APRIL 14, 2011: RECENTLY, a friend of mine who works in technology told me that he wanted to move to California for better job reasons, but the likely uncertainty about his house and mortgage in New England was holding him back.
While just one example, this is an important friction, and one where something can and should be done. While there is an aspect of the jobs situation related to long-run issues of jobs and skills in manufacturing, another real problem is that many households are still deep underwater on houses or at least precariously placed. We cannot fix the left-hand side of household sector’s balance sheet without fixing the right-hand side (this is a version of why the Modigliani-Miller theorem of why liability structure does not affect the value of a balance sheet does not hold when the balance sheet is distressed and the asset suffers from a “debt overhang”). Further, this is a clear externality on everyone. As more households find themselves “stuck”, there is less mobility of labour and less liquidity of houses, which makes others stuck as well.
In my view, the best fiscal stimulus for the US economy would be for the government to engage in a one-time and decisive principal write-down on a significant measure of underwater mortgages. It is not necessarily easy nor fair to everyone, but it offers the best chance in my view of fixing household balance sheets, making people mobile, increasing aggregate demand as they regain home equity, and thereby creating a virtuous cycle of recovery in growth and jobs.