Thoughts on the May Jobs Figures

On June 5, the BLS reported that the national unemployment rate in May dropped to 13.3 percent, from 14.7 percent in April, and that nonfarm employment increased by 2.5 million. The stock market staged a huge rally and the media expressed astonishment. I guess I don’t read enough economic forecasts these days because I was surprised everybody was so surprised.

On May 21 I tweeted:

How can the PPP have committed over $600 billion to firms expected to maintain payrolls, and yet unemployment claims are over 38 million? Either many of those unemployment claims will be withdrawn once the PPP money flows through, or the PPP program has been a complete failure.

The May jobs figures answered my question. The Paycheck Protection Program (PPP) has been at least a partial success. From March 21 through May 30 initial claims for unemployment insurance totaled an astonishing 42.2 million, a number equivalent to about 27 percent of total employment at the beginning of March. But in the meantime, Congress passed the CARES Act, a central feature of which was the PPP. The PPP was intended to limit unemployment during the pandemic shutdown through, essentially, a federal subsidy of business payrolls, as well as to help small businesses survive by providing the liquidity to pay other fixed costs.

The PPP was designed as a loan program, but since the loans are 100 percent forgivable it is, in effect, a grant program. As initially legislated, PPP loans are forgivable if the borrowing firm used 75 percent of the loan for payroll and restored its pre-pandemic employment level by June 30. Through the end of May, 4.5 million PPP loans were approved, totaling $510 billion. However, the program only began taking applications on April 3 and administrative problems caused delays and frustration. Then the program ran out of money and Congress had to enact a new phase of emergency aid to refill it. Money didn’t start flowing to firms in a big way until late April. By then some 28 million Americans had filed for unemployment benefits.

The two criteria for loan forgiveness induced firms with PPP loans to rehire employees who had been laid off; many of those employees probably had already filed for unemployment. Undoubtedly, many firms also recalled workers simply because they wanted to continue operations and the PPP loans enabled them to do so. So it was to be expected that many of the initial unemployment claims were precautionary and, as my tweet suggested, eventually evaporated.

The timing of the rehires, as it relates to the reported unemployment rate, was anyone’s guess. The dip in the May unemployment rate, the survey for which was taken the week of May 10, indicates that the rehiring was relatively rapid. What exactly happens to the unemployment rate in June and July is even more speculative, insofar as Congress, on June 3, passed legislation extending the forgiveness deadline to December 31 (and also lowered the amount of the loan that must be used for payroll maintenance to 60 percent.) So firms are under less pressure to restore their employment to pre-pandemic levels by the end of June. It should not be a surprise if the unemployment jumps up again in coming months, nor should it be a surprise if it stabilizes.

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Homeownership and Retirement

The New York Times today presented a “Room for Debate” feature on the declining rate of homeownership, which has declined 6 percentage points from its peak. The debaters include Dean Baker, Elyse Cherry, William E. Spriggs, A. Michele Dickerson and Ed Glaser. Though I have some qualms with Cherry’s prescription of mass principal write-downs for underwater borrowers, the debaters generally offer reasonable takes on the pros and cons of home ownership and the implications of a declining ownership rate.

It is surprising, however, how little attention these reasonable commentators give to the retirement security benefits of homeownership. That oversight is particularly stark in Glaeser’s comments, where he states bluntly that “there is little public benefit in pushing people to own rather than rent homes.”

Consider a simple example where two identical families earning $75,000 annually at 30 years of age are contemplating renting permanently or plunging into homeownership. Say the first choses a permanent rental apartment for 20 percent of their gross income (about $1,250/month) and the other purchases an equivalent house with a similar monthly mortgage payment, although they will have to pay another 10 percent of their income in property taxes, insurance and maintenance expenses. To keep things simple, let’s ignore the tax benefits of homeownership and the opportunity costs of the home buying family’s initial down payment. Furthermore, assume that all rental and ownership costs inflate by 2 percent per year, except of course the homeowners’ mortgage expense, which is fixed for its 30 year amortization period.

Initially, in this simple scenario, the buying family would be paying a housing cost premium of 50 percent to own rather than rent. But since their mortgage costs are fixed, that ownership premium falls steadily, so that by the time they are 60 years old they are paying only a 6 percent monthly premium over their renting counterparts. By the time they are 61, their mortgage is fully amortized (No refinancing! No home equity loans!) and their ownership costs drop to 50 percent of their counterparts’ rental costs.

In nominal dollar terms, at age 65 the renter family will be paying $2,451 in monthly rent while the home-owning family will have total monthly housing costs of just $1,225. That difference will make a huge difference in the retirement welfare of the two families, not to mention the benefit of cost predictability enjoyed by the homeowners.

Of course, many embellishments to this simple model can be made, but the basic conclusion will stand under a wide variety of assumptions. The renters would have to display a great deal of savings discipline over their working lifetimes to generate enough investment income to offset their housing cost disadvantage and be better off overall than the homeowner at retirement age. I haven’t done a lit review of renter/owner savings behavior, but I’ll guess that very few renter families would display such savings discipline.

So, if there is a public benefit that the elderly be securely housed there is a public benefit to encouraging home ownership. If there isn’t a public benefit to homeownership in this sense, is there a public benefit to other retirement security policies, such as Social Security or 401-k tax advantages?