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April 30, 2009
The undocumented and business survival in the United States
Based on the severe economic contraction during the past six months, it is obvious why the topic of the economy receives so much attention as the economy directly weighs on the lives of citizens and businesses here and throughout the world. But the weight of the economy can have indirect effects as well, including potentially shifting attention from other policy issues.
For instance, a recent Bloomberg News article describes how economic troubles may affect potential immigration reform legislation.
"The long campaign to overhaul U.S. immigration laws may be derailed for yet another year—this time by the deteriorating economy."
The immigration debate is multifaceted, complex, and, at times, contentious. There are myriad issues to consider when entering into the immigration reform discussion, many of which are best left to the political process to decide. But, as the Bloomberg article describes, there is an important economic component to the immigration discussion. Economists can make a modest contribution to the debate by supplying unbiased research that touches on various aspects of the immigration question.
In that spirit, I offer up the results of research I've done with my colleagues, Julie Hotchkiss of the Federal Reserve Bank of Atlanta and David Brown of Heriot-Watt University in Edinburgh. Our research looks into the potential impact of undocumented workers on firm survival and is based on confidential information from the state of Georgia, which between 2000 and 2008 experienced the fastest growth in the number of undocumented immigrants in the United States, according to the Department of Homeland Security.
In this research, we find that firms employing undocumented workers enjoy a competitive advantage over firms that do not employ undocumented workers. We also observe that firms engage in herding behavior, i.e., firms will employ undocumented workers if their competitors do. The herding behavior is a natural consequence of competitive pressure: Rival firms' undocumented workforce lowers a firms' survival probability, while a firm's own undocumented workforce strongly enhances that firm's survival prospects.
Our analysis suggests that cost savings enjoyed by firms employing undocumented workers is a result of paying these workers wages that are less than what is paid to comparable documented workers. Because the advantage of hiring undocumented workers is cost-related, herding behavior and competitive effects are weaker if firms have the option to shift labor-intensive production out of state or abroad.
Our findings have several implications relevant to the policy discussion. The most straightforward prediction would be that if immigration reform is successful in forcing firms to pay undocumented workers market wages, the competitive advantage of hiring these workers may disappear. As a consequence, the demand for undocumented workers might well dissipate.
In addition, reform efforts that reduced the supply of undocumented workers (e.g., through tougher border and worksite enforcement) would raise firms' production costs, which may have an impact on prices if firms pass through these additional costs to consumers. However, this last point is not a direct implication of our analysis.
One word of caution about this study: Our results are based on the payroll reports of employers. This study does not have information on the activities of undocumented workers that are not recorded on firms' official wage records.
There are, of course, many other aspects of immigration policy to be considered, and we are loath to characterize the results of our research as supporting any particular approach or conclusion. But we do hope it sheds some light on a debate that already has its fair share of heat.
By Myriam Quispe-Agnoli, research economist and assistant policy adviser at the Atlanta Fed
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April 24, 2009
Is the investment trend in the current recession “run of the mill”?
In the last macroblog post, David Altig examined personal consumption expenditures during recessionary periods. Reader Dave Backus, the Heinz Riehl Professor of International Economics and Finance at New York University's Stern School of Business, sent us a follow-up email asking about other components of gross domestic product, and investment in particular. Good question, so let's take a look at investment during the current and past recessions.
Earlier this year, the University of Chicago's Casey Mulligan, writing in the New York Times' Economix blog, examined real investment trends for the past four recessions and called the current investment trend in this recession "run of the mill." Employing the same basic idea from our previous macroblog post, below is a chart showing the percentage change from the first quarter to the trough of the last eight recessions, along with the percentage change from the current recession's first quarter to the first quarter of this year.
Prof. Mulligan's point emerges pretty clearly. Matched up against previous recessions, there is nothing spectacularly unusual about the declines in overall investment expenditure—not yet, at any rate. But that picture may be a bit deceiving. Here's the same sort of graph for fixed investment—that is, all investment expenditures other than changes in inventories.
The current recession—which is not yet over as far as we know—does not stack up so favorably when it comes to fixed investment spending. In fact it leads the pack in terms of investment decline among the eight recessions since 1960. This fact is not too surprising given the the relative impact of residential private investment in the current recession. This impact can be seen by comparing gross domestic private investment with gross domestic private investment excluding residential private investment. In all previous recessions apart from 1990, the percentage change in gross domestic private investment excluding residential private investment significantly exceeds the drop in gross private investment, and in the 1990 recession they were roughly comparable. In the current recession, gross domestic private investment excluding residential investment is significantly less than the gross domestic private investment.
