Hutchins Roundup: racial disparities, the Phillips curve and more

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Returns to homeownership for black and Hispanic homeowners are 3.7 and 2.0 percentage points lower, respectively, than for white homeowners, find Amir Kermani of UC Berkeley and Francis Wong of NBER. The disparity explains about 40% of the gap between blacks and whites in retired real estate wealth. The authors find little difference in the appreciation rates of properties owned by non-whites and whites; rather, lower returns for black and Hispanic homeowners are almost entirely attributable to a higher prevalence of “distressed” home sales, such as foreclosures, in which homes are sold at a premium price. Lower liquid wealth and income stability among black and Hispanic homeowners make them more likely to experience foreclosures and short sales – but even within those troubled sales, black and Hispanic homeowners are achieving lower returns of 3.8 and 2.7 percentage points respectively to those of white owners. The authors attribute this to shallower real estate markets in predominantly non-white communities, making it more difficult to sell homes quickly without discounts. Increasing the availability of mortgage modifications for distressed homeowners could dramatically reduce racial disparities in real estate wealth, according to the authors. Receiving a modification after three months of mortgage default can reduce the likelihood of foreclosure by 37 percentage points and increase a homeowner’s annual returns by as much as 9 percentage points.

The Phillips curve – the sensitivity of inflation to a slowing labor market – has become flatter in recent years, as changes in the unemployment rate have had less of an impact on price levels than in the past. Kristin Forbes of MIT, Christopher Collins of Morgan Stanley, and Joseph Gagnon of the Peterson Institute suggest that this is because the Phillips curve relationship is not linear during times of low inflation. Using cross-sectional data on advanced countries, the authors find that, when inflation is below 3% and economic output is below its potential, the negative relationship between inflation and the labor market slowdown becomes almost nonexistent. As such, inflation can persist even as spare capacity increases, possibly because businesses and workers tend to resist falling wages and prices. In contrast, the relationship of the Phillips curve is steep during times of high inflation or when the economy is running above capacity, the authors find. “In countries where inflation has exceeded 3%, it is possible that the slack cuts will start to have more impact on inflation than in the past, even before the output gaps close,” the authors conclude.

After the start of the COVID-19 crisis in the second quarter of 2020, Germany suffered a larger production contraction than the United States, but employment fell only 1.4% in Germany against over 13% in the US Shekhar Aiyar and Mai Chi Dao of the IMF investigate the stabilizing role of German Kurzabeit (KA), a job retention program that provides a government subsidy to employees working reduced hours; workers receive a regular wage for the hours worked and a reduced wage for the hours not worked. Using state-level variation in pandemic exposure and AK-uptake, the authors find that in the second quarter of 2020, unemployment would have been 2.9 percentage points higher without the program. Given that the unemployment rate was 6.2%, this implies that KA reduced unemployment by around a third on average. Additionally, they estimate that the retail contraction would have been 15% larger in the second quarter of 2020 without the program.

Line graph of the number of travelers passing through airport checkpoints, percentage change from same day in 2019 from January 2021 to present

Source: The Wall Street Journal

“[W]We need to take a new, holistic and pragmatic approach in our relationship with China that can truly advance our short and long term strategic and economic goals. As our economic relationship with China evolves, our tactics to defend our interests must also evolve. Over the years, the stakes keep growing and strengthening American competitiveness becomes all the more important. Our strategy must respond to these concerns while being flexible and agile to face the future challenges facing China that may arise ”, says Katherine Tai, US Trade Representative.

“Our goal is not to fuel trade tensions with China. Sustainable coexistence requires responsibility and respect for the enormous consequences of our actions. I am committed to meeting the many challenges ahead in this bilateral process in order to achieve meaningful results. But above all, we must defend our economic interests to the end. And that means taking whatever steps are necessary to protect ourselves from the waves of damage inflicted over the years by unfair competition. We must be ready to deploy all tools and explore the development of new ones, including collaborating with other economies and countries. ”


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