A 'Balance Sheet' Recession or an Unemployment-Based One?

I've decried before the lack of natural history in economics, and I'm thinking Mark Thoma, with whom I usually agree, seems to be doing just that. Thoma on the ongoing recession:

There are different types of recessions, and this one can be termed "a balance sheet" recession. It had a big impact not just on bank balance sheets, but on household (and, for that matter firm) balance sheets as well. Households were particularly hard hit due to declines in stock prices and declines in the value of housing. These losses were large, they upset plans for things such as retirement, and households needed to refill the holes in their balance sheets that had been created (this includes paying off debt).

How do they refill their balance sheets? By saving more and consuming less (paying off debt is a form of saving). Thus, as the recession took hold, we saw a large increase in the saving rate and a corresponding fall in consumption. The tax cuts were an attempt to reverse the decline in consumption, but instead they mostly raised the amount that went into saving.

But that has a benefit. Households are not going to start consuming normally again until their balance sheets are repaired. The faster the holes in their balance sheets are refilled, and tax cuts can help with this, the faster the households can return to their normal rates of consumption -- a prerequisite for the economy to return to normal.

So the targeting of the tax cuts that was OK after all. You don't see the effects of balance sheet rebuilding in the data initially because the tax cuts are being used to fill up balance sheets, there's no immediate effect on consumption, output, employment, etc., to observe in the data. But since balance sheets are refilled faster, we will emerge from the recession sooner, and that's an important benefit of tax cuts that's often overlooked.

I disagree agree with Thoma on two points.

First, most households, even if you include their housing, don't have a lot of assets. Young households, while potentially hammered in Big Shitpile, lack savings (i.e., they're not thinking about retirement). Older households typically haven't been hit hard by the housing decline (they got in early enough not to be underwater), although their 401(k) accounts have been hurt (keep in mind, most households, even older ones, have very little in their 401(k) accounts, and this was true pre-Big Shitpile). In other words, retirement concerns aren't anything new.

Second, as Elizabeth Warren has noted repeatedly, in books and articles (along with her co-author Amelia Warren Tyagi), households often go into debt, not because of consumer purchases*, but due to 'life emergencies': a healthcare crisis, your car blows up and you need a car, a job loss or reduction in salary. While tax breaks would help these people somewhat (flood the economy with enough money, and some of it will eventually slosh around to the right places), what would help more is directly reducing unemployment and underemployment, as well as helping people with healthcare crises (oh yeah, that won't kick in until 2014... go RomneyObamacare!). It's not clear how much a tax cut will help someone whose earnings have dropped (or disappeared), since they won't be paying very much in taxes anyway. (Of course, some additional microeconomic data about credit patterns would be nice to observe how people are handling debt).

But this recession seems to me to be driven far less by individual concerns about 'balance sheets' and more about concerns over unemployment--current or future. With U6 unemployment near twenty percent, how could it not be?

It's a pretty story though.

*I'm not referring to transactional credit--paying off the balance in full, and just avoiding the inconvenience of carrying around cash.