IMF on Public Debt Overhang

The IMF discusses "The Good, the Bad and the Ugly: 100 Years of Dealing with Public Debt Overhangs," in Chapter 3 of its most recent World Economic Outlook. The IMF Fiscal Affairs Department has been compiling data on gross government debt-to-GDP ratios going back to 1875. This chapter focuses on the experience of the 22 advanced economies where there is good data over most of this period. What lessons can be drawn?

For starters: "Public debt levels above 100 percent of GDP are not uncommon. Of the 22 advanced economies for which there is good data coverage, more than half experienced at least one high-debt episode between 1875 and 1997. Furthermore, several countries had multiple episodes: three for Belgium and Italy and two for Canada, France, Greece, the Netherlands, and New Zealand."

Here's a figure showing the 26 episodes for these 22 countries where government debt exceeded the 100% level. One way to eyeball this chart is to draw a mental line horizontally at the 100% debt/GDP ratio. It becomes clear that the experiences here are very diverse: some of countries are on their way to taking on much more debt at this level, while others are about to reduce their debt dramatically. Another lesson that comes out of the figure is that the episodes of high government debt/GDP are essentially in four time periods: the last quarter of the 19th century, the years after World War I, the years after World War II, and the last few decades. But there are almost no examples of high government debt/GDP ratios in this group of advanced economies from the 1950s up through the early 1980s.

Many of the episodes in which debt/GDP ratios decreased dramatically were in the aftermath of war--sometimes in accompaniment with hyperinflation after the war that ate away the value of the debt. Only three of these 26 debt overhang episodes ended in actual default: Germany (defaulted in 1932), and Greece (defaulted in 1894 and 1932).

How does taking on a lot of debt affect economic growth? The IMF authors are suitably reticent here about any claims of causality. As they point out, high government debt might cause slower economic growth, but it's also plausible that slower economic growth makes a debt/GDP problem worse, by raising the desire of government to borrow in hard times while holding down the denominator of the debt/GDP ratio. (For an argument and some supporting evidence that the causality does run from higher government debt to slower growth, Carmen Reinhart, Vincent R. Reinhart, and Kenneth S. Rogoff make that case as  part of their article in the Summer. 2012 issue of my own Journal of Economic Perspectives.) Thus, the IMF authors stick to looking at correlations, without making an argument about causality. 

One of those correlations struck me as especially interesting. When the separate cases where government debt was above 100% of GDP and rising from cases where debt is above 100% of GDP and falling, they find that growth performance is notably better in those cases where debt/GDP ratios are falling. In this sense, it's not just the high level of debt that's the problem, but whether the government is showing a clear ability to address the debt/GDP ratio. 

They consider several episodes of public debt overhang, and seek to distill some lessons. Here are some lessons, intermixed with some of my own reactions: 

"The first key lesson is that a supportive monetary environment is a necessary condition for successful fiscal consolidation." In my own mind, one of the strongest arguments for the Federal Reserve promising to keep interest rates low for some  years into to the future doesn't have anything to do with how it might influence current borrowing and demand; instead, it's because low interest rates help to reassure investors that the the large and growing U.S. government debt is affordable. If U.S. interest rates were to spike upward, paying the interest on the U.S. government debt could become much harder in a hurry. Of course, this insight also emphasizes that the Federal Reserve feels a need to facilitate the huge U.S. budget deficits--not because it favors the deficits, but because the alternative of not facilitating them could be worse. 

"Second, debt reduction is larger when fiscal measures are permanent or structural and buttressed
by a fiscal framework that supports the measures implemented." What the authors mean here is that when governments try to address their debt problems with nonspecific policies like across-the-board spending cuts or spending caps, they often are failing to make any actual real choices about what will change. The countries that have had some success in recent decades in reducing debt/GDP ratios--Belgium in the 1980s, Italy around 1992, Canada around 1995--succeeded because they made specific choices about reforming pensions, entitlements and other spending programs.

Their third lesson is that strong external demand is a huge help. Looking at the world economy today, the potential source of strong external demand is the rapidly growing "emerging market" economies like China, India, Brazil, and others. 

