Big Money
The $800 Billion Paycheck Protection Program: Where Did the Money Go and Why Did it Go There?
David Autor et al.
NBER Working Paper, January 2022
Abstract:
The Paycheck Protection Program (PPP) provided small businesses with roughly $800 billion dollars in uncollateralized, low-interest loans during the pandemic, almost all of which will be forgiven. With 93 percent of small businesses ultimately receiving one or more loans, the PPP nearly saturated its market in just two months. We estimate that the program cumulatively preserved between 2 and 3 million job-years of employment over 14 months at a cost of $170K to $257K per job-year retained. These estimates imply that only 23 to 34 percent of PPP dollars went directly to workers who would otherwise have lost jobs; the balance flowed to business owners and shareholders, including creditors and suppliers of PPP-receiving firms. Program incidence was highly regressive, with about three-quarters of PPP funds accruing to the top quintile of households. This compares unfavorably to the other two major pandemic aid programs, enhanced UI benefits and Economic Impact Payments (i.e. stimulus checks). PPP's breakneck scale-up, its high cost per job saved, and its regressive incidence have a common origin: PPP was essentially untargeted because the United States lacked the administrative infrastructure to do otherwise. The more targeted pandemic business aid programs deployed by other high-income countries exemplify what is feasible with better administrative systems. Building similar capacity in the U.S. would enable greatly improved targeting of either employment subsidies or business liquidity when the next pandemic or other large-scale economic emergency occurs, as it surely will.
Predictably Unequal? The Effects of Machine Learning on Credit Markets
Andreas Fuster et al.
Journal of Finance, February 2022, Pages 5-47
Abstract:
Innovations in statistical technology in functions including credit-screening have raised concerns about distributional impacts across categories such as race. Theoretically, distributional effects of better statistical technology can come from greater flexibility to uncover structural relationships or from triangulation of otherwise excluded characteristics. Using data on U.S. mortgages, we predict default using traditional and machine learning models. We find that Black and Hispanic borrowers are disproportionately less likely to gain from the introduction of machine learning. In a simple equilibrium credit market model, machine learning increases disparity in rates between and within groups, with these changes attributable primarily to greater flexibility.
Board Diversity Matters: An Empirical Assessment of Community Lending at Federal Reserve-Regulated Banks
Brian Feinstein, Peter Conti-Brown & Kaleb Nygaard
University of Pennsylvania Working Paper, January 2022
Abstract:
This working paper shows that the increased presence of minority directors on the twelve regional Federal Reserve Banks - the quasi-governmental entities responsible for evaluating many commercial banks' lending to underserved communities - is associated with greater lending to these communities. To assess this relationship, we leverage original data on the demographic characteristics of Reserve Bank boards of directors and exploit three unusual features of the U.S. financial regulatory system. First, that some Reserve Districts bifurcate states allows for comparisons of lending postures for commercial banks subject to identical state banking regulations - and, for geographically proximate banks on either side of the line, substantially similar economic conditions - but different Federal Reserve Bank supervisors. Second, that Federal Reserve Banks evaluate some commercial banks' community lending and other federal regulators evaluate this activity at other commercial banks within the same geographic region presents another comparison group. Third, a 2010 statutory change that reduced some directors' roles in Reserve Bank governance enables analysis of the extent to which director diversity is correlated with community lending before and after this legal change that presumably tempered some directors' power over regulated commercial banks but left other directors' authority unaffected. Empirical analyses based on all three identification strategies show consistent evidence that racial diversity on Reserve Bank boards is associated with Fed-regulated banks' increased lending to underserved groups. That diversity can be consequential even where, as with the Fed, the connection between the organization's leadership and policy outcomes is attenuated encourages greater scholarly attention to the influence of diversity on outcomes in other public- and private-sector contexts.
The Sustainability of State and Local Pensions: A Public Finance Approach
Jamie Lenney et al.
