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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
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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: Change in timing of withholding 2001: Rebate 2008: Rebate 2009: Making Work Pay credit (withholding) 2011: 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 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 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 Highest income households have highest spending rate Results robust to multivariate analysis Lower income households likely to pay off debt
Income Expectations 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 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 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 Spending occurred quickly—86 percent in first three months Low income and low asset spenders had faster response
Personal Saving Rate Jump in the saving rate in spring 2008 mainly reflects boost to income Saving rate would have risen steadily without rebates
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
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
Recent rebates have had modest spending rates Low “bang for buck” Large rebates nonetheless had noticeable temporary effect on spending Implications for Fiscal Policy
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 Implications for Automobile Purchases in Aggregate
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