Finally, their fourth lesson is that it takes years to address a massive debt overhang. I sometimes think of the trajectories of U.S. government spending and taxes heading off into the future, both rising, but under current projections slowly drawing further apart. If the government can take real steps to make the rise in the spending line a little flatter and the rise in the tax line a little steeper, then the problem is gradually solved. The IMF authors look at annual deficit/GDP ratios, and find that "sustained improvements of more than 1 percentage point a year are rare." 

Where does the U.S. economy stand? The Congressional Budget Office is my go-to source for deficit and debt projections. Its August 2012  report has projections from 2012 to 2022. Using those numbers, the U.S. gross government debt passed the 100% debt/GDP ratio this year--and thus would be counted in future episodes of public debt overhang. Of course, the CBO and others often emphasize not "gross" government debt, which includes debt that the government owes to itself (like the Treasury bonds held in the Social Security trust fund), and instead look at "debt held by the public. On that measure, using the CBO "alternative fiscal scenario," which is a more realistic view, 
debt held by the public is at a 73% debt/GDP ratio in 2012 and is headed for a 90 percent debt/GDP ratio by 2022. 

To me, all of this says that the U.S. government debt burden is still at a level that remains bearable by the enormous U.S. economy. But it's high time to start making those specific medium-term changes that will keep the the U.S. 2012 episode of public debt overhang one that is short, and over the next few years turns a rising debt trajectory into a declining one. 

What's Up With the Dodd-Frank Legislation?

Back in July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The difficulty with the law has always been that while it was fairly clear on its goals, it did not specify how to reach those goals--instead turning over that task to current and newly-created regulatory agencies.  If you're looking for an update on how the law is proceeding, a good starting point is the Third Quarter 2012 issue of Economic Perspectives, published by the Federal Reserve Bank of Chicago, which has six articles on the Dodd-Frank legislation.

Douglas D. Evanoff and William F. Moeller offer an overview of the goals and approach of the law in their opening piece (footnotes and citations omitted):

"The stated goals of the act were to provide for financial regulatory reform, to protect consumers
and investors, to put an end to too-big-to-fail, to regulate the over-the-counter (OTC) derivatives markets, to prevent another financial crisis, and for other purposes. ... Implementation of Dodd–Frank requires the development of some 250 new regulatory rules and various mandated studies. There is also the need to introduce and staff a number of new entities (bureaus, offices, and councils) with responsibility to study, evaluate, and  promote consumer protection and financial stability. Additionally, there is a mandate for regulators to identify and increase regulatory scrutiny of systemically important institutions.  ... Two years into the implementation of the act, much has been done, but much remains to be done."

How are those rules coming along? The law firm of Davis Polk & Wardwell publishes a regular Dodd-Frank report. The September 2012 edition summarizes:

• "As of September 4, 2012, a total of 237 Dodd-Frank rulemaking requirement deadlines have
  passed. This is 59.5% of the 398 total rulemaking requirements, and 84.6% of the 280
  rulemaking requirements with specified deadlines.
• "Of these 237 passed deadlines, 145 (61.2%) have been missed and 92 (38.8%) have been
  met with finalized rules. Regulators have not yet released proposals for 31 of the 145 missed
  rules.
• "Of the 398 total rulemaking requirements, 131 (32.9%) have been met with finalized rules and
  rules have been proposed that would meet 135 (33.9%) more. Rules have not yet been
  proposed to meet 132 (33.2%) rulemaking requirements.

The July 2010 Davis Polk update--the two-year anniversary of the legislation--offers some additional detail: "The two years since Dodd-Frank’s passage have seen 848 pages of statutory text expand to 8,843 pages of regulations. Already at almost a 1:10 page ratio, this staggering number represents
only 30% of required rulemaking contained within Dodd-Frank, affecting every area of the financial markets and involving over a dozen Federal agencies."

It's important to  recognize that writing a new regulation isn't as simple as, well, just writing it. Instead, there is often first an in-house study, followed by a draft regulation, which then is open to public comments, and then can revised, and eventually at some point a new regulation is created. It's not unusual for a regulation to get dozens or hundreds of detailed public comments.