Brookings Papers on Economic Activity, Spring 2021, Pages 1-48
Abstract:
In this paper we explore the fiscal sustainability of US state and local government pension plans. Specifically, we examine whether, under current benefit and funding policies, state and local pension plans will ever become insolvent and if so, when. We then examine the fiscal cost of stabilizing pension debt as a share of the economy and examine the cost associated with delaying such stabilization into the future. We find that, despite the projected increase in the ratio of beneficiaries to workers as a result of population aging, state and local government pension benefit payments as a share of the economy are currently near their peak and will eventually decline significantly. This previously undocumented pattern reflects the significant reforms enacted by many plans which lower benefits for new hires and cost-of-living adjustments often set beneath the expected pace of inflation. Under low or moderate asset return assumptions, we find that few plans are likely to exhaust their assets over the next few decades. Nonetheless, under these asset returns, plans are currently not sustainable as pension debt is set to rise indefinitely; plans will therefore need to take action to reach sustainability. But the required fiscal adjustments are generally moderate in size and in all cases are substantially lower than the adjustments required under the typical full prefunding benchmark. We also find generally modest returns, if any, to starting this stabilization process now versus a decade in the future. Of course, there is significant heterogeneity, with some plans requiring very large increases to stabilize their pension debt.
Unemployment, Partial Insurance, and the Multiplier Effects of Government Spending
Gregory Givens
International Economic Review, forthcoming
Abstract:
I interpret evidence on government spending multipliers using a model in which workers are not fully insured against job loss. Government consumption affects aggregate spending along two margins: (i) an intensive margin owing to a fall in household wealth and (ii) an extensive margin that accounts for growth in the workforce. At insurance levels below a certain threshold, the positive effects of (ii) dominate the negative effects of (i), leading to multipliers for private consumption and output that exceed zero and one. Similar results appear in a quantitative model scaled to match micro estimates on the consumption cost of unemployment.
Service Solvency and Quality of Life After Municipal Bankruptcy
Carolyn Abott & Akheil Singla
Journal of Political Institutions and Political Economy, June 2021, Pages 249-280
Abstract:
Despite playing a critical role in the delivery of public goods to residents, American local governments face many resource-related challenges, including hard budget constraints, state restrictions on revenue generation, and declining economic bases. These situations can sometimes result in a perpetual cycle of fiscal stress, thereby harming residents via the impaired delivery of public goods. This research examines how an understudied and often maligned intervention - Chapter 9 of the federal bankruptcy code, or municipal bankruptcy - might affect residents via local government service delivery. After employing propensity score matching to generate a set of control governments that are fiscally similar prior to intervention, we assess the effects of filing for Chapter 9 on the delivery of public goods. We find that bankrupt governments make deeper cuts to expenditures across a variety of service areas relative to the counterfactual. We also show that these cuts are concentrated in the area of public safety and policing but that these cuts come with an apparent improvement to service quality via increases to crime clearance rates and no negative effects on crime rates. This suggests that Chapter 9 may provide local governments the space to reorganize their fiscal profiles in ways that are politically-untenable during normal times but potentially yield improved public goods at a lower cost for residents.
Is Good Credit Good? State Credit Ratings and Economic Insecurity, 1996-2012
Davon Norris & Elizabeth Martin
Sociological Forum, forthcoming
Abstract:
Obtaining a good credit rating is an important financial goal for governments since good credit yields lower interest rates and signals fiscal responsibility. But what does a government's quest for better credit mean for the wellbeing of its residents? Although good credit gives governments access to cheaper borrowing to invest in socially beneficial services and infrastructure, working to obtain good credit may lead governments to act in ways that appease bondholders but are unfavorable to its residents. Using the case of state government credit ratings from 1996 to 2012, we demonstrate that increases in state credit ratings are associated with higher economic insecurity for a state's population, net of political and economic controls, as well as state and year fixed effects. We argue these findings illustrate that despite the economic rewards, good credit becomes detrimental once we consider the potential tradeoffs relative to other socially and economically meaningful relationships.
