercyclical stance of fiscal policy can help identify whether the growth in government spending affects output growth and so speeds recovery from a recession. We use the heterogeneity in the government-spending reaction functions across twenty countries in the interwar period to identify this effect. The main finding is that the growth of government spending did not have a significant effect on output growth, so that there is little evidence that this central aspect of fiscal policy played a stabilizing role from 1920 to 1939.

As usual, a lot depends on the plausibility of the identifying assumptions employed.

The limitations of the data, in frequency and coverage, may prevent us from reaching a precise answer about the efficacy of fiscal policy, but it is still of interest to know whether that is the conclusion. Of course, the answer and its precision depend on an identification scheme. This paper adopts a new one: the main identifying assumption is that countercyclical fiscal policy could have worked in any country but was not tried to the same extent in every country. Identification relies on differences across countries (or over time) in fiscal reaction functions that capture the response of government spending to national income. We use these differences to estimate the effect of this government spending on the growth of income in turn.

The authors conclude (in a rather provocative and un-Canadian manner, I might add), that the evidence over this period fits better the infamous "Treasury view."

If you have some thoughts to share on their identification scheme and/or interpretation of their results, please feel free to comment. I'm sure the authors would appreciate your feedback.