This blizzard of evolving rules has to create considerable uncertainty in the financial sector. Matthew Richardson discusses the complexities of one particular issue in his contribution to the Chicago Fed publication. He picks one example: the problem that many banks made very low-quality subprime mortgage loans. What does the Dodd-Frank legislation do about this basic issue? As he describes, the act: 1) Sets up a Consumer Finance Protection Bureau in title X to deal with misleading products; 2)
Imposes particular underwriting standards for residential mortgages; 3) Requires firms performing securitization to retain at least 5 percent of the credit risk; and 4) Iincreases regulation of credit rating agencies. Each of these tasks requires detailed rulemaking. And as Richardson points out, "with all of these new provisions, the act does not even address what we at NYU Stern consider to be a primary fault for the poor quality of loans—namely, the mispriced government guarantees in the system that led to price distortions and an excessive buildup of leverage and risky credit."

I'm skeptical of anyone who has strong opinions about the Dodd-Frank legislation, because here we are more than two years later, less than halfway toward figuring out what rules the legislation will actually put in place. Wayne A. Abernethy of the American Bankers Association is one of the authors in the Chicago Fed symposium. Yes, he is speaking for the bankers' point of view. But his judgement about the overall process seems fair to me:

"At least in the financial regulatory history of the United States, there has never been anything like it. I have seen no definitive count of the number of regulations that the Dodd–Frank Act calls forth. The numbers seem to range between 250 and 400—numbers so large that they are numbing. It all defies hyperbole. The Fair and Accurate Credit Transactions Act, adopted in 2003, astonished the financial industry with more than a dozen significant new regulations to be written. ...

"One of the most common criticisms of Dodd–Frank implementation has been a lack of order and coordination in the regulatory process. Instead, the Dodd–Frank Act has succeeded in replacing the financial crisis with a regulatory crisis.  ... As agencies are grappling with impossible rulemaking tasks, most of them are also engaged in major structural reorganizations and shifts in the areas of responsibility. ... Nothing like this has ever been tried before in the history of the United States. Writing 400 financial regulations of the highest significance and the greatest complexity in a couple of years has clearly been too much to expect. ... Getting on with the work to end our self-inflicted regulatory crisis should be among the highest priorities."

 I'm someone who believes that financial regulation needed shaking up. Many of the broad goals of the Dodd-Frank legislation make sense to me: rethinking bank and regulation to deal with macroeconomic risk, not just the risk of an individual institution going broke; figuring out better ways to shut down even large financial institutions when needed; and better regulation of certain financial instruments like credit default swaps and repo agreements; a closer look at technologies that allow ultra-high-speed financial trading; and others.

The Dodd-Frank legislation is almost not a law in the conventional meaning of the term, because it mostly isn't about actual specific activities that are prohibited. Instead, it's about handing over the difficult problems to regulators and telling them to fix it. I'm not sure there was an easy alternative to this regulatory approach: the idea of Congress trying to debate, say, appropriate regulation of the over-the-counter swaps market is not an encouraging thought. But stating a goal is not the same as solving a problem. The passage of Dodd-Frank, in and of  itself, didn't solve any problems.

Labor's Smaller Share

Margaret Jacobson and Filippo Occhino have been investigating the fact that labor has been receiving a declining share of total economic output over the last few decades. I posted on their work last February in "Labor's Declining Share of Total Income."  Now they have written "Labor’s Declining Share of Income and Rising Inequality," which is "Economic Commentary" 2012-13 published by the Federal Reserve Bank of Cleveland.


The starting point is to look at labor income relative to the size of the economy. The top line in the figure shows labor income as a share of GDP, as measured in the national income and product accounts from the U.S. Bureau of Economic Analysis. The lower line in the figure shows the ratio of compensation to output for the nonfarm business sector, as measured by the U.S. Bureau of Labor Statistics. The measures are not identical, nor would one expect them to be, but they show the same trend: that is, with some ups and downs as the economy has fluctuated, the labor share of income has been falling for decades, and is now at an historically low figure.

 This fact lies behind much of the rise in inequality of incomes over this time. The income that is not being earned by labor is being earned by capital--and capital income is much more concentrated than is labor income. Jacobsen and Occhino offer an intriguing figure that measures the inequality of labor income and the inequality of capital income. The measure used here is a Gini coefficient, which "ranges between 0 and 1, with 0 indicating an equal distribution of income and 1 indicating unequal income." (Here's an earlier post with an explanation of Gini coefficients.)