Let the rich be flooded: The distribution of financial aid and distress after Hurricane Harvey
Stephen Billings, Emily Gallagher & Lowell Ricketts
Journal of Financial Economics, forthcoming
Abstract:
Outside of flood hazard zones, households must decide whether to insure or rely on disaster assistance to manage flood risk. We use the quasi-random flooding generated by Hurricane Harvey, which hit Houston in August 2017, to understand the implications of flood losses for households with differing access to insurance and credit. Outside the floodplain, credit-constrained homeowners experience a 20% increase in bankruptcies and a 13% increase in the share of debt in severe delinquency in flooded blocks relative to non-flooded areas. Treatment effects are universally insignificant inside the floodplain, implying that flood insurance mitigates the financial impact of flooding across the credit distribution. Disaster assistance, on the other hand, does not appear to counteract the role of initial inequalities on post-disaster credit outcomes. We find SBA disaster loans and, more surprisingly, FEMA grants to both be regressive in allocation. Our results highlight that averages mask important heterogeneity after disasters, which challenges existing narratives of how effectively Federal disaster programs mitigate the financial burden of natural disasters.
Uneven Paths: Recovery in Louisiana Parishes after Hurricanes Katrina and Rita
Timothy Fraser et al.
Northeastern University Working Paper, January 2022
Abstract:
Factors driving the trajectory of community recovery after disaster are not well understood. We assess why some communities show stronger recoveries from disaster than others, examining the role of four policy toolkits that U.S. county governments frequently adopt to recover from disaster. Using mixed methods, we examine the cases of Hurricanes Katrina and Rita with a novel dataset of recovery policies adopted within each Louisiana parish following the disasters. We introduce a typology for recovery strategies and analyze policy adoption patterns after crises. To compare which policy toolkit leads to the best recovery outcomes, we use synthetic control experiments on the 20 parishes hit by Hurricanes Katrina and Rita between August and September 2005, tracking net income inflow and net inmigration measures from 1996 to 2018 over 1403 parish-year observations, paired with qualitative case studies of parish policies and recovery outcomes. On average, soft and local recovery policies focused on community policies and feedback helped parishes stem the flow of finances away from the disaster zone; in comparison, hard and state policies focused on physical infrastructure and experienced weaker recovery. Evidence shows that soft and local policy toolkits can accelerate recovery and that governments seeking to rebuild infrastructure should invest in locally-engaged community development in order to attain better overall recovery.
Should We Have Automatic Triggers for Unemployment Benefit Duration And How Costly Would They Be?
Gabriel Chodorow-Reich, Peter Ganong & Jonathan Gruber
NBER Working Paper, January 2022
Abstract:
We model automatic trigger policies for unemployment insurance by simulating a weekly panel of individual labor market histories, grouped by state. We reach three conclusions: (i) policies designed to trigger immediately at the onset of a recession result in benefit extensions that occur in less sick labor markets than the historical average for benefit extensions; (ii) the ad hoc extensions in the 2001 and 2007-09 recessions in total cover a similar number of additional weeks as common proposals for automatic triggers, but concentrate coverage more in weaker labor markets; (iii) compared to ex post policy, the cost of common proposals for automatic triggers is close to zero.
Small Business Lending and Regulation for Small Banks
Abhishek Srivastav & Francesco Vallascas
Management Science, forthcoming
Abstract:
Since May 2015 several U.S. Bank Holding Companies (BHCs) have been newly classified as small banks by regulators, thus benefiting from a friendlier regulatory capital environment. Using a difference-in-differences setting, we show that less regulation on small BHCs boosts small business lending of the affiliated commercial banks. We employ various tests to demonstrate that these findings are attributable to a capital channel where increases in lending are driven by the preferential capital treatment granted to the small BHC. The regulatory capital relief also has some positive effects for the local economy. Overall, the effects of the regulatory capital relief for small BHCs are consistent with its desired policy objectives.
The Value of Verified Employment Data for Consumer Lending: Evidence from Equifax
Tat Chan et al.
