Facts, Issues and Problems about Consumption in NTA An-Chi Tung, Institute of Economics, Academia Sinica

Seoul, NTA Workshop2 Outline Cross-section: 15 countries –shape: why differs from past studies? –composition: CG and CF; durables; health and education,… Time-series//cohort pattern : Taiwan, –growth effect –time effect/institutional change

Seoul, NTA Workshop3 Life-cycle Hypothesis and Related Studies

Seoul, NTA Workshop4 Life cycle hypothesis 1.(private) consumption smoothing over the life cycle, based on utility maximization (Modigliani and Brumberg, 1954,…) 2.empirical results are mixed macro (Campbell and Mankiw, 1989,… ) micro – cross section, panel, or cohort (Hall and Mishkin, 1982; Altonji and Siow, 1987) 3.micro studies usually based on household heads at age 20 and above; some find a hump shape (and the retirement consumption puzzle): with peak at middle age due to liquidity constraint (Thurow, 1969), family size (Irvine, 1978), bequest (Barro, 1974),…

5 (from Robb et al, 1992, Canadian Journal of Economics) examples of Canada: cross-section cohort

Seoul, NTA Workshop6 Consumption in NTA ex-post accounting, no utility maximization estimated by individual, not by household Includes both private and public C Includes both durable and nondurable C …

Seoul, NTA Workshop7 NTA results: Mean Consumption normalized by YL of age 30-49

Seoul, NTA Workshop8 Real GDP pc (in 2000 international dollar, from Penn World Table 6.2)

Seoul, NTA Workshop9 By real GDP pc US France Sweden Austria Japan Slovenia Taiwan S. Korea Chile Uruguay Costa Rica Thailand Philippines Indonesia India

10 Patterns of mean consumption Hump shape –Chile 1997 (Indonesia has an esrly hump) Rising at old age –US 2003, Sweden 2003, Japan 2004, Uruguay 1994 (India 1999) Double hump –France 2001, Costa Rica 2004, South Korea 2000 Flat during adulthood –Flat after around age 20: Thailand 2004, India 1999 –Flat after fast drop at around age 20: Slovenia 2004, Taiwan 1998 Other…

Seoul, NTA Workshop11 Are these puzzles?

Seoul, NTA Workshop12 Single Hump conform to Life-cycle hypothesis?

Seoul, NTA Workshop13 Double hump “education” peak in Korea and France CFX shows double hump in Costa Rica cf. Chayanov cycle: there is a cycle in C with peak at age 25, 55, and perhaps 85, due to change in family size (Mason and Miller, 2000)

Seoul, NTA Workshop14 Rising at old age - may also have hump

Seoul, NTA Workshop15 Flat for adults - some have an “education” peak

Seoul, NTA Workshop16 other type a hump, but peak early

Seoul, NTA Workshop17 Mean Consumption by income group (simple average) as Ron Lee has pointed out: In the low group, investment in human capital is low, except for Thailand In the high group, elderly medical expenses are high In the middle and low groups, adult consumption is flat, except for Urugay.

Seoul, NTA Workshop18 Why differ from past findings 1.income level or other factors matter: C on elderly is high in rich countries, and is mostly due to medical expenditures; but Uruguay is high, too. C on children is low in low-income countries, except for Thailand 2.NTA methods to allocate to individuals 3.NTA inclusion of public C and durables 4.data quality or other problems…

Seoul, NTA Workshop19 Composition of Consumption

Seoul, NTA Workshop20 Components of Consumption C = CG + CF CG = CGE + CGH + CGX CF = CFE + CFH + CFD + CFR + CFX

Seoul, NTA Workshop21 US France Sweden Austria Japan Slovenia Taiwan S. Korea Chile Uruguay Costa Rica Thailand Philippines Indonesia India

Seoul, NTA Workshop22 Three issues: results and problems 1.Inclusion of CG 2.“Consumption” or “C-expenditures”: - durables vs nondurables 3.What is in CFX (other private consumption)? - In Japan, pocket money, “miscellaneous”, and remittances have double humps, other C’s do not. - In many economies, durables (CFD) or housing (CFR) are not separately measured.

