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Guest Contribution: “Covid-induced precautionary saving in the US: the role of unemployment rate”



Today, we are pleased to present a guest contribution written by Valerio Ercolani, from the Directorate General for Economics, Statistics and Research at the Bank of Italy. The views expressed in this note represent that of the author and not necessarily reflect those of Bank of Italy.

Last months saw an unprecedented rise in the US saving rate. Most of the accumulated saving was undoubtedly generated by the social distancing and lockdown measures imposed by the government, however part of it could also have been driven by precautionary motives due to grim labor prospects. Some back-of-the-envelope calculations show that the dynamics of the unemployment rate alone can induce a large increase in (precautionary) saving for this year, which can sound an alarm for a new saving glut.

The economic effects of the Covid-19 outbreak have become manifest in official data. In the US, GDP contracted by 5% in Q1, at an annual rate, with service consumption contributing the most to the contraction. During the last three months, employment fell by roughly 19 million units with unemployment rate settling at almost 14% in May. In fact, the latter can be underestimated, for example, Hamilton (2020) shows, through some back-of-the-envelope calculations, that the actual unemployment rate could be even larger, around 20%. In April, the saving rate rose 20.3 percentage points (to 33%), the largest monthly increase since the 1960s (Figure 1). In May, it retreated to a still high 22.3%. Personal saving skyrocketed itself: it almost tripled from February, moving from roughly 1400 to 4100 billions of dollars.

Figure 1: Saving rate and unemployment rate (monthly frequency, US). Source: Bureau of Economic Analysis and Bureau of Labor Services


Most of the accumulated saving was undoubtedly generated by the social distancing and lockdown measures imposed by the government during the emergency, which significantly limited the households’ ability to spend. However, part of it could also have been driven by precautionary motives, related to both medical and economic concerns, and even after the economy fully reopens and the effect of the lockdown on the savings rate wanes, those other factors may well continue to be an important driver. On the health front, the virus may not disappear until a vaccine is developed, produced and distributed on a large-scale; indeed, recent studies show that the pandemic could last between 18 and 24 months, because the virus won’t be halted until about 60-70% of the population is immune (Barry et al., 2020). If this is the case, fear of contracting the Covid-19 may continue to drive people’s behavior even in the post-emergency phase. Hence, demand for physical-proximity services will be subdued and, in some extreme cases, may not resume completely (e.g., in tourism-related or in transport sectors). At the same time, the supply side will likely remain an issue: in order to curb the probability of new outbreaks, several US States, including Florida, Texas, New York and California, are imposing on businesses some forms of social distancing that, while looser than during the emergency, will inevitably constrain their ability to produce and deliver goods and services. All that increases the likelihood of business defaults or resizing, amplifying the risk of income losses or layoffs and hence stimulating households’ precautionary saving (see, among others, Hugget, 1993).

Indeed, labor prospects are grim. Barrero et al. (2020) look at Covid-19 as a reallocation “labor” shock and conclude that almost half of the recent layoffs will be permanent. This is consistent with the results by Coibion et al. (2020) which reports that expectations about the level of unemployment have increased not only for the short term, but also over a medium horizon (three to five years).

In particular, unemployment rate has been shown to be a crucial driver of precautionary saving, on both theoretical and empirical grounds; see, for example, Carroll et al. (2012) and Mody et al. (2012). The latter shows, for a panel of 27 advanced countries (including US), that a 1 percentage point (pp) increase in unemployment rate – taken as a proxy for labor income uncertainty – raises the saving rate by roughly 0.3 pp. The estimated regression controls for a number of other determinants of saving, including the one-year ahead disposable income to capture for “first-moment effects” stemming from changes in economic activity.

