fisher, johnson and smeeding - exploring the divergence of consumption and income inequality during...
DESCRIPTION
Jonathan Fisher's presentation at the 2014 American Economic Association Annual Conference. The presentation explores why income inequality diverged from consumption inequality during the Great Recession, finding that those with the biggest decrease in consumption were the highest income individuals, while those at the bottom of the income distribution had falls in consumption that were smaller and closer to the drop in income. Our results suggest three main factors associated with the observed patterns. First, property values dropped by a larger percentage for high income households, a negative housing wealth effect led these households to cut back consumption. Second, consumer confidence fell by a larger percentage for higher income households. Finally, the transfer and tax policies boosted the income of the lower income quintiles, preserving their consumption so that it did not fall by as much as it would have otherwise.TRANSCRIPT
Exploring the Divergence ofConsumption and Income Inequality
During the Great Recession
Jonathan FisherDavid Johnson
Timothy Smeeding
Any opinions and conclusions expressed herein are those of the authors and do not necessarily represent the views of the U.S. Census Bureau. The research in this paper does not use any confidential Census Bureau information.
The Consumer Expenditure (CE) Surveys• 1984-2011 Interview Surveys• All four-quarter consumer units disaggregated to the
individual using an equivalence scale.• Weights adjusted to account for attrition across the
four quarters.• Adjusted to 2010$ using CPI-U-RS.• We impute income for missing observations and
estimate taxes for everyone (Fisher, Johnson, and Smeeding, 2013; econofish.wordpress.com)
Defining Income and Consumption
• Disposable Personal Income (DPI): income from employment, investment, government transfers, and inter-household transfers of money plus tax credits and food stamps, less income taxes and property taxes.
• Consumption: Outlays for non-durables, plus imputed rent, service flow from vehicles, and the dollar value of free or subsidized housing.
80
85
90
95
100
105
110
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Inequality using Gini Coefficient (2006=100)
Disposable Income
Consumption
The difference between consumptionand income is seen in the NIPA/PCE data too
0.88
0.90
0.92
0.94
0.96
0.98
1.00
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
12,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Bill
ions
of D
olla
rs
Disposable Personal Income
Personal Consumption Expenditures
Average Propensity to Consume
-20.0%
-18.0%
-16.0%
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
Q1 Q2 Q3 Q4 Q5
Staircases going in opposite directions:Percent Change by Respective Quintile, 2006-2011
Disposable Income
Consumption
Consumption by Income Quintile
-20.0%
-18.0%
-16.0%
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
Q1 Q2 Q3 Q4 Q5
Staircases going in opposite directions:Percent Change by Respective Quintile, 2006-2011
Disposable Income
Consumption
Consumption by Income Quintile
-20.0%
-18.0%
-16.0%
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
Q1 Q2 Q3 Q4 Q5
Staircases going in opposite directions:Percent Change by Respective Quintile, 2006-2011
Disposable Income
Consumption
Consumption by Income Quintile
What are the major forcesof the Great Recession?
• High and persistent unemployment• Large and persistent housing market crash• Large but short-term financial market crash• Loss in consumer confidence• Policy response that increased transfers and tax
credits aimed at lower half of distribution
Percent Change in Employment Incomeby Income Quintile, 2006-2011
-30%
-25%
-20%
-15%
-10%
-5%
0%
Q1 Q2 Q3 Q4 Q5
High and persistent unemployment
-25%
-20%
-15%
-10%
-5%
0%Q1 Q2 Q3 Q4 Q5
Percent Change in Consumptionby Income Quintile:
Homeowners versus Renters (2006-2011)
Homeowners
Renters
Large and persistent housing market crash
Percent Change in Property Valueby Income Quintile, 2006-2011
Large and persistent housing market crash-30%
-25%
-20%
-15%
-10%
-5%
0%
Q1 Q2 Q3 Q4 Q5
Percent Change in Consumption by Income Quintile: Securities Owners vs Non-Owners, 2006-2011
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Q1 Q2 Q3 Q4 Q5
Securities owners
Non-owners
Large but short-term financial market crash
Percent Change in Consumer Confidenceby Income Quintile, 2006-2011
(Survey of Consumers)
-30%
-25%
-20%
-15%
-10%
-5%
0%
Q1 Q2 Q3 Q4 Q5
Loss in consumer confidence
Back-of-the envelope counterfactuals1) How would consumption inequality have changed if the
change in consumption equaled the change in income by quintile?
2) How would income and consumption inequality have changed if there were no transfer and tax policy response?
3) Housing wealth effect -- how would consumption inequality have changed if the change in consumption equaled the change in property value by income quintile, using a standard housing wealth elasticity (0.06)?
-20.0%
-18.0%
-16.0%
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
Q1 Q2 Q3 Q4 Q5
Staircases going in opposite directions:Percent Change by Respective Quintile, 2006-2011
Disposable Income
Consumption
Consumption by Income Quintile
Counterfactual change in consumption inequality assuming change in consumption is equal to the change in income by
income quintile
Counterfactual #1
90
92
94
96
98
100
102
104
106
2006 2007 2008 2009 2010 2011
Consumption
Counterfactual #1
Income
Back-of-the envelope counterfactuals1) How would consumption inequality have changed if the
change in consumption equaled the change in income by quintile?
2) How would income and consumption inequality have changed if there were no transfer and tax policy response?
3) Housing wealth effect -- how would consumption inequality have changed if the change in consumption equaled the change in property value by income quintile, using a standard housing wealth elasticity (0.06)?
$0
$500
$1,000
$1,500
$2,000
$2,500
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Mean Government Transfer Incomeby Disposable Income Quintile ($)
Policy response
Counterfactual change in C&Y inequality assuming no increase in transfer benefits or tax credits
Counterfactual #2
90
92
94
96
98
100
102
104
106
2006 2007 2008 2009 2010 2011
IncomeInc Counterfactual #2Cons Counterfactual #2Consumption
Back-of-the envelope counterfactuals1) How would consumption inequality have changed if the
change in consumption equaled the change in income by quintile?
2) How would income and consumption inequality have changed if there were no transfer and tax policy response?
3) Housing wealth effect -- how would consumption inequality have changed if the change in consumption equaled the change in property value by income quintile, using a standard housing wealth elasticity (0.06)?
Counterfactual change in consumption inequality assuming standard housing wealth effects by income quintile
Counterfactual #3
90
92
94
96
98
100
102
104
106
2006 2007 2008 2009 2010 2011
ConsumptionCons Counterfactual #3DPI
Why might have income and consumption inequality diverged during the Great Recession?
• It was generated by a drop in consumption at the top of the income distribution.– Loss in housing wealth was higher for high income
households.– Drop in consumer confidence was higher for high
income households.
Tax and transfer changes were effective
• Tax and transfer policies during the Great Recession:– helped lower income inequality;– helped preserve consumption in the bottom half of
the distribution.
• How will the removal of these more generous benefits affect inequality going forward?– Cut in SNAP– Removal of UI benefit extension– Return of full payroll tax