Saved or spent?

During the great Stimulus Debate there was some argument about whether the cash bonus ($900) would be saved or spent. The government argued that the money would be spent. In our Senate submission Ash de Silva and I referred to this debate (links added):

The Australian Treasury relied on an unpublished study by Christian Broda and Jonathan Parker to support their argument that the tax rebate announced as part of the federal government stimulus package would be spent and not saved.

This particular study investigates the 2008 US$950 tax rebate by comparing spending in households that had received the rebate to spending in households that were eligible to receive the rebate but had not yet actually received the rebate. The econometric test determines whether or not consumption is higher in those households that have received the tax rebate compared to those households that have not received the rebate. It does not test whether the entire tax rebate has been consumed or saved. The study finds that those households that had received the rebate consumed more than those that have not. Unsurprisingly, they find that low income households and liquidity constrained households that had received the rebate spend more than similar households yet to receive the rebate. (They claim that their test shows that low income households have spent more than higher income households, but it is not clear from the reported table that this is the correct interpretation of their results.)

It is important to note that they have found that some of the tax rebate is spent. Of course nobody is suggesting that some of the tax rebate wouldn’t be spent. The debate is about (1) how much would be spent and (2) was this the best way for the government to stimulate the economy? Indeed, Broda and Parker could very easily expand their econometric analysis to determine how much of the US$950 was in fact spent, but do not do so. Rather they provide survey evidence of additional spending. The survey results indicate that US$448 was spent in additional purchases – approximately 48 percent of the US$950. That implies the other 52 percent was saved (at least temporarily). They concluded that ‘the stimulus payments are initially being spent at significant rates’. This is, of course, true; it is also fair to say that the Economic Stimulus Act of 2008 has not succeeded.

Two things have happened since then: Broda and Parker updated their analysis, and an Australian version of the Broda and Parker paper has appeared (the ANU paper).

Judith has a discussion of that paper in The Australian.

The main result of the ANU paper is summarised by the authors in the following way: “The household consumption response to the bonus payment is insignificant. It is also quantitatively small. For example, the average household, which received a payment of $900, spent in the week of receipt of the payment an additional $1 on non-durables or less than 1 per cent.”

Yes – you read that correctly – out of $900 an addition $1 was spent on non-durable goods. I don’t want to concentrate of Judith’s piece – she can post more on that. I want to point to another scandal – how did the government (and Treasury) come to rely on the original Broda and Parker paper?

If you examine the original five page paper it is very preliminary. The latest version of the paper is 27 pages long plus tables. The original paper contains a (very) incomplete description of the methodology and very basic econometric results. There is a statistically significant difference between spending in households that have received the stimulus payment and those that have not. The revised version is much more sophisticated. The basic result is unchanged. We now know that the there is a statistically significant increase in spending in the week that the household receives the stimulus payment. But, of course, the question is how much additional spending?

On average, we find that household spending rises on receipt of an ESP and remains elevated for some time. Across specifications, we find that households raise their spending on NCP-measured household goods in the week of receipt by roughly 10 percent of average weekly spending, about 1.5 percent of the average ESP, or around $14. This spending effect decays slowly over the following weeks, so that over seven weeks, the receipt of a payment causes 3 to 5 percent more spending, roughly 4 percent of the ESP, or 30 to 50 dollars spent on covered items. There is no significant change in spending prior to receipt, lending support to our methodology.

In this paper the average stimulus payment (labelled ESP) is $902 (in the original version they reported a $950 payment) – so we are looking at $50/902 over a seven week period. In the original study Broda and Parker spoke of a survey augmenting their results showing additional spending. In the second paper they use the survey to provide additional controls but do not refer to additional spending. The other interesting finding is that the ANU paper finds an announcement effect while the Broda and Parker finds none. Both paper claim that result bolsters their argument.

Okay – so here is the rub: Treasury claimed at the original Broda and Parker paper showed that spending would increase but didn’t and couldn’t say by how much. Set aside that Treasury would rely so heavily on what can, at best, be described as an extended abstract and not a peer-reviewed or published paper. The problem here is what Deirdre McCloskey calls Oomph. Broda and Parker claim that the spending they find is economically significant. I’m not convinced but at least they made the argument. I wonder, however, if politicians had been told …

Quick. We have to get people spending and if we give them $900 they’ll rush out during a seven week period and blow $50.

… whether they would have been so keen to spend the money?

As an aside I notice that the ANU paper has not referenced either of the Broda and Parker papers despite using the same methodology and data source (the Australian version of the American consumer panel). That is an oversight that should be corrected.
Update: Barnaby Joyce raised the issue in the Senate.