While we know that a careful analysis on precautionary saving would need household-level data (see, e.g., Attanasio and Weber, 1993), we use the above mentioned result to perform some back-of-the-envelope calculations about the effects of unemployment rate on the average US saving rate in 2020, due to precautionary motives (Table 1). We present three scenarios, based on alternative assumptions about the increase in US unemployment during the year. The most conservative one is an increase from the 3.7% observed in 2019 to 10%, in line with the projections of IMF (2020). The worst-case scenario assumes an increase to 20%, more in line with the projections in Petrosky-Nadeu et al. (2020). We take an intermediate of 15% as our benchmark. Using the coefficient estimated by Mody et al. (2012), i.e. 0.3, in the intermediate scenario the saving rate would increase by 3.4 pp, which would represent the largest yearly surge since the 1960’s. Indeed, so far, the largest increase occurred in 1970 and amounted to 1.9 pp.

Applying the same back-of-the-envelope calculation, the observed rise in unemployment during the Great recession period (3.5 pp between 2008 and 2009) would have predicted an increase of the saving rate in 2009 of 1 pp; although other factors have clearly been at play, this prediction is strikingly close to the observed increase (1.1 pp).

Table 1: Precautionary saving and unemployment rate in US. Notes: the table reports the back-of-the-envelope calculations using Mody et al. (2012) and Muellbauer (2020).


The flip side of a saving expansion is a fall in consumption. Muellbauer (2020) estimates an augmented-consumption function for US, finding that one pp increase of unemployment in a quarter generates a fall in consumption of roughly 0.5%, in the same quarter. Back-of-the-envelope calculations, which convert quarterly changes into yearly ones, show that that the intermediate scenario in Table 1 is associated to a fall in consumption of roughly 3%. The implied increase in the saving rate of such a fall in consumption, holding income constant, is roughly 2.9 pp, very close to the figure obtained from Mody et al. (2012).

All in all, the proposed figures depict only part of the story because saving is driven by a number of other factors such as income, wealth and interest rate dynamics (see, among others, Dynan, 2008), on top of the continuation of the social distancing measures. Therefore, a new saving glut could emerge globally to the extent that the saving dynamics observed and anticipated for the US is not an unicum. Indeed, saving rates in the major European countries rose sharply last March as well as bank deposits (Arnold and Storbeck, 2020). As conjectured by Blanchard (2020) and Goy (2020) such a striking surge in (precautionary) saving could be long-lasting, potentially reinforcing some already existing tendencies such as persistently low levels of inflation and of the natural rate.


This post written by Valerio Ercolani.

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Equality Is Good—Believe It or Else



Samuel Scheffler is one of the most prominent contemporary moral and political philosophers. He is especially well known for his ability to come up with arguments and counterarguments to any position. He is also a committed egalitarian. In a recent column that appeared in the New York Times, Scheffler responds to an argument against equality of wealth, income, and other desirable social goods. He recognizes the strength of the argument and tries to show that it doesn’t undermine the case for equality. I don’t think he succeeds. His defense of equality will convince only those already committed to this view.

The argument he’s trying to answer was raised by another famous philosopher, Harry Frankfurt, in an essay that appeared in 1987. It is an argument that most people who read Mises Institute articles will know already. In brief, the argument is that what matters to someone is how well he himself is doing. So long as a person has enough to lead a satisfying life, why should it matter whether there are other people who have more?

Scheffler states Frankfurt’s argument in this way:

It does not matter whether some people have less than others. What matters is that some people do not have enough. They lack adequate income, have little or no wealth and do not enjoy decent housing, health care or education. If even the worst-off people had enough resources to lead good and fulfilling lives, then the fact that others had still greater resources would not be troubling. When some people don’t have enough and others have vastly more than they need, it is easy to conclude that the problem is one of inequality. But this, according to Professor Frankfurt, is a mistake. The problem isn’t inequality as such. It’s the poverty and deprivation suffered by those who have least.

I must here avert a possible misunderstanding. Frankfurt is by no means a supporter of the free market. He is in most respects a standard welfare-state liberal. But he denies that equality is good for its own sake. When Frankfurt reiterated his contention in a short book that appeared in 2015, he became the object of severe attack. Colleagues shunned this once revered figure.

