Saturday, June 22, 2013
Two forces that have extended unemployment in this recession.
Lee E. Ohanian is a UCLA professor who has written a couple of papers exploring why this economic decline has had a much slower recovery. In some research that he did for the St. Louis Fed he argues that one of the reasons why employment has been slow to recover is the implicit subsidy caused by a lengthening process of foreclosure. Over the last decade the foreclosure process has gotten longer in part because of the legal process and in part because of the numbers. So the process that used to take three months now can take eighteen.
Ohanian and his UCLA colleague Kyle F. Herkenhoff argue that the lengthened process of foreclosure offers the equivalent of an shadow unemployment compensation payment. In essence the lack of a requirement to maintain housing payments, based on the average mortgage, offers a subsidy of about $9000 per year.
Beginning in 2005 the fraction of mortgages held by the unemployed began to take a sharp upturn rising from about 2-7% by 2009. Their paper estimated that the increased time has held down employment by a third to a half percent. That would not have brought down unemployment to pre-recession numbers but it would have helped.
When coupled with the extended unemployment benefits that seem to be a policy choice in every recent downturn, the ability to encourage people back to work is significantly diminished.
The influence of public policy on the duration and even severity of recessions has been a common topic of discussion over the last few years from economists like Robert Higgs to writers like Amity Schlaes. Ohanian's work adds some fuel to the fire about what Gordon Tullock called the "theory of public bads."