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

Disbursements of Rebates: Aggregate Data

Personal Saving Rate 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

Spending Growth: Actual versus Excluding Rebate Effects

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

Percent Change in Real PCE (a.r.) 2008Q12008Q22008Q32008Q4 Published national accounts data Dynamic model simulation excluding rebate income Difference between data and model simulation Contribution of rebates to the change in real PCE estimated from responses in the Michigan survey Consumption Growth: Actual versus predicted

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

Source: Parker, et al, 2011 Consumption response to the 2008 rebate

Source: Parker, et al, 2011 Consumption response to the 2008 rebate, Cumulative

Consumption response to the 2008 rebate, Durables

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”

Source: Parker, et al, 2011 Consumption response to 2008 rebate, Using survey question

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