As Scheffler realizes, if you deny Frankfurt’s claim and maintain that equality has value in itself, you must confront an objection.

And Professor Frankfurt, it seems, has a point. Those in the top 10 percent of America’s economic distribution are in a very comfortable position. Those in the top 1 percent are in an even more comfortable position than those in the other 9 percent. But few people find this kind of inequality troubling. Inequality bothers us most, it seems, only when some are very rich and others are very poor.

Even when the worst-off people are very poor, moreover, it wouldn’t be an improvement to reduce everyone else to their level. Equality would then prevail, but equal misery is hardly an ideal worth striving for.

How does Scheffler answer this point? After making a few suggestions that aim to show that egalitarian measures are instrumentally good, he says:

This brings us to a more fundamental point. The great political philosopher John Rawls thought that a liberal society should conceive of itself as a fair system of cooperation among free and equal people. Often, it seems, we do like to think of ourselves that way. We know that our society has always been blighted by grave injustices, beginning with the great moral catastrophe of slavery, but we aspire to create a society of equals, and we are proud of the steps we have taken toward that ideal.

But extreme inequality makes a mockery of our aspiration. In a society marked by the spectacular inequalities of income and wealth that have emerged in the United States in the past few decades, there is no meaningful sense in which all citizens, rich and poor alike, can nevertheless relate to one another on an equal footing….If extreme economic inequality undermines the ideal of a society of equals, then is that merely one of its bad effects, like its corrupting influence on the political process? Or, instead, is that simply what it is for economic inequality to matter as such?

I don’t think this argument achieves very much. Of course, people cannot regard themselves as a society of equals in the sense that Rawls and Scheffler favor if the society allows “extreme” inequalities. But unless you already regard equality as a good in itself, why should the notion of a society of equals appeal to you? Invoking this ideal doesn’t help the case for equality.

Scheffler might respond in two ways. He might say that if we do accept the value of equality, we will also see that there is a good related to it, that of a society of equals, which has independent value. In that way, we get “two goods for the price of one.” He might also say that someone could first find the notion of a society of equals valuable and in that way come to accept the value of equality.

I don’t think either of these responses gets the egalitarian very far. The fact that a philosopher as skilled as Scheffler fails to come up with anything better should lead us to suspect that there isn’t much of a case for equality. It doesn’t amount to more than “You must believe in equality—because you must!”

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Economists Think Congress Could Create An Economic Disaster This Summer



Congress has less than a month to hammer out a deal on the next round of stimulus before expanded unemployment benefits expire. State and local governments are starting to feel the pinch of budget shortfalls. And while the U.S. got a piece of (relatively) good news in last week’s jobs report, which featured an unemployment rate 2.2 percentage points lower in June than it had been in May, the economy has been thrown back into chaos in the meantime, with a number of states pulling back on their reopenings amid spiking COVID-19 infections and hospitalizations.

Our newest survey of economists highlights just how consequential governmental decisions over the next month may be: On average, these economists think that a refusal by Congress to extend unemployment benefits or bail out state and local governments is just as likely to hurt the economy as local economies staying open in spite of COVID-19 spikes — or even closing because of the virus.

In partnership with the Initiative on Global Markets at the University of Chicago Booth School of Business, FiveThirtyEight asked 31 quantitative macroeconomic economists what they thought about a variety of subjects around the coronavirus recession and recovery efforts. The most recent survey was conducted from July 2 through 6, which means the June jobs report was fresh on respondents’ minds — but so was the state of the pandemic, along with challenges ahead for lawmakers.

[Related: How Americans View The Coronavirus Crisis And Trump’s Response]

“There’s a distinct risk that between now and November, Congress’s ability to continue fiscal support will be very limited by election-year politics,” said Jonathan Wright, an economics professor at Johns Hopkins University who has been consulting with us on the design of the survey. “That could be more of a drag on the economy than the local and state shutdowns just because the effect would be so huge.”

