In today's Finshots, we look at some stunning conclusions from a blockbuster paper on unemployment authored by a few prominent economists including Raj Chetty.

The Story

For the uninitiated, Raj Chetty is a celebrated Indian Origin economist who’s been looking at the US unemployment experience (post-COVID) using some very interesting data. His prognosis is relevant today because policymakers have a hard time making decisions considering their estimation of economic activity mostly depends on systematic, recurring surveys of businesses and households. Collecting, aggregating and making sense of this data takes time. And when it comes to a pandemic, time is of the essence.

So, Chetty and his collaborators offer an alternative. They want to use real-time transaction data from private companies to measure economic activity. Sort of like using credit card information of a large group of people or a job-portal website to see what’s happening out there. And their recent paper is perhaps one of the most ambitious projects trying to illustrate the benefits of using this kind of data. If you don’t have the time or the patience to read the paper, the team also has a visual tracker at hand to help you make sense of the scale and scope of the crisis we have at hand. Do check it out.

In any case, our story will focus on what the team found whilst analyzing these real-time data sets. Because let's be honest—That’s the only thing that matters, right?

For starters, Chetty and his team found that there is a veritable dip in economic activity. And they contest that this drop in GDP could be attributed to a dip in consumer spending. While this conclusion might not be all that surprising, do note that most of the reduced spending was concentrated in households with a high income.

As Chetty writes in his paper —

This is both because the rich account for a larger share of total spending to begin with and because high-income households reduced their spending by 17%, whereas low-income households reduced their spending by only 4% as of June 10

After all, the rich have consumption patterns that are very different from the poor. Somebody who is barely making ends meet is probably spending money on essentials — food, diapers, electricity, that sort of stuff. The rich on the other hand primarily spend money elsewhere — salons, beauty parlours, restaurants, hotels, air travel, parties and pubs. And while you can’t stop eating altogether, you can stop eating at an upscale restaurant. So the more affluent folks have had to prune spending considerably because of the pandemic. Ideally, you wouldn’t feel too sorry for them. But the aggregate impact of this consumption dip affects people employed in these sectors.

Think Restaurants — There’s a cleaner that preps your table. There’s a manager that takes you to your seat. There’s a waiter who promptly fills your order and there’s a chef who cooks the dish. Most of the ingredients that went into the dish came from a farm 20 miles away. A distributor fulfils your order each day after liaisoning with a trucking company. And the truck driver makes sure you get your “produce” when you need it.

All of these people are cogs in a gigantic machine that’s sputtering right now. And it's not looking good for them.

Also, Chetty and his team argue that the impact of this spending dip is more visible in upscale areas — “In the highest-rent ZIP codes, More than 65% of workers at small businesses were laid off within two weeks after the COVID crisis began; by contrast, in the lowest-rent ZIP codes, fewer than 30% lost their jobs. Workers at larger firms and in tradable sectors (e.g., manufacturing) were much less likely to lose their jobs than those working in small businesses producing non-tradable goods (like a dish), irrespective of their geographic location.”

And it’s not like the US government did not foresee this. They did.

The problem here seems to be stemming from a sudden dip in consumer spending. The only way to boost this spending is to supplement people’s income. Which is why the government offered additional grants alongside unemployment benefits (i.e. actual money) in a bid to boost consumer spending. However, very little of the additional spending flowed to businesses most affected by the COVID shock. Poor unemployed people don’t tend to party and visit restaurants. I mean, even if they did, it most certainly wouldn’t be at a time when there’s a pandemic at large. So while the unemployment benefits did help people tide over the crisis, it didn’t really fix the unemployment problems plaguing the services industry.

But what about loans?

The US government also set aside large sums of money to provide loans (which could potentially be forgiven) to businesses in the hope that these companies would guarantee their employees eight weeks of payroll and help them pay their bills. But the data tells us that this program had little impact on unemployment numbers.

One potential explanation is that the businesses that claimed most of these loans were businesses who wouldn’t have fired their employees either way. That sort of makes sense. But the team also contend that these loans were not distributed to the industries most likely to experience job losses from the COVID crisis. For example, firms in the professional, scientific, and technical services industry received a greater share of these loans than accommodation and food services.

A terrible travesty that.

In either case, Chetty and his team conclude that we might not see unemployment levels improve until people are fully confident of going out and spending money like they used to. The loans and the unemployment benefits might help a bit. But until the vaccine arrives, we will probably be staying in limbo.

Until then…

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The Economist who would fix the American Dream

Since today’s story was about Raj Chetty, we thought we’d recommend this excellent article on the Atlantic profiling his journey from New Delhi to being one of the most celebrated economists in the world.  Do check it out. It’s really fascinating.