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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. PART 1 MACRO TRENDS AND HOUSEHOLD DEBT TIPPING POINTS 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 1 Some trends that may have made U.S. households more vulnerable to hitting tipping points 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 2 Income growth has been limited across much of the distribution Growth in Real Household Incomes, 1979-2013 (solid lines = market income; dashed lines = after-tax-and-tra nsfer income) Percent 125 100 + 88.3% + 84.7% 75 To p q u in tile 50 + 33.1% 25 + 11.2% 0 Mid d le q u in tile -25 -50 1979 1984 1989 Source. Congressional B udget Office. 6/22/17 1994 1999 2004 Dynan - The Evolving U.S. Economy and Household Debt 2009 3 Changes in the workplace imply less predictable incomes Individuals with Alternative Work Arrangements Percent of those employed 10 1995 2005 2015 8 6 4 2 0 I ndependent cont ractors On-call workers Temporary help agency Workers provided by workers contract firms Source. Katz and Krueger (2016); 2015 figures are the "alternative weights" estimates. 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 4 More students are borrowing to attend colleges that tend to add little to earnings prospects Source. Brookings (2015). 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 5 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 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 6 Some trends that make it more difficult for policymakers to mitigate the immediate macro fallout from reaching tipping points 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 7 Nominal interest rates have trended down Interest Rates Percent 20 15 10-year Treasu ry rate 10 Effective fed eral fu n d s rate 5 0 1955 1965 1975 1985 1995 2005 2015 Source. Federal Reserve B oard. 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 8 Government debt has risen (and is projected to rise further) Federal Debt Held by the Public 120 Percent of GDP Actual Project ed 2010 2020 100 80 60 40 20 0 1940 1950 1960 1970 1980 1990 2000 Source. Congerssional Budget Office. 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 9 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 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 10 Some trends that mean the longer-term effects of hitting tipping points are more consequential than in the past 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 11 Productivity growth has been low Productivity Growth (percent change, annual rate) 3.3 2.8 1.6 1.3 1950-1973 1974-1995 1996-2003 2004-2017 Note: Nonfarm business sect or. Time ranges correspond to different "eras" of productivity growth; width of each bar corresponds to the duration of time. Source. Bureau of Labor Statistics. 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 12 Business dynamism has fallen Activity Measures for Young Firms (Age 5 or Less) Percent Percent 25 60 Share of firms that are young (left axis) 50 20 40 15 30 Share of employment from young firms (lright axis) 10 20 5 10 0 0 1982 1987 1992 1997 2002 2007 Source. Decker, Haltiwanger, Harmin, and Miranda (2014). 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 13 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 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 14 PART 2 SOME BETTER NEWS 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 15 The current state of household balance sheets 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 16 The traditional indicators show enormous improvement Household Debt to Income Ratio Percent of disposable income 140 Household Debt Service Ratio Percent of disposable income 14 13 120 12 100 11 80 10 60 40 1980 9 1990 2000 2010 Source. Federal Reserve B oard. 6/22/17 8 1980 1990 2000 2010 Source. Federal Reserve B oard. Dynan - The Evolving U.S. Economy and Household Debt 17 The share of underwater mortgages has fallen substantially Share of Mortgages with Negative Equity Percent 35 30 25 20 15 10 5 0 2009 2010 2011 2012 2013 2014 2015 2016 Source. Z illow. 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 18 Delinquencies rates (broadly speaking) have largely normalized Overall Household Debt Delinquency Rate Percent of balances that are 90 or more days delinquent 10 8 6 4 2 0 1999 2002 2005 2008 2011 2014 2017 Source. Federal R eserve Bank of New York. 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 19 But one area to watch is student loans Student Debt as a Share of Overall Household Debt Percent 12 Student Debt Delinquency Rate Percent of balances 90+ days delinquent 14 12 10 10 8 8 6 6 4 4 2 2 0 2003 2006 2009 2012 2015 Source. Federal Reserve Bank of New York. 6/22/17 0 2003 2006 2009 2012 2015 Source. Federal Reserve Bank of New York. Dynan - The Evolving U.S. Economy and Household Debt 20 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 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 21 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 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 22 CONCLUSION AREAS WHERE MORE WORK NEEDS TO BE DONE 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 23 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 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 24 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 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 25 Endnotes Slide 3: Source—Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2013. 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, 1995-2015,” National Bureau of Economic Research Working Paper No. 22667, 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 2027. 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. 6/22/17 Dynan - The Evolving U.S. Economy and Household Debt 26