In addition to that difference, the comparison of gross investment patterns is significantly affected by the behavior of inventory changes across recessions. The modest decline in overall inventories in the current downturn is the reason for the relatively benign view of investment highlighted in Casey Mulligan's Economix piece.
So, let's consider again whether the current investment trend in this recession is "run of the mill." Perhaps at first glance it is, but when we break down the components of gross domestic private investment, these charts inform us that the relative declines in the various components of gross domestic private investment are quite different in this recession. And just how benign that picture is depends, in part, on whether the slow pace of inventory decumulation thus far proves a lasting feature of this recession. On that, we will just have to wait and see.
By Courtney Nosal, economic research analyst at the Atlanta Fed
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April 17, 2009
Abnormal consumer spending—not quite
I was struck by this headline which led a Tuesday post in Economix, the economics blog of the New York Times—"Consumer Spending Declines: A Historical Oddity."
Sometimes these sorts of teasers are not great indicators of a more nuanced analysis that follows, but in this case the headline synopsis pretty well captured the plot.
"That the American consumer is cutting back spending is blindingly obvious these days, but it is still hard to overemphasize this central feature of the current recession. Americans borrowed like crazy for years against their home values, which have now fallen and are dragging consumption down with them.
"The sustained decline in consumer spending is also—as the European Central Bank points out in a tight piece of work synthesizing features of past recessions—a historical oddity of the first order."
That analysis is not, I think, quite so tight. Here's a chart that measures the cumulative percent change in real personal consumption expenditures from the beginning of each U.S. recession since 1960 to the lowest point of those expenditures over the recession's course:
The first very obvious feature of this picture is that there is nothing like a typical recession pattern when it comes to consumer spending. The second obvious feature is that the fall in household consumption in the current downturn looks entirely unremarkable when stacked up against past episodes.
For those of you still reading, it would be fair of you to remind me that the current recession is not over, so the record is yet incomplete. Though personal consumption expenditures actually increased in January and February, the most recent retail sales report might warrant caution. In fact, Economix has followed up with a cross-recession comparison of retail sales that definitely puts the current recession in a relatively bad light. That's fine, though I would note that retail sales are only a piece of overall personal consumption expenditures, a piece that does not really capture the increasing share of spending on services that has occurred over the postwar period.
But even if the turnaround in overall consumer spending proves durable, it is not entirely clear that there is much solace to be taken from such a development. If you are inclined to look to the darker side of things, the fact is that a turnaround in consumption generally comes well before a recession ends. In the long and relatively severe recessions of 1973–75 and 1981–82, consumer spending bottomed out a full year before the economy turned around in general. (The bottom was eight months before the end of the recession in the 1969–70 and 2001 recessions and two months before the end in the 1960–61, 1980, and 1990–91 recessions.)
For lots of reasons, then, I wouldn't want to overweight good (or even benign) news from the consumer spending front. But historical oddity? I don't believe so—yet.
By David Altig, senior vice president and research director at the Atlanta Fed
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April 15, 2009
Déjà vu all over again
I have, recently, been experiencing a strange sense of familiarity watching the Congressional Budget Office's (CBO) efforts to monitor the budgetary implications of the Troubled Asset Relief Program (TARP). On the one hand, the long-term costs are rising:
"Since January, CBO has raised its estimate of the net cost (on a present-value basis) of the transactions covered by the TARP by $152 billion for 2009 and by $15 billion for 2010. Those revisions stem from three factors—changes in financial market conditions, new transactions, and a small shift in the anticipated timing of disbursements."
On the other hand, the CBO wants to book less spending in the near term than what the Treasury has in mind, for reasons that have to do with accounting procedures and the pace of actual TARP spending:
"Budget accounting issues are clouding the deficit forecasts for this year. The above estimate of this year's deficit to date includes outlays of about $290 billion for the Troubled Asset Relief Program (TARP). Although the Treasury has been recording most spending for the TARP on a cash basis, CBO believes that the budget should record the program's activities on a net present-value basis adjusted for market risk. Using that approach, CBO estimates that outlays of $140 billion should be recorded for the TARP through March. That approach would yield an estimated deficit of $803 billion for the first half of the year."
