Transcript Discussion of Charles Steindel (2009) “Implications of the

Discussion of Charles Steindel (2009)
“Implications of the Financial Crisis for Potential
Growth: Past, Present and Future”
Angel Ubide*
Tudor Investment Corp,PIIE and CEPS
Rome, Sept 2009
* Views expressed here are my own and do not represent, in any way,
those of Tudor Investment Corporation.
• Main message:
– No overstatement of past real activity in
finance and real estate
– Assumptions for overstatement would be
“extreme”, and impact would not be material
– Thus, likely slower activity in finance and real
estate will not have substantial effects on
future US potential growth
• Interesting methodological discussion: sector
reallocation vs impact on overall growth =>
better past productivity performance in nonfinance sectors
• But does size of finance sector matter for cost of
capital? Could one consider spreads and risk
premia, and thus cost of capital, would have
been wider, and thus a net overall growth loss?
Post-crisis experience seems to suggest so.
• Paper looks for alternatives, but finds them
“extreme”.
• Are the alternative estimates “extreme”?
The outcome would be material.
– Real value added in financial services lower
by 0.25 percent (Table 2)
– Contribution to real GDP growth in residential
construction lower by 0.2 percent (Table 3)
– Would this “extreme” alternative scenario
imply potential growth lower by 0.45 percent?
Did the US financial sector add any
value in the last 10 years?
• How “extreme” is the assumption that finance
workers may not migrate to high wage jobs outside
finance?
•
Jacob Funk Kirkegaard (2009) Structural and Cyclical Trends in Net Employment
over US Business Cycles, 1949–2009: Implications for the Next Recovery and
Beyond, PIIE, WP 09/05
•
FIRE has experienced structural job losses since 2001
Finance has experienced structural losses in this downturn
How to square results with Natalia, Estevao and
Keim (2009)?
• Which sectors are likely to generate the increase in the
Nairu? Finance, real estate and autos are likely
candidates.
• Beveridge curve seems to be shifting, suggesting a
higher Nairu
• Smaller finance sector will leave some marginal projects
unfunded and may contribute to longer term
unemployment.
• It could also slow down spending in innovation. But it
may force companies to increase productivity.
• Welfare impact of excessive allocation of resources to
finance: Peak Finance? (Simon Johnson, PIIE)
– Financial innovation not targeted at improving capital allocation –
how much do CDS really lower financing costs? See also Adam
Posen and Marc Hinterschweiger, “How Useful Were Recent
Financial Innovations? There Is Reason To Be Skeptical,”
– Too big to fail
– High share of talent in finance (5->15 percent over 1970-1990)
– High share of total profits in GDP (5-> almost 40 percent over
1982- 2008)
– Compensation (100 –> 180 percent of all industries
compensation since 1982, flat at 100 before)
– Likely to reverse – consumer protection
• Overall, a very interesting paper which makes an
interesting methodological point about GDP
accounting.
• However, there seems to be a small bias
towards ruling out alternative scenarios – some
additional discussion may be useful.
• And the research suggesting lower potential
growth is large, the paper would perhaps benefit
from a more comprehensive discussion.
Thank you
• Structural-losses sectors: sectors that show
slower net employment growth rates than the
total workforce during expansions and slower
net employment growth (or faster relative net
employment declines) during contractions.
Structural-loss sectors create relatively few new
jobs during expansions and often shed many
more during recessions than the economy as a
whole. These sectors gradually decline in
employment importance in the economy.
Groshen and Potter (2003)