Discussion of “Has consumption inequality mirrored income inequality Discussion of “Has consumption inequality mirrored income inequality?” by Mark Aguiar and Mark Bils Main idea of paper: Compare increase in spending on total number of new cars relative to the average monthly spending in the previous year in cities with high clunkers per 2004 auto sales to low clunkers to 2004 auto sales. Like it. What the experiment answers: run the program, change the world, now fix the bc and consider removing the CARS program for one city and see what would be different. All we measure is individual relative responses in the in the world with the policy. If we found no effect on car purchase for that city, we would conclude the program had no effect, we find sales, so we measure a direct effect. But only the direct effect! The results say nothing about the multiplier!! It could be that the program was critical in ending the recession – it’s last month was JUNE 2009 – CARS started in July 2009. Now kick the tires and discuss importance. NBER Economic Fluctuations and Growth Program Meeting July 2011, Cambridge MA Jonathan A. Parker Kellogg School of Management, Northwestern University

Very nice paper In this discussion: Background and possible explanations for lack of increase in c ineq Explain the main intuition for the AB result Two key assumptions Corroborating/related evidence

I. Background Krueger Perri (2003, 2006)

Possible explanations Near-complete consumption insurance 2. Self-insurance Increase in Var(ln y) due to transitory shocks to income (Krueger Perri) Income changes expected (Primiceri van Rens) 3. CEX under-measures increase in consumption inequality And so do related expenditure datasets 1. Poor smoothing of cohort specific shocks

Three possible problems with CEX Decreasing coverage or participation of high-consumption households Cannot explain Decreasing coverage/measurement of luxury goods Decreasing measurement or coverage of all expenditures of high-consumption households 2: Implies the expenditures of the high-consumption households are increasingly understated

increased as much as income inequality II. Bils and Aguiar In the CEX, There is not increasing under-measurement of luxuries vs. necessities But there is increasing under-measuring of the all expenditures of high-consumption households over time . . So consumption inequality has actually increased as much as income inequality But first some background or complementary evidence Bottom line: I think this is probably correct

The essence of the exercise Log budget share of good: ln wi = ln (xi /X ) Inferred 2007 Observed 2006 Estimated Engel curve for luxury Observed 1980 Inferred adjustment to ln X90 Estimated Engel curve for normal good Log total real expenditure: X = xLux+xNormal+xNec ln X10 ln X90 ln X90 ln X90 ln X10

III. Two key assumption in method Prices don’t matter Typical demand system x, X nominal expenditures: wi,t = xi,t / Xi, = αi + γi’ ln pt + βi ln ( Xi,t / a(pt )) + εi,t + Restrictions of demand theory The danger: In AB framework, real shares could vary due to substitution due to changes in relative prices Partly an issue of question, partly of restricting data Dora Costa and James Hamilton infer bias in CPI assuming well-measured total and shares Infer pt from parameters and xi,t and Xi,t If AB had blamed under-measurement of luxuries, this would be more of a worry

wi,t = xi,t / Xi, = αi + γi’ ln pt + βi ln ( Xi,t / a(pt)) + εi,t Elasticities are well-measured Typical demand system x,X nominal expenditures: wi,t = xi,t / Xi, = αi + γi’ ln pt + βi ln ( Xi,t / a(pt)) + εi,t + Restrictions of demand theory The AB framework is nonstandard Usually instrument for X due to noise in x getting into X Observation: slope of late-sample Engels curves should be steeper

2006 estimate of βLux should be larger than 1980 estimate Log budget share of good: ln wi = ln (xi /X ) Observed 2006 Estimated Engel curve for luxury 2006 Estimated Engel curve for luxury 1980 Observed 1980 Observed 1980 and 2006 Estimated Engel curve for normal good Log total real expenditure: X = xLux+xNormal+xNec ln X10 ln X90 ln X90

But Figure 5: Elasticities are stable

But OK: because elasticities have measurement error, reverse regression shows change we expect

IV. Corroborating/related evidence

Fact 1: consumption inequality (mostly) tracks income inequality across groups of households But why does not under-measurement error confound this inference? Cutler and Katz (1991)

Fact 2: improved consumption measurement shows slightly more consumption inequality Attansio, Battistin, Ichimura (2004)

Fact 3: CEX shows increased saving rates and bigger increases for high-income households Parker, Vissing-Jorgensen, Ziebarth (Summer Institute 2009)

Inconsistent with NIPA & FOF & SCF Maki and Palumbo (2001) use SCF/FOF data Saving rates by quintiles of income from changes in wealth, returns, and income Increase in saving rates for low income But decrease in saving for high income: 9% to -2% Parker, Vissing-Jorgensen, Ziebarth: this implies CEX measures low consumption about right CEX measures 74% of top consumption in 1980 and this falls to 51% in 1990 (problem: assumed homogeneity in returns by class) Agree with AB that the CEX measures of Consumption inequality are fishy

Recall: Three possible problems with CEX Decreasing coverage or participation of high-consumption households Cannot explain Decreasing coverage/measurement of luxury goods Decreasing measurement or coverage of all expenditures of high-consumption households 2: Implies the expenditures of the high-consumption households are increasingly understated

On 2: measurement of luxuries Parker, Vissing-Jorgensen, Ziebarth (Summer Institute 2009)

On 2: measurement of luxuries Parker, Vissing-Jorgensen, Ziebarth (Summer Institute 2009) Calculate the ratio of aggregate CEX consumption to NIPA consumption for each goods in each year Scale up CEX expenditures by good and time specific factors Recalculate CEX consumption inequality Finding: adjustment makes little difference => 0.04 higher increase in 90-10 log expenditure PVZ also estimated group mismeasurement necessary to generate ratios, but AB method better => no PVZ paper CONCLUDE four pieces of corroborating evidence: cross-group, diary/recall, saving rates, inference from NIPA shares

Summary For high consumption households, the budget share of luxuries has risen more than implied by their rise in total spending and Engel curves Implication: their total spending is undermeasured Consistent with corroborating evidence Relies on stability of demand system and well-measured prices

The essence of the exercise Log budget share of good: ln wk= ln (xk /X ) Inferred 2007 Observed 2006 Estimated Engel curve for luxury Observed 1980 Inferred adjustment to ln X90 Estimated Engel curve for normal good Log total real expenditure: X = xLux+xNormal+xNec ln X10 ln X90 ln X90 ln X90 ln X10

Appendix

90-10 Inequality in men’s log wages Juhn Murphy Pierce (1993)

90-10 Inequality in men’s log income Gordon (2008)