After a few minutes of pondering why it seemed like I had seen this before, I flashed back to my early days in the Federal Reserve System and the saga of the Resolution Trust Corporation, the Congress-created vehicle that helped the country work its way through the aftermath of the 1980s savings and loan crisis. In August 1989, here's what the Congressional Budget Office was thinking:
"The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (Public Law 101-73) is a complex measure affecting federal government taxes, premiums, spending, borrowing, and regulation. While the bill strengthens the government's system for insuring commercial banks, its primary focus lies in addressing the huge liabilities forced on the government by failed and insolvent savings and loan institutions.
"… The legislation establishes a new Resolution Trust Corporation (RTC) to merge or close currently insolvent insured thrifts. The RTC is to spend a total of $50 billion on this task… The $50 billion in resources available to the RTC are sufficient, in the Administration's estimate, to cover the government's liabilities for currently insolvent thrifts with $10 billion left over to help defray interest costs…"
The CBO, however, was not convinced that the RTC's resolutions would come so cheap.
"… many observers, including CBO, doubt that this level of resources is enough."
And in January 1990, the CBO was unhappy with the Treasury's accounting procedures:
"Last year's Financial Institutions Reform, Recovery, and Enforcement Act effectively excluded about $30 billion of deposit insurance spending from budget totals in 1990 and 1991, by having the funds borrowed through a newly chartered, government-sponsored enterprise, the Resolution Financing Corporation (REFCORP).
"REFCORP's status as a government-chartered enterprise is critical to the budgetary treatment of its borrowing. Normally, the U.S. Treasury conducts any necessary financing for the government. Treasury borrowing finances the deficit; it does not reduce the deficit. Otherwise, the budget would always be balanced. But because REFCORP is technically private, the funds that it borrows and turns over to the (on-budget) Resolution Trust Corporation count as offsetting collections. These funds offset the associated spending to resolve failed savings and loans. …
"CBO believes that REFCORP is a government entity, that its borrowing is government borrowing, and that the budgetary treatment that has been adopted is inappropriate."
By accounting for things the way they thought they should be accounted for, the CBO estimated as of August 1991 that the costs of the resolution process would in fact be quite a lot higher than initially assumed:
"CBO now believes that the RTC will pay total losses of about $155 billion (in 1990 dollars) for a caseload of about 1,500 institutions."
What is more, the whole process was taking quite a bit more time than originally hoped:
"CBO assumes that the RTC continues resolving institutions through calendar year 1994, more than two years longer than originally scheduled."
In August 1992, even that time frame was looking optimistic…
"CBO assumes that the RTC or a successor will deal with a heavy caseload through 1998…"
But the news wasn't all bad:
"CBO estimates the cleanup's cost at $135 billion. Sobering as this figure is, it actually represents a glimmer of good news: CBO's former estimate was about $155 billion."
Movement in the right direction notwithstanding, Congress did not exactly jump at the opportunity to extend the RTC's life span. From the January 1994 Economic and Budget Outlook:
"The savings and loan cleanup is forging ahead after a prolonged interruption in its funding. From April 1992 until December 1993, the Resolution Trust Corporation (RTC) had only very limited authority to incur losses. It was largely confined to selling off its portfolio of assets and to resolving the occasional institution that could be closed or merged at little or no loss to the government; hence, the RTC recorded negative outlays in both 1992 and 1993.
"The Congress brought this drought to an end in late 1993 with the Resolution Trust Corporation Completion Act."
And when Congress eventually acted, the picture was brighter yet:
"There is good news on the RTC front: the agency will not fulfill the gloomy predictions that were common even a year or two ago. CBO now estimates the total value of losses covered by the RTC since its inception in 1989 at about $90 billion (expressed, by convention, in 1990 dollars)."
And that is about where it ended up:
"The total tab for the RTC lies somewhere between the sunniest and gloomiest projections made during its early years. CBO now estimates the total value of losses covered by the RTC and its successor through 2000 at about $90 billion (expressed, by convention, in 1990 dollars). …
"Four and a half years ago, CBO feared that the RTC's costs alone could be as high as $185 billion, and some outside experts were even more pessimistic. (The Bush Administration, in contrast, originally stated that $50 billion would be sufficient.)"
So there you have it. The last great experiment in working through financial crisis took longer than expected, involved some accounting pushing and shoving at the outset, confronted a skeptical Congress, and cost more than initially projected, but quite a lot less than feared.