Seoul, NTA Workshop23 Public Consumption CG = CGE + CGH + CGX age-specific pattern per capita

Seoul, NTA Workshop24 An observation Richer countries have larger public consumption expenditures, on both health and education.

Seoul, NTA Workshop25 US France Sweden Austria Japan Slovenia Taiwan S. Korea Chile Uruguay Costa Rica Thailand Philippines Indonesia

Seoul, NTA Workshop26 Two kinds of public consumption Public goods: with non-rivalness and non- excludability, e.g., defense, law,… → allocated equally on everyone “Merit goods” (or “social goods”,…): goods that could be delivered as private goods, but are delivered by government to avoid under-provision (due to externality or market failure,…), e.g, education, health → shows distinct age profile, and estimated separately

Seoul, NTA Workshop27 A question Addibility of “public goods” to private goods? –less problematic with “merit goods”, but –public consumption is sometimes found to enter into private utility function negatively (Bailey, 1971) –people derive utility from the “services” of government purchases NTA: ex-post accounting –In any case, need to be careful in adding CG to CF

Seoul, NTA Workshop28 Private Consumption CF = CFE + CFH + CFD + CFR + CFX no data sometimes

Seoul, NTA Workshop29 US France Sweden Austria Japan Slovenia Taiwan S. Korea Chile Uruguay Costa Rica Thailand Philippines Indonesia India

Seoul, NTA Workshop30 Mean CF (private consumption)

Seoul, NTA Workshop31 Mean private consumption Most countries show single or double hump shape in CF, e.g., –Sweden: rising at old age → double hump –Austria: flat → hump,… Uruguay: CFX dominates all else (as in many other economies)

Seoul, NTA Workshop32

Seoul, NTA Workshop33 CFX (other consumption)

Seoul, NTA Workshop34 Durables consumption

Seoul, NTA Workshop35 CFD (durables) In the literature on life-cycle consumption, the “services” of durables are either ignored or assumed to be additive to nondurable good consumption. In NTA, C expenditure on durables are counted as current consumption, –may need to refine.

Seoul, NTA Workshop36 CFD of 4 countries: Japan (29, 59) and Philippines (26, 54) show double hump, US has a late peak (58), and Sweden somewhat earlier (48).

Seoul, NTA Workshop37 CFD (durables)

Seoul, NTA Workshop38 CFD (durable) and CFR (housing) are not calculated in all economies – due to lack of micro data or aggregate control Is it a problem if these are combined into CFX? –how to deal with this?

Seoul, NTA Workshop39 Health and Education

Seoul, NTA Workshop40 US France Sweden Austria Japan Slovenia Taiwan S. Korea Chile Uruguay Costa Rica Thailand Philippines Indonesia

Seoul, NTA Workshop41 Health and Education An observation: –Rich countries spend more on both, and mostly by government Some definition questions: –Is day care or private tutorship considered education? –Is long-term care included as medical expenditure?

Seoul, NTA Workshop42 Time Trend of Level and Shape

Seoul, NTA Workshop43 From Gretchen Donehower (Jan, 2007) : Labor Income and Consumption, Age Dollars (US, 2000)

Seoul, NTA Workshop44 Taiwan, 1978, 1988, 1998, 2003

Seoul, NTA Workshop45 Taiwan,

Seoul, NTA Workshop46 Increase of education and health over time Mean consumption (normalized)

Seoul, NTA Workshop47 Cohort performance

Seoul, NTA Workshop48 Mean Real Consumption deflated by GDP deflator CF CG

Seoul, NTA Workshop49 Growth in mean LY Real (deflated by GDP deflator) normalized by average YL 30-49

Seoul, NTA Workshop50 Taiwan’s real GDP pc (in international $)

Seoul, NTA Workshop51 Normalized mean consumption CF CG

Seoul, NTA Workshop52 “normalized” cohort time series

Seoul, NTA Workshop53 Concluding remark Are puzzles explained? Need conversation with existing literature in macro, public finance, labor,… Not done today –Finance of Consumption –Methodology (Beet can say something on estimating health expenditure) –many others…