With a congressional showdown looming, we asked the experts to estimate the probability that several policy decisions would have the biggest negative impact on U.S. gross domestic product in the fourth quarter of 2020. Among the five options we presented, the single most important to the economists was a decision by state and local governments to reclose their economies because of COVID-19 outbreaks. But a decision by Congress not to provide funding to state and local governments was close behind. And the weight given to choices made by the federal government — bailing out local governments, extending unemployment insurance and providing ongoing aid for small businesses — added up to be even more important when taken as a whole:

What are the biggest economic risk factors by year’s end?

Average probabilities that each scenario would have the largest negative impact on U.S. GDP in the fourth quarter, according to economists

Local or state response options Avg. Probability
Decision to reverse local economic openings due to COVID-19 spikes 26%
Decision to keep local economies open despite COVID-19 spikes 17
Total 43
Federal response options
Not providing funding for state and local governments* 23%
Ending/reducing expansion of unemployment benefits 20
Ending/cutting back on aid to small businesses 14
Total 57

* Funding to address budget shortfalls associated with COVID-19.

The survey of 31 economists was conducted July 2-6.


“[State and local governments] are facing severe budget crises and will be laying off workers to balance their budgets,” said Julie Smith, a professor of economics at Lafayette College. That, she said, could lead to longer periods of high unemployment and financial pain for many households. Meanwhile, she added, cutting back or ending the federal unemployment extension would cause many people’s incomes to decline dramatically, leaving them with much less money to spend — which could make a big dent in GDP.

Perhaps for this reason, there’s a lot of uncertainty in the economists’ fourth-quarter real GDP predictions. When we last asked the panel for its forecast, it thought that GDP would be growing by 4.1 percent at the end of the year, a big improvement from the -28.2 percent quarter-over-quarter annualized growth it foresaw for the second quarter of 2020. This time around, the panel is calling for less negative growth (-25.5 percent) in the second quarter and a very similar fourth-quarter growth rate to last time (3.8 percent). But the range around that end-of-year forecast has gotten a lot wider — a sign of just how much things could go wrong. The gap between our consensus forecast’s 10th and 90th percentile predictions for fourth-quarter GDP growth was 10.9 percentage points in the last survey; now that gap is 12.8 percentage points, with almost all of the extra uncertainty coming in the form of downside risk. (The panel’s consensus 10th percentile GDP growth forecast has dropped from -2.0 percent to -3.5 percent.)

[Related: Voters Who Think The Economy Is The Country’s Biggest Problem Are Pretty Trumpy. That Might Not Help Him Much.]

The economists weren’t especially optimistic about the trajectory of the unemployment rate over the course of 2020, either. The consensus prediction was that the unemployment rate in December would be 10.1 percent, which is only 1 percentage point lower than the rate in June — and is still comparable to the unemployment rate at the height of the Great Recession. Stephen Cecchetti, a professor of international finance at the Brandeis International Business School, pointed out that workers are increasingly likely to be losing their jobs permanently, rather than temporarily, which will make it harder for them to get back into the labor force. And he added that it will take time for the economy to adjust to a new reality where working from home is the norm, which could also keep the unemployment rate from falling quickly. Cecchetti was also among the economists who thought that in a worst-case scenario, the unemployment rate could skyrocket again by the end of the year.

“There are a lot of people who haven’t been exposed to the virus,” he said. “It’s not hard to imagine new outbreaks in places like New Jersey or Massachusetts that force us to shut down all over again.”