Make of it what you will.
By David Altig, senior vice president and research director at the Atlanta Fed
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April 06, 2009
The mean and the variance of the longer-term inflation outlook
Ever hear the one about the statistician who had his head in the oven, his feet in the freezer, but who said he felt fine—on average? We kind of feel that way when we look at the recent distribution of inflation forecasts. Not only does the Federal Reserve Bank of Atlanta produce its own economic forecasts, but we’re also eager consumers of others’ forecasts. That’s because we believe there is useful information to be learned from varying views. For one thing, it helps to reveal the risks. The current inflation forecast is a good case-in-point.
Figure 1 shows the consensus CPI forecast for the Blue Chip panel of economic forecasters from March 10:
The “average” forecast shows CPI-measured inflation falling at a 2.25 percent (annualized) pace in the current quarter, followed by a modest .25 percent rise in the second quarter and then gradually climbing to a 2 percent growth trend in the second half of next year.
Our interpretation of the Blue Chip consensus inflation forecast (if such a thing is really possible, since it’s merely an average of many forecasts) is that falling energy and other commodity prices combined with a large amount of economic slack is likely to exert considerable downward pressure on inflation over the next few quarters. But as the economy gradually recovers, we should begin to see a gradual return of inflation to something closer to what the Federal Reserve sees as consistent with price stability.
OK, that’s the combined wisdom of the 50-some members of the consensus forecast panel. But there’s a bit more to the story than just the average forecast. Consider the 10 highest inflation forecasts relative to the 10 lowest. The inflation “optimists” see the CPI tracking at, or a shade under, 0.5 percent over the forecast horizon, while the pessimists see inflation continuing to move higher and topping 3 percent (annualized) in the second half of 2010. Now, some discrepancy in economic forecasts is to be expected, but the range of disagreement in the Blue Chip forecast about the longer-term inflation trend—at a little over 3 percentage points—is an exceptionally large spread. (By our calculations, it’s about twice the spread of the group’s longer-term average inflation prediction.)
However, we’ve got a pretty good idea of what’s causing such a large discrepancy. There likely are two competing and seemingly large risks within the consensus. First, some of these forecasters may believe the economy will not rebound in the way that is implied by the forecast average, which is to say that the economic slack (see Friday’s jobs report) putting downward pressure on inflation may be with us for some time. These forces could be exacerbated and prolonged if the public were to incorporate the lower near-term price behavior into their longer-term inflation expectations. We’re going to speculate that this is the inflation scenario the Blue Chip inflation “optimists” have in mind.
On the other side, some of these Blue Chip forecasters may believe the economy will do an abrupt about-face and climb out of the recession more adeptly than the consensus now predicts. In their view, if it does, and the Federal Reserve is not adept at shrinking the size of its balance sheet, there would be the proverbial inflationary scenario of “too much money chasing too few goods.” And, again, if the public incorporates this scenario into their expectations, the prediction of the inflationary pessimists comes to pass.
These competing inflation scenarios were a topic of conversation at the January Federal Open Market Committee (FOMC) meeting (below is a quote from the minutes of that meeting):
“Many [FOMC meeting] participants noted some risk of a protracted period of excessively low inflation, especially if inflation expectations were to move down in response to lower actual inflation and increasing economic slack, and a few even saw some risk of deflation.
“Several others, however, anticipated that longer-run inflation expectations would remain well anchored, supported in part by the Federal Reserve’s aggressive expansion of its balance sheet and the resulting growth of the monetary base…some noted a risk that expected inflation might actually increase to an undesirably high level if the public does not understand that the Federal Reserve’s liquidity facilities will be wound down and its balance sheet will shrink as economic and financial conditions improve.”
One risk has feet in the fire—the other in the freezer. Here’s hoping that the consensus is right.
Update from April 6, 2009:
The April 10 Blue Chip report came out today, showing a further widening of the spread between the forecasts for CPI inflation. While the mean forecast was revised only slightly, the difference between the top and bottom 10 forecasts for Q4 2010 increased by a full percentage point, from 3.3 to 4.3.
