"Maybe the housing crash and mortgage modification that followed have something to do the recession of 2008."

Casey Mulligan got a lot of grief for this post:

"Want to Cut Your Debt? Work Less

Copyright, The New York Times Company

Mortgage modification programs create terrible work incentives and are ubiquitous these days, and this is one reason why this recession is so different from previous ones.

In most cases, a homebuyer takes out a mortgage that covers only part of the value of the house he’s buying. In other words, the house a person buys is worth more than the mortgage he owes on it. This means that in the event of borrower delinquency, the lender can, in most cases, obtain his full principal by foreclosing on the house and selling it to a new purchaser.

However, housing prices have fallen dramatically since 2006. By 2008, about 12 million mortgages were “under water” – meaning that market value of the house had fallen below the amount owed on the mortgage. Because of the low resale values, foreclosing on any of those homes will not yield lenders their entire principal; lenders in those cases must rely on the good behavior of the borrowers.

Officials at the Federal Reserve, the United States Treasury, the F.D.I.C., Fannie Mae (most recently, its “Early Workout” program) and Freddie Mac have encouraged lenders in such cases to “modify” mortgages – that is, to accept a stream of payments from the borrowers that is different from the amounts promised when the mortgages were initially signed. In particular, these “modification programs” encourage lenders to reduce mortgage payments so that each borrower’s housing payments (including principal, interest, taxes and insurance) are 38 percent of the borrower’s gross income( THEN THEY'RE PROPORTIONAL. THERE'S NO INCENTIVE TO MAKE LESS. ). The payments are to be reduced for the next five years, or when the mortgage is paid off (whichever comes first).

Of course, a borrower cannot be harmed by the opportunity to have his mortgage payment reduced. But what is economically noteworthy is that the amount of the payment reduction depends on the borrower’s income – the less he or she earns, the more the payment is reduced. ( I'M NOT SURE I UNDERSTAND THE CONCERN. SURELY IT'S BETTER TO EARN MORE AND PAY MORE THAN TO EARN LESS AND PAY LESS. FOR ONE THING, YOU WILL HAVE MORE MONEY AFTER YOU'VE MADE THE HOUSING PAYMENT. ) For example, a borrower whose annual family income is $100,000 can have her housing payments reduced to $38,000 per year, whereas a borrower whose annual income is $50,000 can have his payments reduced to $19,000 per year.( THAT ISN'T A GOOD REASON TO EARN LESS. I DON'T UNDERSTAND THIS. )

One implication of the mortgage modification rules is that a family that earns $50,000 less in the year prior to their modification stands to save $19,000 per year for the following five years – or a total of $95,000 on its housing payments! Those are 95,000 reasons to hesitate when looking for a new job, when wrapping up a maternity or paternity leave, or when confronting other job transition situations. ( NOT IF YOU CAN EARN MORE. IS ALL THE EXTRA MONEY GOING TO HOUSING PAYMENTS? )

I do not expect every adult among those in the 12 million underwater households to be without a job because of the modification rules( ARE YOU SAYING THAT THEY QUIT THEIR JOB? THEN THEY DO NOT RECEIVE UNEMPLOYMENT BENEFITS. ). Although modification professionals have specialized in educating homeowners about their modification options, many homeowners probably do not fully understand the mortgage consequences of their earning decisions. Nobody knows the exact numbers, but, even if 90 percent of homeowners were oblivious or uninterested in their modification options, that would leave over a million households that were aware. One million plus workers would make a large dent in the employment statistics.

My previous post reminded readers that productivity has been rising and employment falling in this recession. If approximately one million workers realized that earning income in 2008 was not in their financial interest – and acted on this realization – their actions would have the effect of significantly reducing aggregate employment and hours. As businesses operated with less labor, labor productivity would rise. Maybe the housing crash and mortgage modification that followed have something to do the recession of 2008."

I don't see the incentive at all. Quitting your job will make you much poorer, since you won't have any income, and if you're fired or let off, that has nothing to do with your housing payments. Once fired or let off, your payments are proportional to what you earn. There's no incentive to stay out of a job if you can get one for mortgage payments. For one thing, you have to look for a job for UI, and any fool knows that you should take a decent job if you're offered one. You never know when you'll be offered another. I must have missed something.

My explanation is that employers have been laying off workers proactively due to the fear and aversion to risk. In other words, they have been letting workers go even though demand hasn't fallen enough to justify the layoffs. That's why productivity is rising. I'm putting the fear and aversion to risk now rampant in the economy up against loan modifications as an explanation of rising productivity, and readers can decide which explanation is more probable.