About half of the economists in the survey also thought the country’s top earners would end the year with an even greater share of the nation’s personal income. In order to get a sense of how much the panel thought the COVID-19 recession would increase income inequality, we asked about a new metric created by the Bureau of Economic Analysis, which found that in 2016, households in the top 10 percent of incomes (adjusted for household size) accounted for 37.6 percent of the country’s personal income. Fifty percent of the respondents thought this number would be significantly higher by the end of 2020 as a result of the COVID-19 pandemic, while 47 percent thought it would be about the same. Only one respondent thought it would be lower.

“My best guess is that this pandemic is going to worsen income inequalities,” said Sarah Zubairy, a professor of economics at Texas A&M University. She hypothesized that this was because job loss has been concentrated among lower-wage workers who can’t do their jobs remotely, and who may find themselves ricocheting in and out of the labor force if states have to abruptly pull back their reopening plans.

[Related: The Economy Is A Mess. So Why Isn’t The Stock Market?]

And in another sign that the U.S. has been knocked off course by the virus — and the subsequent leadership response — our survey panel overwhelmingly believes (with 90 percent agreement) that China will beat both America and the European Union on the road back to pre-crisis real GDP levels. In retrospect, according to Wright, this was kind of a “no-brainer” because China’s economic growth so far has been quite swift, and it has tools to enact sweeping fiscal stimulus that aren’t available to less centrally controlled economies like the U.S. or the E.U. But some of this might also be based on the Chinese government’s reputation for — how should we put this? — releasing overly favorable public data. “When all is said and done, if they don’t like the actual data they can fudge the numbers,” Wright said. “Put those three things together, and there’s almost no way they can’t be the first back.”

Wright also pointed to another ominous result in the survey: 19 percent of respondents thought that the 10-year average real U.S. GDP growth rate would be reduced by 1 to 2 percent per year. To be sure, the vast majority (77 percent) of economists thought the 10-year average growth rate would be reduced by less, although only one person thought it would go up. But the responses were still alarming, Wright said, because they indicated a serious degree of pessimism about the speed with which the economy will not just return to where it was at the end of 2019, but also catch up with where it would have been if the COVID-19 pandemic hadn’t happened.

[Related: In 2008, Everyone Thought The Recession Was Bad. But in 2020, Many Americans’ Views Depend On Their Party.]

However, Allan Timmermann, professor of finance and economics at the University of California, San Diego — who has also been consulting with us on the survey — was encouraged that the majority of respondents didn’t expect more long-term damage to growth. “This is still a large impact in terms of its cumulative effect on the economy,” he wrote in an email. “But it does suggest that most respondents think the economy will bounce back in due course — as opposed to leading us to a ‘lost decade’ scenario (as we have seen in Japan) with growth slowing down by an even larger amount.”

Overall, though, the latest survey responses paint a picture of America’s still-precarious road back to economic health. So much depends on the course of COVID-19 itself and how much the virus forces local economies to shut down again to slow its spread. But a lot is also riding on important policy decisions around the virus, which are still being debated. “I think economists have been surprised so far by the pace of the rebound,” Wright said. “But that hasn’t made them less worried about the weeks or months ahead.”

Subscribe to our coronavirus podcast, PODCAST-19

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Newsletter: Growth Hinges on Containing Covid-19



This is the web version of the WSJ’s newsletter on the economy. You can sign up for daily delivery here.

Containment Policy

A strong economic recovery depends on effective and sustained containment of Covid-19, economists said in a new Wall Street Journal survey. More than 90% of business and academic economists agreed “somewhat” or “strongly” that economic recovery depends on containing the virus. “A virus resurgence will push consumer spending back into hibernation,” said Scott Anderson, chief economist at Bank of the West. Federal Reserve officials, including Chairman Jerome Powell, have voiced similar views in recent days, Harriet Torry and Anthony DeBarros report.

The U.S. entered a recession in February, the National Bureau of Economic Research determined last month. A recovery could already be under way. Economists in the survey estimated that gross domestic product contracted at a 31.9% annual rate in the second quarter. They expect the economy will expand at a 15.2% rate in the third quarter—though the obvious downside risk is from another big outbreak.