The figure has two main takeaways. First, labor income has become more unequally distributed over time, but since the early 1990s, the big shift in income inequality is because capital income is more unequally distributed. Second, capital income tends to rise during booms and to fall in recessions. Thus, it seems plausible that the inequality of capital income has dropped in the last few years of the Great Recession and its aftermath, but will rise again as economic growth recovers.

What has caused the long-run decline of the labor share of income? Jacobson and Occhino explain this way: "[W]e begin by looking at what determines the labor share in the long run. The main factor is the technology available to produce goods and services. In competitive markets, labor and
capital are compensated in proportion to their marginal contribution to production, so the most important factor behind the labor and capital shares is the marginal productivities of labor and capital, which are determined by technology. In fact, one important cause of the post-1980 long-run decline in the labor share was a technological change, connected with advances in information and
communication technologies, which made capital more productive relative to labor, and raised the return to capital relative to labor compensation. Other factors that have played a role in the long-run decline in the labor share are increased globalization and trade openness, as well as changes in
labor market institutions and policies."

There is no particular reason to believe that these trends will continue--or that they won't. But the declining share of income going to labor suggests the importance of finding ways to increase the marginal product of labor, especially for workers of low and medium skills, perhaps by focusing on the kind of training and networking that might help them make greater use of the advances in information and communication technology to improve their own productivity.

Reducing the Tax Favoritism for Housing

In a pure income tax, what is the appropriate way to tax owned housing? Jack Grigg and Thornton Matheson of the IMF explain in Chapter V of the "United States: Selected Issues" report published as IMF Country Report 12/214.

"Neutral taxation of owner-occupied housing would call for taxing its imputed rental value, but allowing a full mortgage interest deduction." For those not indoctrinated into the jargon, the idea here is that when you live in a house that you own, you are--in a way--renting that house to yourself.  Thus, you are in effect paying rent to yourself, and paying mortgage expenses. In a pure income tax, you would pay income tax on the income you receive from your owned-and-rented-to-yourself property ("imputed rental value"), but you would be able to deduct from taxation the costs of that property--namely, the interest payed on the mortgage.

This logic may seem counterintuitive to many homeowners! But another way to think about it is that a pure income tax should not favor owning over renting. (That is, the decision to favor owning is a political policy decision that has costs and benefits, but it's not part of a pure income tax.) Thus, if I buy a house and rent it out, or if I buy the same house and live in that house, my income tax bill should look the same.

But practical difficulties surface immediately, of course. How would "imputed rental income" be calculated? Grigg and Thornton write:  "Taxing imputed rents has generally proved impracticable, however, although several countries have at one time or another done so. Belgium taxes imputed rent, but the value was last reviewed in 1975 and has been indexed to inflation since 1990, resulting in imputed rents generally below their market counterparts, especially for old houses. In the Netherlands, imputed income is calculated as a percentage (up to 0.55 percent) of a property’s market value. Norway abolished its tax on imputed rents, based on property values, in 2005, and Sweden followed in 2007. While property values provide a readily observable basis for taxing imputed rents, they are likely to represent an imprecise measure of the returns to housing. An alternative is to use house prices and average price-to-rent ratios to estimate imputed rents, but this requires regular updating."

The administrative tax of figuring out an appropriate imputed rent in the enormous and diverse U.S. economy may be impractical. But then, if the gains from imputed rental income are not included in the income to be taxed, there is an argument for not allowing the deductibility of mortgage interest, either. The authors write: "As imputed rent taxation is thus generally unattractive on administrative grounds,
tax neutrality could be better approximated by phasing out mortgage interest deductibility." Indeed, countries like Denmark ad France give only very limited mortgage interest deductions.

The U.S. tax treatment of housing is very generous by the standards of OECD countries. We don't tax imputed rental income: doing so would raise $337 billion in taxes over the next five years, according to Office of Management and Budget estimates. We do let mortgage interest be deductible for first and second homes up to $1 million, which reduces income  tax revenues by $606 billion over the next five years. In addition, we have various provisions so that capital gains in housing values are untaxed, which reduces income taxes by an estimated $171 billion over the next five years.

