What is MPC from income shock?
• Critical for getting the multiplier started
• Vast literature on failure of LC/PIH prediction
of response to temporary income
– Euler equation: Hall, Campbell-Mankiw
– Specific income shocks
Specific income shocks
Response to windfalls or anticipated income
• Wilcox, Income tax refunds
• Parker, Hitting the FICA ceiling
• Stephens, Receipt of Social Security check
• Souleles, Tuition payments
– (Christian, labor supply response)
• Hsieh, Alaska oil payments
See literature review in Shapiro-Slemrod (2003)
Survey Approach
•
•
•
•
•
Specific policy
Estimate MPC, not GE effects
Clearly endogenous
Clearly income, not price/allocative
What was household response to a
specific policy at a specific time?
Shapiro-Slemrod surveys
1992:
2001:
2008:
2009:
2011:
Change in timing of withholding
Rebate
Rebate
Making Work Pay credit (withholding)
Social Security payroll tax holiday
(withholding)—In field this spring
Recent work joint with Claudia Sahm, FRB
Economic Stimulus Act of 2008
• One-time stimulus payments, aka “Tax Rebates”
• Typical rebate:
– Singles $600
– Married $1200
– Plus $300 per child
• Broad eligibility (did not need tax liability)
• Phased out for upper income levels
• Paid by EFT or check
2008 Stimulus Payments
Large and distributed quickly
• $96 billion
– 0.8% of annual personal income
– 8.7% of annual Federal personal tax receipts
≈ one-month of income tax revenue
• Disbursed mainly in 2008:Q2
Questions surveys can answer
• How much additional spending did the
2008 stimulus payments generate?
• Timing of spending?
• Types of spending and debt repayment?
• Different responses across households?
Research Design
• Survey questions: Ask directly about
response to rebates
• Follow-up questions and multivariate
analysis: Assess the survey responses
• Validate survey responses: Compare to
aggregate data on spending and debt
• Compare to other surveys
Key Survey Question
Thinking about your family’s financial
situation this year, did the tax rebate
lead you mostly to increase spending,
mostly to increase saving, or mostly to
pay off debt?
Response to 2008 Rebates
Increase spending
Increase saving
Pay off debt
Memo:
Number of respondents
Feb-Apr
20%
31%
49%
1,447
Survey Months
May-Jun Nov-Dec
19%
22%
27%
23%
53%
55%
980
990
Pooled
20%
28%
52%
3,417
Note: Authors' weighted tabulation of the Reuters/Michigan Survey of
Consumers.
One-fifth of households mostly increased their spending
Most common response is to pay off debt
Distribution of responses stable across 2008,
similar to responses to 2001 rebates
Marginal Propensity to Consume (MPC)
• “Mostly spend” rate not same as MPC
– “Mostly spenders” do some saving
– “Mostly savers” do some spending
• Under a range of plausible distributional
assumptions…
1/5 mostly spend  MPC of 1/3
Age and Response to Rebates
Age (years)
Under 30
30-39
49-49
50-64
65 and over
Under 65
65 and over
Percent
Spend
11%
17%
25%
21%
26%
20%
26%
Oldest households have highest spending rate
Qualitatively consistent with life-cycle consumption
But spending rate high relative to pure life-cycle model
Income and Response to Rebates
Household Income
$0 to $20,000
$20,001 to $35,000
$35,001 to $50,000
$50,001 to $75,000
More than $75,000
Refused / Don't know
income
Percent
Spend
20%
22%
17%
17%
26%
30%
Highest income households have highest spending rate
Results robust to multivariate analysis
Lower income households likely to pay off debt
Income Expectations
Multivariate Regression:
Probability Mostly Spend
Estimate
Expected income growth g
g > 4%
0 < g < 4%
-10% < g < 0
g < -10%
3.9
(2.2)
1.7
(2.2)
-0.8
(2.8)
-5.1
(2.8)
Expected income growth strongly is strongly associated with spending
Summary of Age and Income Effects
• Being young or poor does not indicate
high spending rate
– Debt repayment modal for less well off
• Finding contrary to conventional wisdom
– CBO, Hamilton Project (Jan 2008) white
papers
• Income growth a better indicator of
liquidity-constrained behavior
Type of Spending
Specific Type of Spending
Major household item (durables, appliances)
Percent of
Spenders
25%
Other specific expenses
56%
Food
Gasoline, fuel
Clothing
Recreation (incl. travel)
Housing-related expenses (incl. renovations)
Vehicle-related (incl. purchases and repairs)
Medical, education, other specific expenses
General expenses
Pay off credit card or other loan, pay taxes
10%
2%
8%
21%
9%
3%
2%
17%
3%
Spending split between “regular expenses” and “something else”
Household durables and recreation are most common types of spending
Some question whether this spending is truly incremental
Type of Debt Repayment
Percent of
Debt Repayers
Credit card
51%
Mortgage, home equity
9%
Specific bills (medical, tuition)
26%
Everyday bills (utilities, fuel), other debt
14%
Most common response was paying down credit card balances
Sizeable minority paid everyday bills—may indicate spending
Using Survey Data for
Aggregate Implications
• Use survey data to estimate
– MPC (implied by “mostly spend rate”)
– Timing of spending
• Use aggregate data
– Level and timing of aggregate disbursements
• Compare survey estimate to
– Actual spending and saving
– Debt levels
• Direct effect only: No GE/multiplier effects
Timing of Spending:
Rebate Evidence
When did spending increase?