WSJ Video: Economists have long used letters of the alphabet like V and U to describe economic recoveries. But the coronavirus downturn is so different from past recessions that economists are coming up with new shapes to describe the potential return to growth. WSJ’s Jon Hilsenrath explains.


The U.S. producer-price index for June is expected to increase 0.4% from a month earlier. (8:30 a.m. ET)

The Baker Hughes rig count is out at 1 p.m. ET.


Back to Work, Slowly

New applications for unemployment benefits edged down last week and the number receiving payments fell to the lowest level since mid-April. The fall in new claims extends a trend of gradual declines from a peak of 6.9 million in mid-March, when the coronavirus pandemic and mandated business closures shut down swaths of the U.S. economy. The modest easing of unemployment rolls, meanwhile, suggests new layoffs are being offset by hiring and recalling of workers, Eric Morath reports.

One other thing to watch in the weekly jobless claims report: The headline figures are for regular state programs. While those have been trending lower, the number of people receiving benefits through pandemic-response programs is going up. When you combine the array of long-established and brand new state and federal programs, total continuing claims hit a record high of 32.9 million during the week ending June 20, the latest data available.

Treasury Secretary Steven Mnuchin said the Trump administration is working with the Senate to pass a new bill for coronavirus-related economic aid by the end of July. Mr. Mnuchin said the administration supports a second round of economic impact payments to households, an extension of enhanced unemployment benefits for furloughed workers and a “much, much more targeted” version of the Paycheck Protection Program of forgivable loans for small businesses, Paul Kiernan reports.

Harley-Davidson said it would cut about 700 jobs as part of a global overhaul, the latest company to reduce its workforce as the coronavirus pandemic depresses economic activity. The job cuts amount to about 13% of the company’s global workforce. Other companies have also said recently they would shed workers, including Walgreens Boots Alliance, United Airlines and Levi Strauss, Austen Hufford reports.

Meatpackers are trying to replace human meat cutters with robot butchers. Companies like Tyson and JBS have been slower to automate than other manufacturing sectors. The coronavirus pandemic has changed that, Jacob Bunge and Jesse Newman report.

U.S. cases hit another daily record. New cases in the U.S. rose by more than 63,000, as hospitals in Texas, California and other states struggle to accommodate a surge of new patients.

What’s behind new Covid-19 outbreaks? America’s patchwork of policies. Skyrocketing coronavirus cases in the South and West reveal missteps at all levels of government, Arian Campo-Flores, Rebecca Ballhaus and Valerie Bauerlein report.

Individual companies are often forced to step into the breach. Starbucks will require customers in the U.S. to wear masks at company-operated stores starting next week, as retailers look to keep employees and patrons safe, Heather Haddon reports.

Can We Build It? Yes We Can!

Gold is climbing toward a record high, oil futures went from minus $40 a barrel to $40 in a month and a half, but the hottest commodity in the U.S. these days is wood. Prices for forest products like lumber and plywood have soared because of booming demand from home builders making up for lost time, a DIY explosion sparked by stay-at-home orders and a race among restaurants and bars to install outdoor seating areas. Lumber futures are up more than 85% since April 1, Ryan Dezember reports.


Was shutting down the economy worth it? “Based on the best currently available evidence, we estimate that, by the end of 2020, Covid-19-mitigating public health measures will save between 500,000 and 2,700,000 lives in the U.S.; however, the economic downturn from shelter-in-place measures and other restrictions on economic activity could create a collateral loss of 50,400-323,000 lives. This manuscript concludes that Covid-19-mitigating public health measures are justified; however they can create potentially significant, albeit less overt, mortality,” Olga Yakusheva, Eline van den Broek-Altenburg, Gayle Brekke and Adam Atherly write in a new working paper.


Real Time Economics has launched a downloadable calendar with concise previews forecasts and analysis of major U.S. data releases. To add to your calendar please click here.


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