But the issues go well beyond costs to the government in a time when we need to be scrutinizing the spending and tax sides of the federal budget to find a trajectory toward smaller budget deficits over the medium and long term.  Tax breaks for housing create economy-wide distortions in the allocation of
investment across sectors. The authors explain: "The marginal effective tax rate on housing investment in the U.S. is currently only 3½ percent, as compared to 25½ percent for business investment in equipment, structures, land and inventories. This discourages investment in productive assets, to the detriment of long-run economic growth."

Of course, it's never wise to make dramatic changes to tax policies affecting the housing market, because the existing tax policies are part of the conditions of demand and supply in the current market. The still-shaky U.S. housing market doesn't need another sudden shock. But the example of the United Kingdom shows how the mortgage interest deduction can be gradually phased out: set a ceiling on the total amount of the deduction, and then over time, reduce that ceiling in real terms and reduce the tax rate that can be applied to the deduction. Grigg and Thornton write:

"The UK experience offers a lesson in how the mortgage interest deduction can be gradually phased out. Until 1974, mortgage interest tax relief (MITR) in the UK was available for home loans of any size. In that year a ceiling of £25,000 was imposed. In 1983, this ceiling was increased to £30,000, below the rate of both general and house price inflation. From 1983 onwards, the ceiling remained constant, steadily reducing its real value. Beginning in 1991, this erosion of the real value of MITR was accelerated by restricting the tax rate at which relief could be claimed, to the basic 25 percent rate of tax in 1991, and then to 20 percent in 1994, 15 percent in 1995 and 10 percent in 1998. These ceilings on the size of loans and restrictions on the tax rate at which relief could be claimed chipped away at the
value of the tax deduction, paving the way for its complete abolition in 2000 ..."

Similarly, one could phase in limits on the special treatment for capital gains in housing, limiting it to primary residences and to a maximum amount.

I'm acutely aware that, given the fall in U.S. housing prices over the last few years, many homeowners would love to see housing prices soar again. But the U.S. economy and U.S. households have now absorbed most of the pain of the housing price decrease. The goal over the medium terms should be to make the housing market less tax-favored. It would benefit the U.S. economy to focus less on housing and more on investments that generate future economic growth. Most of the tax benefits of housing  go to those with well above-average incomes--since these are the people who are living in bigger houses and itemizing deductions. The additional revenue from reducing the favored tax treatment of housing can be part of a package to reduce marginal tax rates and trim future budget deficits.

Elephant Poaching and Policy Options

How should African elephants be protected from poachers? Just passing laws that elephants should not be harmed is clearly an insufficient policy, because many governments across Africa have limited ability to enforce such laws. Thus, two complementary  policies are often suggested. One is to encourage local people who live near Africa's elephants to help protect them and their habitat by making the elephants a valuable economic resource. For example, local people may see economic benefits from tourists who come to see the elephants. A  second proposal is for other countries to ban imports of ivory--or at least to ban imports that are not certified as coming from elephants that were killed as part of a sustainable wildlife management plan. 

But these policies aren't working to protect elephants. Brian Christy provides a journalistic overview of the situation in "Ivory Worship," appearing in the October 2012 issue of National Geographic. The entire article is a great read, with all sorts of detail about ivory poaching in Africa and markets for ivory in the Philippines, China, Thailand, and elsewhere. Here, I'll just offer a smattering of quotations scattered throughout the article on some of the main points that relate to the policy choices on how best to protect elephants.

"Elephant poaching levels are currently at their worst in a decade, and seizures of illegal ivory are at their highest level in years. ... Still, according to Kenneth Burnham, official statistician for the CITES program to monitor illegally killed elephants, it is “highly likely” that poachers killed at least 25,000 African elephants in 2011. The true figure may even be double that. "

"[A] global ivory trade ban was adopted in 1989.  ...  At the time of the ivory ban, Americans, Europeans, and Japanese consumed 80 percent of the world’s carved ivory. ... . African ivory brought into a country before 1989 may be traded domestically. And so anyone caught with ivory invokes a common refrain: “My ivory is pre-ban.” Since no inventory was ever made of global ivory stocks before the ban, and since ivory lasts more or less forever, this “pre-ban” loophole is a timeless defense."