Within a few weeks
Within 1-3 months
More than 3 months
Percent of
Spenders
36%
50%
14%
Spending occurred quickly—86 percent in first three months
Low income and low asset spenders had faster response
Disbursements of Rebates:
Aggregate Data
60
48
Billions of Dollars (monthly rate)
50
40
28
30
20
14
10
4
2
0
April
May
June
July
Aug-Dec
Personal Saving Rate
Personal Saving Rate, Percent
6
5
4
3
2
1
0
Jan-08
Apr-08
Actual
Jul-08
Oct-08
Jan-09
Excludes Rebate Income and Rebate Spending
Jump in the saving rate in spring 2008 mainly reflects boost to income
Saving rate would have risen steadily without rebates
Rebate’s Effect on Spending Growth:
Survey-based Evidence
Percent (annual rate)
3
2
1
0
2008Q1
2008Q2
2008Q3
-1
-2
Survey-based estimate of contribution of rebate
2008Q4
Spending Growth: Actual versus
Excluding Rebate Effects
0
Percent (annual rate)
2008Q1
2008Q2
2008Q3
-1
-2
-3
-4
Actual
Excluding rebate effects
2008Q4
Validating the survey evidence
• Simulations of macro spending model
• Comparisons with aggregate debt levels
• Analysis of other surveys (see paper)
All support our basic survey results
Model Simulation
Simple FRB consumption model:
• Dynamic error correction model of
consumption growth
• Explanatory variables:
–
–
–
–
Disposable income (excluding rebate)
Net worth
Federal Funds rate
Consumer sentiment
• Compare actual and simulated data
Consumption Growth: Actual versus predicted
Percent Change in Real PCE (a.r.)
2008Q1 2008Q2 2008Q3 2008Q4
Published national accounts data
-0.6
0.1
-3.5
-3.1
Dynamic model simulation excluding rebate
income
0.5
-2.2
0.5
-2.4
Difference between data and model simulation
-1.1
2.2
-4.0
-0.7
Contribution of rebates to the change in real
PCE estimated from responses in the Michigan
survey
0.0
2.4
-0.3
-1.7
Did rebate reduce consumer debt in aggregate?
Ratio of revolving credit to spending, in recessions
Benefits of Survey Approach
• Survey responses
– Households’ counterfactual response
• Standard data on behavior (aggregate or
micro)
– Hard to isolate policy effect from other shocks
• Surveys give timely estimates of policies’
effects
Implications for Fiscal Policy
• Recent rebates have had modest
spending rates
• Low “bang for buck”
• Large rebates nonetheless had noticeable
temporary effect on spending
Implications for
Current Business Cycle
• 2008 rebates
– Raised spending growth in 2008Q2
– Lowered spending growth in 2008Q4
• Lesson for understanding 2008
– Consumption contraction began before fall
crisis
2008 Rebate: CEX Evidence
Consumer Expenditure Survey (Parker,
Souleles, Johnson, and McClelland, 2011)
• CEX questions about receipt of rebate
• Related paper on 2001 rebate uses timing
of receipt (randomized by Social Security
number) as instrument
• In 2008, little variation in timing so
identification from cross-sectional variation
2008 Rebate: CEX Evidence
• MPC on non-durables low
• MPC on total consumption higher
– Mainly coming from automobiles
• Lagged/cumulative MPC larger
Consumption response to the 2008 rebate
Source: Parker, et al, 2011
Consumption response to the 2008 rebate, Cumulative
Source: Parker, et al, 2011
Consumption response to the 2008 rebate, Durables
Consumption response to the 2008 rebate
Implications for Automobile Purchases in Aggregate
2008 JAN
2008 FEB
2008 MAR
2008 APR
2008 MAY
2008 JUN
2008 JUL
2008 AUG
2008 SEP
2008 OCT
2008 NOV
2008 DEC
2008 Total
Real expenditures by
households on motor
vehicles, billion 2005
dollars, annual rate,
seasonally adjusted
340.84
339.24
326.83
322.75
314.55
306.39
281.14
307.05
292.02
262.72
262.88
262.01
301.535
Payments from 2008
Rebates, nominal,
annual rate
23.3
577.1
334.4
164.1
12.4
8.1
11.7
13.1
2.6
96
Nominal rebateinduced spending on
Real rebate-induced
Implied Share of
new and used motor
spending on new and
Motor Vehicle
vehicles implied by
used motor vehicles
Outlays Owing to
Table 12 PSJM*
implied by Table 12 PSJM
Rebates
5.6
144.1
218.8
119.6
42.4
4.9
4.7
6.0
3.8
46
5.4
140.0
211.9
115.8
40.8
4.7
4.5
5.6
3.5
44
0.02
0.45
0.69
0.41
0.13
0.02
0.02
0.02
0.01
0.15
2008 Rebate: CEX and Survey
Approach Cross-Validation
• CEX includes Shapiro-Slemrod “mostly
spend/save/pay debt” question
• Somewhat more CEX respondents “mostly
spend”
– 1/5 in Michigan survey, 1/3 in CEX
– Mostly pay off debt modal in both
• CEX consumption strongly predicted by
“mostly spend”
Consumption response to 2008 rebate, Using survey question
Source: Parker, et al, 2011
2008 Rebate: Summary
• CEX and Michigan survey have similar
estimates on impact
• CEX has larger cumulative effect
– mainly from automobiles
– not precisely estimated
• Cross-validation
• Policymakers tend to focus on largest
estimated MPC, which imply larger
multipliers