Kerwin Charles and Melvin Stephens “The Level and Composition of Consumption over the Business Cycle” Comments by Christopher Jencks June 9, 2005

2 Main Findings Mean expenditures hardly changed between 1988 and 2000 for any income group in the Consumer Expenditure Survey (CEX). Expenditures in top three income quartiles were not affected by the business cycle. In the bottom income quartile, a 2 point swing in unemployment only changed expenditures by about 6 percent.

3 Problem I: Trends Hard to believe that living standards were no higher in 2000 than in Comparisons between the CEX and the National Income and Product Accounts (NIPA) suggest that CEX underestimates spending in many categories. This problem may have gotten worse between 1988 and 2000, although CEX and NIPA definitions differ (medical care).

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5 Problem II: Recessions have changed Historically, a recession meant both higher unemployment and lower consumption. But this pattern changed in the 1990s. The recession involved an unusually small drop in consumption. The recession involved no drop at all in consumption (although rise slowed).

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7 What’s going on? In the GDP fell in only two quarters and consumption never fell. Employment leveled off because:  More consumer goods were imported,  Productivity rose  Domestic investment fell. Unemployment rose because:  Net immigration remained high  New native job seekers exceeded retirees

8 Why doesn’t higher unemployment still lower consumption? Many trends predict that unemployment should lower consumption more than in past Savings rate is down. Unemployment insurance coverage is down. Unsecured borrowing fell from 1990 to 1993 (Is this consistent with industry data?)

9 Why doesn’t higher unemployment still lower consumption? -- (cont.)  Asset values matter more than saving rates for consumption smoothing  Secured borrowing may have risen in and  Is the two earner family protective? How?  Could inter-family transfers have risen?  Did macroeconomic policy change in ways that protected more consumers?

10 Conclusions about paper Need more checks on validity of CEX trend data for expenditures. Check NIPA. Need data on whether CEX incomes fell in early 1990s and rose late 1990s. Need to define “treatment.” Estimate effect of “treatment” on cash and noncash income, total expenditure, and types of expenditure Spell out how people protect themselves from downturns, and see why lowest quartile fares worst, if it does. Is it just low assets?