 "Not all countries agreed to the [ivory] ban. Zimbabwe, Botswana, Namibia, Zambia, and Malawi entered “reservations,” exempting them from it on the grounds that their elephant populations were healthy enough to support trade. In 1997 CITES held its main meeting in Harare, Zimbabwe, where President Robert Mugabe declared that elephants took up a lot of space and drank a lot of water. They’d have to pay for their room and board with their ivory. Zimbabwe, Botswana, and Namibia made CITES an offer: They would honor the ivory ban if they were allowed to sell ivory from elephants that had been culled or had died of natural causes. CITES agreed to a compromise, authorizing a one-time-only “experimental sale” by the three countries to a single purchaser, Japan. In 1999 Japan bought 55 tons of ivory for five million dollars. Almost immediately Japan said it wanted more, and soon China would want legal ivory too.... "

 "In a 2002 report China warned CITES that a main reason for China’s growing ivory-smuggling problem was the Japan experiment: “Many Chinese people misunderstand the decision and believe that the international trade in ivory has been resumed.” Chinese consumers thought it was OK to buy ivory again. ... By 2004 China had forgotten its concerns and petitioned CITES to buy ivory....  In July 2008 the CITES secretariat endorsed China’s request to buy ivory, a decision supported by Traffic and WWF. Member countries agreed, and that fall Botswana, Namibia, South Africa, and Zimbabwe held auctions at which they collectively sold more than 115 tons of ivory to Chinese and Japanese traders."

"[I]t also meant, according to CITES, that China could now do its part for law enforcement by flooding its domestic market with the low-priced, legal ivory. This would drive out illegal traders, who CITES had heard were paying up to $386 for a pound of ivory. Lower prices, CITES’s Willem Wijnstekers told Reuters, could help curb poaching.  Instead the Chinese government did the unexpected. It raised ivory prices. ... China also devised a ten-year plan to limit supply and is releasing about five tons into its market annually. The Chinese government, which controls who may sell ivory in China, wasn’t undercutting the black market—it was using its monopoly power to outperform the black market. Applying the secretariat’s logic that low prices and high volumes chase out smugglers, China’s high prices and restricted volumes would now draw them in. The decision to allow China to buy ivory has indeed sparked more ivory trafficking, according to international watchdog groups and traders I met in China and Hong Kong.And prices continue to rise. ... By all accounts, China is the world’s greatest villain when it comes to smuggled ivory. In recent years China has been implicated in more large-scale ivory seizures than any other non-African country. ..."

"The genie cannot be returned to her bottle: The 2008 legal ivory will forever shelter smuggled ivory. There is one final flaw in the CITES decision to let China buy ivory. To win approval, China instituted a variety of safeguards, most notably that any ivory carving larger than a trinket must have a photo ID card. But criminals have turned the ID-card system into a smuggling tool. In the ID cards’ tiny photographs, carvings with similar religious and traditional motifs all look alike. A recent report by the International Fund for Animal Welfare found that ivory dealers in China are selling ivory carvings but retaining their ID cards to legitimize carvings made from smuggled ivory. The cards themselves now have value and are tradable in a secondary market. China’s ID-card system, which gives a whiff of legitimacy to an illegal icon, is worse than no system at all."

In short, Brian Christy's essay makes a plausible case that a ban on imported ivory has some possibility of reducing incentives for elephant poaching. His article doesn't address the question of how much tourists coming to look at elephants can provide an economic incentive to protect them. But he makes a strong prima facie case that trying to have regular large sales of legally harvested ivory is a fiasco, more likely to encourage and facilitate additional smuggling than to undercut it.



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The Unbanked and Underbanked

If you don't have a bank account, then you pay extra for many day-to-day financial transactions. Need a check cashed? Lots of non-bank places will do that--for a fee. Need a money-order to pay a bill? Lot's of non-bank places do that--for a fee. Need a loan? Payday loans and rent-to-own stores and pawnshops are available--for a fee. Of course, banks have fees, too, but the unbanked typically pay a lot more for basic financial transactions. In addition, those who live in the cash economy often find it harder to save for an emergency, and are highly vulnerable to losing a substantial part of their assets if their cash is stolen or lost.

