Increased volatility for high-income households
"[I]n work with Annette Vissing-Jorgensen we have looked at how the labor income of high-income households has changed significantly. What we zoomed in on is that high-income households used to live a relatively quiet life in the sense that the top 1 percent would earn a relatively stable income, more stable than the average income. When the average income dropped by 1 percent, the incomes of the top 1 percent would drop by about only six-tenths of a percent. In the early 1980s that switched, so that in a recession if aggregate income dropped by 1 percent, the incomes of the top 1 percent dropped more like 2.5 percent — quadrupling the previous cyclicality. So now they're much more exposed to aggregate fluctuations than the typical income. We also show that decade by decade, as the top income share increased, so did its exposure to the business cycle in the 1980s, 1990s, and 2000s. And as you go further and further up the income distribution, that top share — not just the top 1 percent, but the top 10th of a percent, and the top 100th of a percent — there's also been a bigger increase in inequality and a bigger increase in the exposure to the business cycle. ...
"First, starting around the end of the 1980s, we see the adoption of incentive-based pay for CEOs and other highly placed managers. Incentive compensation over this time rises, and it happens to be that the incentive compensation is not based on relative performance, which would therefore difference out what goes on in the macroeconomy, but instead is based on absolute performance. And in the U.S. case, that could partly be due to simply what counts legally as incentive-based compensation and so is not subject to corporate profits tax. Pay in the form of stock options, for example, counts as incentive-based compensation. Pure salary does not and so is taxed as corporate profits above $1 million.
"The other possibility is that ... new information and communication technologies allow the best managers to manage more people, to run bigger companies, and therefore to earn more; the best investment managers to manage more money and to make more for themselves; the best entertainers and performers to reach more people and therefore earn a larger share of the spending on entertainment goods. High earners have become small businesses. ... We do know that increased cyclicality in income among high earners can't come simply from the financial sector. That sector just isn't quantitatively big enough, and you see the increase in earnings share and in cyclicality across industries and occupations. It's not the case that just the top hedge fund managers have become the high earners and they're very cyclical; Oprah is also."Why don't households smooth consumption?
"I use Nielsen Consumer Panel data to design and run my own survey on households to measure the effect of what was then the second of these large randomized experiments run by the U.S. government, the economic stimulus program of 2008. The key feature of that program was that the timing of the distribution of payments was determined by the last two digits of the Social Security number of the taxpayer, numbers that are essentially randomly assigned. So the government effectively ran a $100 billion natural experiment in 2008, distributing money randomly across time to people, and this policy provides a way to measure quite cleanly how people respond to infusions of liquidity. ...
"The first thing I found out is that illiquidity is still a tremendous predictor of who spends more when a predictable payment arrives. But it's not only liquidity. People with low income have a very high propensity to spend, and not just people who have low income today, as would be associated with the standard buffer-stock model. You can imagine a situation where you've had a bad income shock, you happen to have low liquidity, and you spend a lot. But illiquidity one or even two years prior to the payment is just as strongly associated with a propensity to spend out of liquidity, as illiquidity at the time of the payment. This same set of people who have persistently high propensities to consume are also the people who characterize themselves as the type of people who spend for today rather than save for tomorrow when I asked them specifically about their type, not their situation. They are also the people who report that they have not sat down and made financial plans. ... Low liquidity, or low financial wealth, is a very persistent state across households, suggesting the propensity to spend is not purely situational. A lot of it is closer to an individual-specific permanent effect than something transient due to temporary income shocks. ...
"So the question is how many people are influenced by constraints in practice. Is their marginal propensity to consume noticeably influenced by the fact that they might be constrained next month or in six months? I would say that's quantitatively important for roughly half of the population. ... I don't think there's a lot of transition between the people who would consistently hit these constraints or be concerned about them and the people for whom they're not that relevant."
Tradeoffs in the coming revisions in the Consumer Expenditure Survey
"The BLS [Bureau of Economic Statistics] is revising the CE Survey now. It's called the Gemini Project, and I have been involved a little with advising how to revamp it. Surveys in general have been experiencing problems with participation and reporting. The CE is suffering from these problems, and so the Gemini Project is trying to address them. The CE has the huge benefit of being a nationally representative survey done by the Census Bureau; almost all of the alternative datasets that we're using from administrative sources that are not strictly survey datasets are less representative. So reducing the CE's problems with participation and reporting could potentially have a very large payoff. Of course, the cost of the change is that the CE Survey as it stands now is a very long panel dataset that has had the same format throughout the whole time. So we're going to break that and no longer be adding new time periods to an intertemporally comparable dataset. But I think that's probably a cost worth paying at this point.
"What the BLS is planning is to change dramatically the way the CE Survey is conducted. They're going to gather data in quite different ways than they have in the past, including some spending categories that will almost have so-called administrative sources. What I have been pushing for is maintaining some panel dimension in the new version of the CE Survey. If you don't have a panel dimension, then for lots of macro-type questions, you can track people only at the group level. And since groups are usually affected differently by other things going on in the world, you lose a lot of ability to identify stuff that might be interesting — tracking someone who had a specific policy exposure in one period and seeing how they're doing a month or a year later. If the BLS eliminates the panel dimension, researchers couldn't do anything like I did with my tax rebates work, nor any other work that looks at treatments that are happening at the individual level. But I'm hoping that the new, state-of-the-art version of the CE Survey will last another 35 years and be just as good."