By Michael Bryan, vice president, and Laurel Graefe, economic analyst, in the research department at the Atlanta Fed
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April 01, 2009
Snapping ropes and breaking bricks
James Hamilton of Econbrowser is concerned about the current state of monetary policy. On the blog, Jim writes:
"I would suggest first that the new Fed balance sheet represents a fundamental transformation of the role of the central bank. The whole idea behind open market operations is to make the process of creating new money completely separate from the decision of who receives any fiscal transfers. In a traditional open market operation, the Fed buys or sells an existing Treasury obligation for the same price anyone else would pay for the security. As a result, the operation itself does not involve any net transfer of wealth between the Fed and the private sector. The philosophy is that the Fed should base its decisions on economy-wide conditions, and leave it entirely up to the market or fiscal authorities to determine where those funds get allocated.
"The philosophy behind the pullulating new Fed facilities is precisely the opposite of that traditional concept. The whole purpose of these facilities is to redirect capital to specific perceived priorities. I am uncomfortable on a general level with the suggestion that unelected Fed officials are better able to make such decisions than private investors who put their own capital where they think it will earn the highest reward."
After I looked up "pullulating," I found much to agree with in Professor Hamilton's description—or at least I did up to that last sentence. I certainly share his discomfort with a presumption that "Fed officials are better able to make… decisions than private investors," but that doesn't quite capture my view—and I emphasize my view—of how nontraditional policy is supposed to work. My own description of what the "fundamental transformation" of central bank policy is all about appears, hot off of the virtual press, in the first quarter issue of EconSouth, the Atlanta Fed's regional economics publication:
"I have a simple way of thinking about how monetary policy works. Imagine a long rope. At one of end of the rope are short-term, relatively riskless interest rates. Farther along the rope are yields on longer-term but still relatively safe assets. Off at the other end of the rope are multiple tethers representing mortgage rates, corporate bond rates, and auto loan rates—the sorts of interest rates that drive decisions by businesses and consumers. In the textbook version of central banking, the monetary authority grabs the short end of this allegorical rope, where the federal funds rate resides, and gives it a snap. The motion ripples down and hopefully reaches longer-term U.S. Treasury rates, which then relay the action to other market interest rates, where the changes reverberate throughout the economy at large.
"That's the story in normal times, and over the past year and a half the Federal Open Market Committee (FOMC) has done a fair bit of rope-snapping. In August 2007 the FOMC set the federal funds rate target—the overnight rate on loans made between banks—at 5.25 percent. As of December 2008, the rate target was lowered to a very low range of 0–0.25 percent. As the committee noted then (and reiterated in January), 'weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.'
"These FOMC statements held another extremely important message: 'The focus of policy going forward will be to support the functioning of financial markets and stimulate the economy.' In a speech to the National Press Club on Feb. 18, Federal Reserve Chairman Ben Bernanke elaborated:"
'Extraordinary times call for extraordinary measures. Responding to the very difficult economic and financial challenges we face, the Federal Reserve has gone beyond traditional monetary policy making to develop new policy tools to address the dysfunctions in the nation's credit markets.'
"One way to view the effects of those credit market dysfunctions is to imagine that someone had placed a series of bricks at strategic points along the segment of rope connecting short-term interest rates to broader market rates. With these bricks in place, it is simply not enough for a central bank to keep snapping short-term interest rates: The bricks—dysfunctions in the markets—will keep the impulse from being transmitted to the interest rates that are directly connected to market outcomes. Thus, a new set of policy instruments is needed, instruments that allow the monetary authority to circumvent blockages in the monetary transmission mechanism."
The "policy instruments" I have in mind, of course, are the pullulating new facilities that have Jim Hamilton worried. But it is worth emphasizing that many of these facilities are motivated by "unusual and exigent circumstances," a point emphasized in the recent Treasury-Federal Reserve statement (which is discussed in some detail by Tim Duy):
"As long as unusual and exigent circumstances persist, the Federal Reserve will continue to use all its tools working closely and cooperatively with the Treasury and other agencies as needed to improve the functioning of credit markets, help prevent the failure of institutions that could cause systemic damage, and to foster the stabilization and repair of the financial system."
How long will those conditions persist? Returning to my EconSouth commentary:
"No set timetable exists, but one would presume that as long as the bricks of market dysfunction are lying around, the tools will be necessary. Eventually, of course, markets will heal, the bricks will crumble, and the stage will be set to a return to business as usual in monetary policy and the economy. The sooner the better, but in the meantime it's helpful to have the tools in hand to start cracking the bricks."
That's my story, and I'm sticking to it.
By David Altig, senior vice president and research director of the Atlanta Fed
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