Drunk Driving

"Are Buzzed Drivers Really the Problem? A Quasi-Experimental Multilevel Assessment of the Involvement of Drivers with Low Blood Alcohol Levels in Fatal Crashes," by Richard J. Stringer. March 2016. Available at https://docs.wixstatic.com/ugd/6b9875_8e07a3cd7e6c45cdadaf6a34cf4ba4d2….

In 2013 the National Transportation Safety Board recommended that states lower the legal blood alcohol concentration (BAC) for Driving Under the Influence from 0.08% to 0.05%. A 2007 article in the Journal of Safety Research, "Effects of Legal BAC Limits on Fatal Crash Involvement: Analyses of 28 States from 1976 through 2002," by A.C. Wagenaar et al., claims that this reduction would save 538 lives, but this paper argues that simple arithmetic indicates that claim is overstated.

In 2012 there were 27,605 fatal accidents. Of those, 17,455 had driver BAC of zero. In contrast, there were only 646 fatal accidents in which the driver had a BAC between 0.05% and 0.08%. Thus, for the policy prescription of 0.05% to save 538 lives, alcohol would have to be responsible for over 80% of all such crashes and the policy change would have to be 100% effective. But according to the official traffic fatality reporting system, alcohol was deemed responsible for the accident in only 14% of those crashes.—P.V.D.

Misguided Mortgages and the Great Recession

"Mortgage-Backed Securities and the Financial Crisis of 2008: A Post Mortem," by Juan Ospina and Harald Uhlig. April 2018. NBER #24509.

This September marks the 10th anniversary of the collapse of Lehman Brothers, arguably the watershed event of last decade's financial crisis sparked by a collapse in residential real estate. The standard explanation for the crisis blames "loose" lending standards by mortgage originators, particularly for lower-income borrowers, combined with the repackaging of mortgages into securities sold to investors falsely informed by misguided AAA ratings.

In previous Working Papers columns (Spring 2011, Fall 2012, and Spring 2014) I described papers that challenge the lower-income-borrowers portion of this narrative. This paper examines the other portion, asking how large were the investment losses on AAA-rated non-governmental mortgage-backed securities.

Ospina and Uhlig examine all non-agency residential mortgage-backed securities (RMBS) issued between 1987 and 2008. They find that the total cumulative losses through 2013 were only 2.3% of the original principal for AAA-rated securities and only 0.42% for subprime AAA-rated securities. AAA securities provided a return of about 2.44% to 3.31% on average, depending on the assumptions regarding their terminal value. For reference, the yield on 10-year treasuries in 2008 was 3–4%.

The total investment loss on all non-agency RMBS amounted to less than $350 billion, which was quite a bit less than the amount devoted to the 2009 American Recovery and Reinvestment Act. Write the authors, "We suggest that it is an interesting challenge to craft a theory of a world-wide recession, triggered by these losses."—P.V.D.

Banking

"The Impact of the Dodd–Frank Act on Small Business," by Michael D. Bordo and John V. Duca. April 2018. NBER #24501.

The consensus among economists is that banking regulation in the United States historically protected small banks whose loan portfolios were geographically and economically undiversified. (See "Banking Approaches the Modern Era," Summer 2002.) This regulation stemmed from the important role of small banks in congressional electoral coalitions.

Congress recently repealed some Dodd–Frank regulatory restrictions on smaller banks. Ordinarily I would have viewed this as special interest mischief, but this paper demonstrates that Dodd–Frank had adverse effects on smaller banks and the small business loans in which they specialize.

The share of commercial and industrial loans of less than $1 million at large banks—those with at least $300 million in assets—has fallen by 9 percentage points since 2010. The share of small loans at smaller banks has declined by twice as much. The real volume of small loans declined sharply in 2011, and it has grown only slowly in subsequent years, while the volume of loans of over $1 million has increased by 80% since 2011. This development marks a sharp break from the 1993–2010 period, when the value of small and large loan originations followed roughly similar trends. —P.V.D.

Stock Market Short-Termism

"Stock Market Short-Termism's Impact," by Mark J. Roe. May 2018. SSRN #3171090.

"Short-Termism and Capital Flows," by Jesse M. Fried and Charles C.Y. Wang. May 2018. SSRN #2895161

American investors, and thus the companies in which they invest through public stock markets, are allegedly characterized by excessive "short-termism"—that is, their demand for quick returns undercuts long-term investment. This, in turn, supposedly is responsible for decreased research and development, and a subsequent decline in U.S. living standards. In my Winter 2017–2018 Working Papers column I described a paper by Steven Kaplan that presented data inconsistent with short-termism. These two papers also argue against the idea that changes in investing have reduced R&D and living standards.

Mark Roe notes that stock trading has increased enormously and the average time investors hold stock has deceased drastically over time, but R&D has not. Instead R&D has increased from about 1% of gross domestic product in the 1970s to almost 1.8% now.

Many criticize stock buybacks as a sign of lack of corporate investment in the future. Stock buybacks have increased since the 2007–2008 financial crisis, but long-term borrowing rose in tandem. Low interest rates induced corporate America to substitute low-interest debt for stock. As a result, public firms have more cash, not less.

Capital investment is down in the past decade, but not because of stock market short-termism. First, factory capacity utilization in the United States has failed to fully recover from the 2007–2009 recession. Capacity utilization was still only 75% in January 2017, down from 81% before the recession. When capacity is more fully utilized, investment will rationally follow. Second, if the stock-market-driven story were correct for the United States, we should see differences between capital spending trends for the United States and for nations in which capital comes from banks rather than equity markets. But the capital expenditure decline since the 2007–2009 economic setback exists in Europe and Japan as well.

The Fried and Wang paper challenges an influential 2014 Harvard Business Review article entitled "Profits Without Prosperity," by William Lazonick. According to him:

Corporate profitability is not translating into widespread economic prosperity. The allocation of corporate profits to stock buy-backs deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their net income—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their net income. That left very little for investments in productive capabilities or higher incomes for employees.

According to Fried and Wang, S&P 500 shareholder payouts provide an incomplete and distorted picture of corporate capital flows and their effect on firms' investment capacities, for three reasons. First, companies are issuing new stock even when they are buying up existing stock. After taking into account equity issuances, Fried and Wang estimate that net shareholder payouts from S&P 500 firms during the years 2007–2016 were only about $3.7 trillion, or 50% rather than 96% of these firms' net income over this period. Second, a focus on S&P 500 firms—which generally have fewer growth opportunities than smaller and younger firms—creates a misleading picture of net shareholder payouts among all public firms. S&P 500 firms are net exporters of equity capital, but public firms outside of the S&P 500 are net importers of equity capital. Third, the focus on shareholder payouts as a percentage of net income is highly misleading because R&D spending (equal to about 25–30% of net income) is subtracted from corporate revenue before net income is calculated. In fact, a firm that spends more on R&D will, everything else equal, have a lower net income and a higher shareholder payout ratio. —P.V.D.