Scott Ross Baker

Measuring Economic Policy Uncertainty

We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency. Several types of evidence – including human readings of 12,000 newspaper articles – indicate that our index proxies for movements in policy-related economic uncertainty. Our US index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt-ceiling dispute and other major battles over fiscal policy. Using firm-level data, we find that policy uncertainty raises stock price volatility and reduces investment and employment in policy-sensitive sectors like defense, healthcare, and infrastructure construction. At the macro level, policy uncertainty innovations foreshadow declines in investment, output, and employment in the United States and, in a panel VAR setting, for 12 major economies. Extending our US index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upwards since the 1960s.

Debt and the Consumption Response to Household Income Shocks

This paper exploits a detailed new dataset with comprehensive panel financial information on millions of American households to investigate the interaction between household balance sheets, income, and consumption during the Great Recession. In particular, I test whether consumption among households with higher levels of debt is more sensitive to a given change in income. I match households to their employers and use shocks to these employers to derive persistent and unanticipated changes in household income. I find that highly-indebted households are more sensitive to these income fluctuations and that a one standard deviation increase in debt-to-asset ratios increases the elasticity of consumption by approximately 25%. I employ direct measures of asset levels, available credit, and potential credit access to show that these results are driven almost entirely by borrowing and liquidity constraints. These estimates suggest that the drop in consumption during the 2007-2009 recession was approximately 20% greater than what would have been seen with the household balance sheet positions seen during the 1980s.

Has Economic Policy Uncertainty Hampered the Recovery

The U.S. economy hit bottom in June 2009. Thirty months later, output growth remains sluggish and unemployment still hovers above 8%. A critical question is why. One view attributes the weak recovery, at least in part, to high levels of uncertainty about economic policy. This view entails two claims: First, that policy uncertainty is unusually high in recent years. Second, that high levels of policy uncertainty caused households and businesses to hold back significantly on spending, investment and hiring. We take a look at both claims in this article. We start by considering an index of economic policy uncertainty developed in Baker, Bloom and Davis (2012). Figure 1, which plots our index, indicates that economic policy uncertainty fluctuates strongly over time. The index shows historically high levels of economic policy uncertainty in the last four years. It reached an all-time peak in August 2011. As discussed below, we also find evidence that policy concerns account for an unusually high share of overall economic uncertainty in recent years. Moreover, short-term movements in overall economic uncertainty more closely track movements in policy-related uncertainty in the past decade than earlier. In short, our analysis provides considerable support for the first claim of the policy uncertainty view. The second claim is harder to assess because it raises difficult issues of what causes what. We do not provide a definitive analysis of the second claim. Nevertheless, our evidence suggests that policy uncertainty can damage the economy, and that high levels of policy uncertainty have been an important factor hampering the recovery. We find evidence that increases in economic policy uncertainty foreshadow declines in output, employment and investment. While we cannot say that economic policy uncertainty necessarily causes these negative developments – since many factors move together in the economy – we can say with some confidence that high levels of policy uncertainty are associated with weaker growth prospects.

The Impact of Unemployment Insurance on Job Search: Evidence from Google Search Data

Job search is a key choice variable in theories of labor markets but is difficult to measure directly. We develop a job search activity index based on Google search data, the Google Job Search Index (GJSI). We validate the GJSI with both survey- and web-based measures of job search. Unlike those measures, the GJSI is high frequency, geographically precise, and available in real time. We demonstrate the GJSI’s utility by using it to study the effects of unemployment insurance policy changes between 2008 and 2014. We find no evidence of an economically meaningful effect of these changes on aggregate search.

Effects of Immigrant Legalization on Crime: The 1986 Immigration Reform and Control Act

In the late 1970s, rates of undocumented immigration into the United States increased dra- matically. This increase led to pressure on the federal government to nd some way of dealing with the immigrants, culminating in the 1986 Immigration Reform and Control Act (IRCA). This paper seeks to examine the e ects that the 1986 IRCA, which legalized over 2.5 million undocumented immigrants, had on the commission of crime in the United States. Using ad- ministrative data from the IRCA application process, I nd evidence that IRCA applicants are associated with higher crime rates prior to legalization and that, subsequent to legalization, this association disappears. I nd national decreases in crime of approximately 2%-5% associ- ated with one percent of the population being legalized, primarily due to a drop in property crimes. This fall in crime is equivalent to 160,000-400,000 fewer crimes committed each year due to legalization. Finally, I calibrate a labor market model of crime using empirical wage and employment data and nd that much of the drop in crime could be explained by greater job market opportunities among those legalized by the IRCA.

Income Changes and Consumption: Evidence from the 2013 Federal Government Shutdown

We use the 2013 federal government shutdown and rich data set from an online personal finance website to study the effects of changes in income on changes in consumption. The 2013 shutdown represented a significant and unanticipated income shock for federal government workers, with no direct effect on permanent income. We exploit both the differences between unaffected state employees and affected federal employees as well as between federal employees required to remain at work and those required to stay at home. Furthermore, we are able to discern various detailed types of household spending with widely varying elasticities. We find strong evidence for excess sensitivity of consumption patterns, violating the permanent income hypothesis. We demonstrate that this decline in spending can be largely explained by credit constraints, increased home production, and changes in time allocation. The results demonstrate the importance of liquidity and behavioral responses when constructing stimulus or social insurance policy.

Debt and the Response to Household Income Shocks: Validation and Application of Linked Financial Account Data

The increasing availability of data derived from linked consumer financial accounts has the potential to dramatically expand the potential for research. Examining the most comprehensive existing set of linked-account data, consisting of transaction and balance sheet data for millions of Americans, I demonstrate the power and versatility of such sources. I discuss advantages and concerns arising from this type of data and match a range of distributional moments to external sources. As one application, I test consumption elasticities across households with varying levels, and types, of debt. I find that heterogeneity in consumption elasticity can be explained entirely by credit and liquidity.

Shopping for Lower Sales Tax Rates

Using comprehensive high-frequency state and local sales tax data, we show that shopping behavior responds strongly to changes in sales tax rates. Even though sales taxes are not observed in posted prices and have a wide range of rates and exemptions, consumers adjust in many dimensions. They stock up on storable goods before taxes rise and increase online and cross-border shopping in both the short and long run. The differences between short- and long-run spending responses have important implications for the efficacy of using sales taxes for counter-cyclical policy and for the design of an optimal tax framework. Interestingly, households adjust spending similarly for both taxable and tax-exempt goods. We embed an inventory problem into a continuous-time consumption-savings model and demonstrate that this seemingly irrational behavior is optimal in the presence of shopping trip fixed costs. The model successfully matches estimated short-run and long-run tax elasticities with an implied after-tax reservation wage of

Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments

7-10. We provide additional evidence in favor of this new shopping-complementarity mechanism.