This entry was posted in Uncategorized. Bookmark the permalink.

18 Responses to Saved or spent?

  1. Tapdog

    Question for somebody who knows about these things.

    “Of the $70bn surplus that Labor inherited in 2007 and has subsequently spent, the Australian economy derived lasting measurable benefit from about $Xbn whilst $Ybn can reasonably be regarded as a lost opportunity to do something really useful. $Zbn was splashed up against the wall and effectively wasted.”

    Solve for X, Y and Z

  2. Rabz

    Assuming Aust Government debt of $230 billion:

    “Of the $70bn surplus that Labor inherited in 2007 and has subsequently spent, the Australian economy derived lasting measurable benefit from about $zerobn whilst $100bn can reasonably be regarded as a lost opportunity to do something really useful. $200bn was splashed up against the wall and effectively wasted.”

  3. Driftforge

    Far better to send that money into the general population than into the banking system though.

    But yeah, its going to go towards relieving cost of living pressures.

  4. NoFixedAddress

    Sinclair…

    Further evidence that the top 20% of every single government department, that survives the hopeful purge, should be dismissed.

    And for those that would trot out the canard that we would lose institutional memory there is one word…GOOD.

    IT’S TIME to have a reset in the entire Australian “public service”.

  5. Ellen of Tasmania

    I want to point to another scandal – how did the government (and Treasury) come to rely on the original Broda and Parker paper?

    It’s even sadder when you think that ‘thou shalt not steal’ would have saved us both the payouts and the cost of any investigations into its ‘effectiveness’.

  6. Fed Up

    I was a single working mother when Kev started handing out the cash and I for one didn’t spend a cent of it until 18 months later. I was working 3 casual jobs and I didn’t know how long I’d keep any of them (I actually lost one of them due to the downturn) so I held on to my savings for as long as possible. Last time I heard that this was the smart thing to do, keep some cash in reserve for the down times to help get you through (isn’t that the whole point of a government having a surplus in the first place) so I find it ludicrous that a government would go against that principle, expect us to do the same, rather than use solid economic judgement that says we’ll need it later.

    I made a blog post about it when it was happening and here’s an excerpt: “When the economy is suffering, we are urged to spend more – that in doing so becomes patriotic to help keep our country afloat. … Open your wallets and give generously at the store. Give until it hurts. After all, it’s why we’re here – isn’t it?”

    Can someone please explain to me, a lowly humanities major, how all economic common sense went out the window as the Red Devil tries to claw back a surplus now after she and her predecessor spear-headed the charge that wiped out the surplus we had?

  7. Rabz

    … how all economic common sense went out the window as the Red Devil tries to claw back a surplus now after she and her predecessor spear-headed the charge that wiped out the surplus we had?

    They’re very sensitive to the fact that they’ve never delivered a budget surplus in a good two decades or more.

    But no, I can’t explain why they bother either.

    Not that it matters, as there isn’t going to be a surplus anyway.

  8. Adam Diver

    The great irony of course is that stimulus spending by consumers will always be attempted at the height of consumer uncertainty.

    The very act of a massive stimulus is not likely to increase confidence either.

  9. My $900 they gave back went with most of the rest to pay off my non-tax deductable debt (Mortgage). I knew I’d have to save up to pay for the higher taxes to pay off the higher debt the Trade Union Party always runs up.

  10. Randy

    Members of my family received 4 lots of $900 which we all put into our Super Funds attracting a further Govt co-contribution. We didn’t need the money, we didn’t ask for the money but we were not going to look a gift horse in the mouth.

  11. Econocrat

    Treasury are lying Marxists.

  12. Sleetmute

    Here’s a great post by Lars Christensen discussing how Paul Krugman warns against fiscal stimulus…

  13. CC

    Even Swan’s Freudian slip assessment of the GFC spendathon was correct: ‘depressingly little to show for it’

    Didn’t we learn all this (in practice, not just in theory) with Keating’s cash handout to families? That too failed to stimulate anything. As have all such ‘cash stimuluses’ since.

  14. Pingback: Joyce asks about the stimulus at Catallaxy Files

  15. Pat Simpson

    Good algebra, Tap Dog!

  16. Jill Stirling

    Well-My handout went in the bank and stimulated European Economies-on our 8 week trip to the UK and Europe.
    My problem is how is it good economics to spend when we should be saving in difficult times?

  17. Jill Stirling

    Senator Wong is a waffler.

  18. Pingback: The stimulus that didn’t stimulate : Hey… what did I miss? | Institute of Public Affairs

Comments are closed.