The FDIC does an annual survey in partnership with the U.S. Census Bureau to find out more about the "unbanked," who lack any deposit account at a banking institution, and the "underbanked," who have a bank account but also rely on providers of "alternative financial services" like payday loans, pawnshops, non-bank check cashing and money orders, and the like. The results of the 2011 survey have now been released in "2011 FDIC National Survey of Unbanked and Underbanked Households." 
From the start of the report, here are some bullet-points (footnotes omitted):

 "• 8.2 percent of US households are unbanked. This represents 1 in 12 households in the nation, or nearly 10 million in total. Approximately 17 million adults live in unbanked households. ...
• 20.1 percent of US households are underbanked. This represents one in five households, or 24 million households with 51 million adults....
• 29.3 percent of households do not have a savings account, while about 10 percent do not have a checking account. About two-thirds of households have both checking and savings accounts.
• One-quarter of households have used at least one AFS product in the last year, and almost one in ten households have used two or more types of AFS products. In all, 12 percent of households used AFS products in the last 30 days, including four in ten unbanked and underbanked households."

The survey provides considerable detail about the unbanked and the underbanked. For example, about 30% of the unbanked don't use any of the "alternative financial services"--and thus are living in something close to a pure cash economy. Nearly half of unbanked household had a bank account at some point in the past and nearly half report that they are likely to have a bank account in the future.

Some people will prefer to live in a non-bank world. I suspect that a substantial number of them are in the underground economy, staying under the government's radar and avoiding taxes. About 5.5% of those in the survey report that they can't open a bank account because of identification, credit, or banking history problems. But there are also a substantial number of the unbanked who have notions about bank accounts that are misleading or false: like a belief that they don't have enough money to open a bank account or in some way wouldn't "qualify" to open an account. Many of the unbanked also like the convenience and speed of dealing with nonbank firms that cash checks or give instant loans, and they are familiar with these firms in their neighborhoods.

But I fear that many of the unbanked dramatically underestimate the size of the fees that they pay for dealing with these alternative financial service providers, and have little notion of the programs at many banks that are designed to provide services to those who will tend to have low balances. 

The Potential GDP Perspective on Business Cycles

The Congressional Budget Office calculates "potential GDP," which is the amount that the economy would produce at full employment. During a recession, actual economic output is below potential GDP; during an extreme economic boom, like the dot-com boom of the late 1990s, the economy can for a time have output greater than potential GDP. Here's a graph showing potential GDP in blue and actual GDP in red, both in real dollars from 1960 up through the mid-2012,  generated by the ever-useful FRED website of the Federal Reserve Bank of St. Louis.



The graph does usefully show the depth of the current recession, and other recessions, as well as how actual GDP climbs above potential GDP in the dot-com boom of the late 1990s, as well as during the guns-and-butter period of the late 1960s and the housing boom of the mid-2000s. But you do have to squint a bit to make it all out! And your eye can be fooled in thinking about the depth of recessions, because the graph shows the gaps in absolute levels, not in percentage terms. Thus, when GDP is much lower back in the 1960s, the absolute gap may appear small, but the percentage gap could be larger.

So here's a graph based on the same data that shows the percentage amount by which actual GDP was above or below potential GDP in the years from 1960 up through mid-2012.

A few themes jump out from looking at the data in this way:

1) If the Great Recession is measured according to  how far the economy had fallen below potential GDP, it is actually quite similar to the effects of the double-dip recession in the early 1980s.

2) If the Great Recession is measured by the size of the drop, relative to potential GDP, it is about 9 percentage points of GDP (from an actual GDP 1 percent above potential GDP to an actual GDP that is 8 percent below potential GDP). The total size of this drop isn't all that different--although the timing is different--from the years around the double-dip recession of the 1980s, the years around the recession of 1973-75, and the recession of 1969-1970.

3) The recovery from the early 1980s recessions was V-shaped, while the recovery from the Great Recession is more gradual. But this change isn't new. The recoveries from all the recessions before the early 1980s were reasonably V-shapes, and the recoveries after the 1990-91 and 2001 recessions were more U-shaped, as well.

4) The most red-hot time for the U.S. economy in this data, in the sense that the economy was running unsustainably ahead of potential GDP for a time, was what is sometimes called the "guns-and-butter" period of the late 1960s an early 1970s, when the federal government spent on both social programs and the military at the same time. In the dot-com boom, the economy was also well above potential GDP. The U.S. economy was also unsustainably above potential GDP during the housing boom around 2005-6, but it wasn't as white-hot a period of economic boom as these others.