Marketing Science, forthcoming
Abstract:
What is the value of verified employment data in consumer lending? We study this question using a data set covering all employment verification inquiries to Equifax. Using a difference-in-differences approach, we analyze the changes in applicants' loan outcomes after their employers join Equifax's digital verification system, which provides lenders with an efficient way of accessing the (employer-) verified employment data in auto loan applications. Holding the employment status constant, we find that the availability of digitally verified data significantly expands credit access: the loan origination rate increases by 35.5% on average, and is more significant among deep subprime (146%) and subprime consumers (44%). The interest rates charged on these loans rise only slightly. The expanded credit access also benefits lenders, with an estimated 19.6% increase in profit. This is because the benefit of the market expansion effect dominates the cost of a higher delinquency risk among the expanded loan portfolio. Our results suggest that, besides seeking new data sources, managers and policy makers should also consider ways to extract more value from existing data.
Default Effects of Credit Card Minimum Payments
Hiroaki Sakaguchi et al.
Journal of Marketing Research, forthcoming
Abstract:
Credit card minimum payments are designed to ensure that individuals pay down their debt over time, and scheduling minimum automatic repayments helps to avoid forgetting to repay. Yet minimum payments have additional, unintended psychological default effects by drawing attention away from the card balance due. First, once individuals set the minimum automatic repayment as the default, they then neglect to make the occasional larger repayments they made previously. As a result, individuals incur considerably more credit card interest than late payment fees avoided. Using detailed transaction data, the authors show that approximately 8% of all of the interest ever paid is due to this effect. Second, manual credit card payments are lower when individuals are prompted with minimum payment information. Two new interventions to mitigate this effect are tested in an experiment, prompting full repayment and prompting those repaying little to pay more, with large counter effects. Hence, shrouding the minimum payment option for automatic and manual payments and directing attention to the full balance may remedy these unintended effects.
Doing It by the Book: Political Contestability and Public Contract Renegotiations
Jean Beuve, Marian Moszoro & Pablo Spiller
Journal of Law, Economics, and Organization, forthcoming
Abstract:
We present a public procurement model in which contractual flexibility and political tolerance for contractual deviations determine renegotiations. In the model, contractual flexibility allows for adaptation without formal renegotiation, while political tolerance for deviations decreases with political competition. We then compare renegotiation rates of procurement contracts in which the procurer is either a public administration or a private corporation. We find robust evidence consistent with the model predictions: public-to-private contracts are renegotiated more often than comparable private-to-private contracts, and that this pattern is more salient in politically contestable jurisdictions. The frequent renegotiation of public contracts results from their inherent rigidity and provides a relational quality of adaptability to contingencies in politically contestable environments.
Can Targeted Government Investment in Rural Establishments Induce Innovative Activity?
John Mann, Steven Miller & Trey Malone
Economic Development Quarterly, forthcoming
Abstract:
Rural economic development strategies increasingly focus on "homegrown" economic policies, including investing in entrepreneurial development. However, few studies have evaluated the effectiveness of these strategies, in part because of data constraints. Using a mixed-methods approach, basic t-tests, fixed-effect probit regression, and propensity scoring techniques on data from the Small Business Innovation Research Program and the Rural Establishment Innovation Survey, this article tests the effectiveness of federal policies in inducing innovative activity in rural and urban establishments. The authors also explore indirect comparisons between rural and urban establishments. They find that Small Business Innovation Research (SBIR) awards can increase the likelihood that an establishment will act innovatively and that this effect may be larger in rural settings than in urban settings. Results suggest that targeted public investment can induce rural innovation.
Compensating communities for industrial disamenities: The case of shale gas development
Max Harleman
Economic Inquiry, forthcoming
Abstract:
Governments often compensate communities for hosting disruptive industries. Sometimes compensation comes with restrictions that preclude highly-valued investments. I exploit policy discontinuities at the Pennsylvania-Ohio border to understand how restrictions affect local investment. Ohio delivers unrestricted revenues to schools and municipalities with shale development. Pennsylvania leaves out schools, and requires that municipalities address the industry's impacts. Municipalities in both states save most of the revenues. Ohio schools leverage them to increase borrowing and finance capital investments. This suggests that affected residents have greater demand for school investments, and that broad use of compensation may benefit communities more than allocating it narrowly.