Feed on

This finding, while not surprising, is hard for me to square with the Political Economy we live in:

On the Distribution of the Welfare Losses of Large Recessions
by Dirk Krueger, Kurt Mitman, Fabrizio Perri  –  NBER WP#22458

How big are the welfare losses from severe economic downturns, such
as the U.S. Great Recession? How are those losses distributed across
the population? In this paper we answer these questions using a
canonical business cycle model featuring household income and wealth
heterogeneity that matches micro data from the Panel Study of Income
Dynamics (PSID).  We document how these losses are distributed across
households and how they are affected by social insurance policies.
We find that the welfare cost of losing one’s job in a severe
recession ranges from 2% of lifetime consumption for the wealthiest
households to 5% for low-wealth households.  The cost increases to
approximately 8% for low-wealth households if unemployment insurance
benefits are cut from 50% to 10%.  The fact that welfare losses fall
with wealth, and that in our model (as in the data) a large fraction
of households has very low wealth, implies that the impact of a
severe recession, once aggregated across all households, is very
significant (2.2% of lifetime consumption).  We finally show that a
more generous unemployment insurance system unequivocally helps
low-wealth job losers, but hurts households that keep their job, even
in a version of the model in which output is partly demand
determined, and therefore unemployment insurance stabilizes aggregate
demand and output.

My point simply is this. If we are living in a plutocracy, and if we understand that lower-income families have little to no political power and influence, then can we explain why almost ALL of US monetary and fiscal policy is focused on avoiding recessions and getting out of them quickly? I suppose you can argue that this paper does show that recessions DO hurt the rich … but do they hurt the rich more than bad regulatory and trade policy, or other policies, for example?

One Response to “As Tyler Cowen Says, “Model This””

  1. Doug M says:

    In terms of dollars lost, recessions hurt the rich. And they tend to hit the rich harder.

    However, in terms of pain, (changes in ability to consume) a 20% loss in wealth to someone with 2 mm is assets probably triggers less belt tightening than a 10% loss in wealth to someone with $200,000 in assets, or a 5% loss in income to someone with no assets.

    World ends, Poor hardest hit.

Leave a Reply