What Happened: Financial Factors in the Great Recession

From a new NBER working paper by Mark Gertler and Simon Gilchrist

Abstract:

Since the onset of the Great Recession, an explosion of both theoretical and empirical research has investigated how the financial crisis emerged and how it was transmitted to the real sector. The goal of this paper is to describe what we have learned from this new research and how it can be used to understand what happened during the Great Recession. In the process, we also present some new evidence on the role of the household balance sheet channel versus the disruption of banking. We examine a panel of quarterly state level data on house prices, mortgage debt and employment along with a measure of banking distress. Then exploiting both panel data and time series methods, we analyze the contribution of the house price decline versus the banking distress indicator to the overall decline in employment during the Great Recession. We confirm a common finding in the literature that the household balance sheet channel is important for regional variation in employment. However, we also find that the disruption in banking was central to the overall employment contraction.

Gated copy of the paper is here.  

The Impact of the Dodd-Frank Act on Small Business

from the "The Impact of the Dodd-Frank Act on Small Business," by Michael D. Bordo and John V. Duca 

Abstract

There are concerns that the Dodd-Frank Act (DFA) has impeded small business lending.  By increasing the fixed regulatory compliance requirements needed to make business loans and operate a bank, the DFA disproportionately reduced the incentives for all banks to make very modest loans and reduced the viability of small banks, whose small-business share of C&I loans is generally much higher than that of larger banks. Despite an economic recovery, the small loan share of C&I loans at large banks and banks with $300 or more million in assets has fallen by 9 percentage points since the DFA was passed in 2010, with the magnitude of the decline twice as large at small banks.  

Controlling for cyclical effects and bank size, we find that these declines in the small loan share of C&I loans are almost all statistically attributed to the change in regulatory regime.  Examining Federal Reserve survey data, we find evidence that the DFA prompted a relative tightening of bank credit standards on C&I loans to small versus large firms, consistent with the DFA inducing a decline in small business lending through loan supply effects.  We also empirically model the pace of business formation, finding that it had downshifted around the time when the DFA and the Sarbanes-Oxley Act were announced.  Timing patterns suggest that business formation has more recently ticked higher, coinciding with efforts to provide regulatory relief to smaller banks via modifying rules implementing the DFA.  The upturn contrasts with the impact of the Sarbanes-Oxley Act, which appears to persistently restrain business formation. 

Casey Mulligan's latest study on the labor market effects of the Affordable Care Act

From University of Chicago's Casey Mulligan, a new paper titled, "The Employer Penalty, Voluntary Compliance, and the Size Distribution of Firms: Evidence from a Survey of Small Businesses."

Abstract: 

A new survey of 745 small businesses shows little change in the size distribution of businesses between 2012 and 2016, except among businesses with 40-74 employees, in a way that is closely related to whether they offer health insurance coverage.  Using measures of both size and voluntary regulatory compliance, the paper links these changes to the Affordable Care Act's employer mandate.  Between 28,000 and 50,000 businesses nationwide appear to be reducing their number of full-time-equivalent employees to below 50 because of that mandate.  This translates to roughly
250,000 positions eliminated from those businesses. 

The gated paper is available at the National Bureau of Economic Research.

When it comes to business data, is Yelp as good as the U.S. Census?

From the paper titled, "Nowcasting the Local Economy: Using Yelp Data to Measure Economic Activity," by Edward L. Glaeser, Hyunjin Kim and Michael Luca

Here's the abstract from NBER.

Abstract:

Can new data sources from online platforms help to measure local economic activity? Government datasets from agencies such as the U.S. Census Bureau provide the standard measures of local economic activity at the local level.  However, these statistics typically appear only after multi-year lags, and the public-facing versions are aggregated to the county or ZIP code level. In contrast, crowdsourced data from online platforms such as Yelp are often contemporaneous and geographically finer than official government statistics.  In this paper, we present evidence that Yelp data can complement government surveys by measuring economic activity in close to real time, at a granular level, and at almost any geographic scale.  Changes in the number of businesses and restaurants reviewed on Yelp can predict changes in the number of overall establishments and restaurants in County Business Patterns.  An algorithm using contemporaneous and lagged Yelp data can explain 29.2 percent of the residual variance after accounting for lagged CBP data, in a testing sample not used to generate the algorithm.  The algorithm is more accurate for denser, wealthier, and more educated ZIP codes.