The Financial Crisis: Economic and Health Effects

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DESCRIPTION (provided by applicant): The United States and most of the developed world is experiencing its greatest economic crisis since the Great Depression. Households have been affected in a number of ways. Large declines in house values combined with the assumption of risky mortgages and equity extraction has led to negative housing equity for a significant fraction of home owners and foreclosures for some. Large declines in stock values have decimated the savings of many households, especially affecting retirement savings. Record rates of job loss jeopardize the economic foundations of a large and growing fraction of workers and their families. One major objective of this proposed project will be to quantify the effects of the financial crisis on the wealth positions of U.S. households and any adjustments in behavior households made in response. To paint as complete a picture as possible these analyses will employ multiple longitudinal data sources (HRS, PSID, American Life Panel, and ELSA) that vary in the covered age range, sample size, the frequency and timing of interviews as well as the richness of available information. In panel data we will estimate the responses by households to changes in their wealth positions, in particular in consumption and saving, retirement and bequests. Thus we will find how households financed the wealth losses. An important element to intertemporal decision making is what individuals expect about the future. The recent extended turmoil in the financial markets makes it difficult to form such expectations. This project will document and estimate changes in subjective uncertainty and optimism about the financial situation of households and relate them to individuals' economic choices. Another major objective of this research is to investigate whether the economic crisis is associated with declines in health. Past research has shown a close relationship between health and economic status and these unexpected changes in wealth provide an opportunity to separate some of the explanations for this relationship. In addition to self-reported health information we will take advantage of available biomarkers in the HRS and ELSA. Thus the study will relate changes in health to wealth changes and to expectations about unemployment and other stresses. Most of these analyses will be duplicated on data from the English Longitudinal Study of Ageing, taking advantage of different evolutions of the crisis and somewhat richer information on health in ELSA.