Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Not just the poor live hand-to-mouth

24.04.2014

When the economy hits the skids, government stimulus checks to the poor sometimes follow.

Stimulus programs — such as those in 2001, 2008 and 2009 — are designed to boost the economy quickly by getting cash into the hands of people likely to turn around and spend it.

But sending cash to just the very poor may not be the right approach, according to researchers from Princeton University and New York University who analyzed information on the finances of U.S. households from 1989 to 2010.

"What we found is that households that have the lowest liquid wealth — where liquid wealth is defined as basically anything other than housing and retirement accounts — tend to spend a large part of their stimulus checks, but many of those households aren't the poorest in terms of income or net worth," said Greg Kaplan, an assistant professor of economics at Princeton. "That's the group we call the wealthy hand-to-mouth."

Thirty to 40 percent of U.S. households live hand-to-mouth, consuming all of their disposable income. Two-thirds of those households fall into a category described as the "wealthy hand-to-mouth," according to the work by Kaplan, Giovanni Violante, the William R. Berkley Term Professor of Economics at New York University, and Justin Weidner, a graduate student in economics at Princeton.

The median income of "wealthy hand-to-mouth" households is middle class — roughly $40,000 a year — and they have a median illiquid wealth of about $50,000. But because they have little cash on hand, they react to swings in income more like the poor than like the wealthy, Kaplan said. The poor hand-to-mouth, in contrast, have little cash on hand and little illiquid wealth.

Kaplan said the research has at least two significant implications for economic stimulus programs.

"The first is in thinking about the optimal way to target stimulus payments in order to get the biggest bang for the buck in terms of spending," he said. "The conventional wisdom has been that you want to give them [stimulus payments] to the poorest of the poor. Our work suggests that to maximize the amount spent you may want to pay out to people at middle-class levels of income as well as the lowest levels."

Another important implication, Kaplan said, is that while the wealthy hand-to-mouth are as likely to spend small stimulus checks as their poorer counterparts, the same is not true for larger stimulus checks. As the size of the payout increases, the wealthy hand-to-mouth are more likely to begin saving some of the money, reducing its effectiveness as a boost to the economy.

But why would a household with substantial illiquid wealth find itself short of cash? Kaplan said it can make sense for households to put money in illiquid assets — such as housing or retirement accounts — that offer high returns or substantial value even if it means the households then find themselves with little cash on hand. Also, the households may have recently purchased a house, using much of their liquid wealth as a down payment, Kaplan said. The researchers found that, on average, households held wealthy hand-to-mouth status for about 3.5 years.

Jonathan Parker, the International Programs Professor in Management and a professor of finance at the Massachusetts Institute of Technology Sloan School of Management, said the examination of the wealthy hand-to-mouth households highlights policy issues that go beyond economic-stimulus programs.

"Overall, this is a very nice example of social science advancing our understanding of how policies aimed at long-term issues like the adequacy of retirement saving have important implications for household liquidity and the ability of people to maintain their current standard of living in the face of adverse income changes or spending demands," Parker said.

The researchers also looked at household finances in Australia, Canada, France, Germany, Italy, the United Kingdom and Spain. The percentage of hand-to-mouth households varied widely from nation to nation, but in all nations most of those who live hand-to-mouth qualify as wealthy hand-to-mouth.

"It seems to be a common phenomenon that if you want to target people with a high propensity to consume, you should look at people who have money tied up in illiquid wealth," Kaplan said.

A paper based on the research by Kaplan, Violante and Weidner, "The Wealthy Hand-to-Mouth," was presented at a Brookings Institution conference last month. The paper is one of three to come out of a project by the researchers focused on understanding fiscal stimulus payments and household balance sheets. The research was supported by grant 1127632 from the National Science Foundation.

Michael Hotchkiss | Eurek Alert!
Further information:
http://www.princeton.edu/main/news/archive/S39/81/99O06/index.xml?section=topstories

Further reports about: Economics Foundation Management Technology income stimulus

More articles from Studies and Analyses:

nachricht Win-win strategies for climate and food security
02.10.2017 | International Institute for Applied Systems Analysis (IIASA)

nachricht The personality factor: How to foster the sharing of research data
06.09.2017 | ZBW – Leibniz-Informationszentrum Wirtschaft

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Neutron star merger directly observed for the first time

University of Maryland researchers contribute to historic detection of gravitational waves and light created by event

On August 17, 2017, at 12:41:04 UTC, scientists made the first direct observation of a merger between two neutron stars--the dense, collapsed cores that remain...

Im Focus: Breaking: the first light from two neutron stars merging

Seven new papers describe the first-ever detection of light from a gravitational wave source. The event, caused by two neutron stars colliding and merging together, was dubbed GW170817 because it sent ripples through space-time that reached Earth on 2017 August 17. Around the world, hundreds of excited astronomers mobilized quickly and were able to observe the event using numerous telescopes, providing a wealth of new data.

Previous detections of gravitational waves have all involved the merger of two black holes, a feat that won the 2017 Nobel Prize in Physics earlier this month....

Im Focus: Smart sensors for efficient processes

Material defects in end products can quickly result in failures in many areas of industry, and have a massive impact on the safe use of their products. This is why, in the field of quality assurance, intelligent, nondestructive sensor systems play a key role. They allow testing components and parts in a rapid and cost-efficient manner without destroying the actual product or changing its surface. Experts from the Fraunhofer IZFP in Saarbrücken will be presenting two exhibits at the Blechexpo in Stuttgart from 7–10 November 2017 that allow fast, reliable, and automated characterization of materials and detection of defects (Hall 5, Booth 5306).

When quality testing uses time-consuming destructive test methods, it can result in enormous costs due to damaging or destroying the products. And given that...

Im Focus: Cold molecules on collision course

Using a new cooling technique MPQ scientists succeed at observing collisions in a dense beam of cold and slow dipolar molecules.

How do chemical reactions proceed at extremely low temperatures? The answer requires the investigation of molecular samples that are cold, dense, and slow at...

Im Focus: Shrinking the proton again!

Scientists from the Max Planck Institute of Quantum Optics, using high precision laser spectroscopy of atomic hydrogen, confirm the surprisingly small value of the proton radius determined from muonic hydrogen.

It was one of the breakthroughs of the year 2010: Laser spectroscopy of muonic hydrogen resulted in a value for the proton charge radius that was significantly...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ASEAN Member States discuss the future role of renewable energy

17.10.2017 | Event News

World Health Summit 2017: International experts set the course for the future of Global Health

10.10.2017 | Event News

Climate Engineering Conference 2017 Opens in Berlin

10.10.2017 | Event News

 
Latest News

Ocean atmosphere rife with microbes

17.10.2017 | Life Sciences

Neutrons observe vitamin B6-dependent enzyme activity useful for drug development

17.10.2017 | Life Sciences

NASA finds newly formed tropical storm lan over open waters

17.10.2017 | Earth Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>