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!
Rutgers-led innovation could spur faster, cheaper, nano-based manufacturing
14.02.2018 | Rutgers University
New study from the University of Halle: How climate change alters plant growth
12.01.2018 | Martin-Luther-Universität Halle-Wittenberg
Satellites in near-Earth orbit are at risk due to the steady increase in space debris. But their mission in the areas of telecommunications, navigation or weather forecasts is essential for society. Fraunhofer FHR therefore develops radar-based systems which allow the detection, tracking and cataloging of even the smallest particles of debris. Satellite operators who have access to our data are in a better position to plan evasive maneuvers and prevent destructive collisions. From April, 25-29 2018, Fraunhofer FHR and its partners will exhibit the complementary radar systems TIRA and GESTRA as well as the latest radar techniques for space observation across three stands at the ILA Berlin.
The "traffic situation" in space is very tense: the Earth is currently being orbited not only by countless satellites but also by a large volume of space...
An international team of researchers has discovered a new anti-cancer protein. The protein, called LHPP, prevents the uncontrolled proliferation of cancer cells in the liver. The researchers led by Prof. Michael N. Hall from the Biozentrum, University of Basel, report in “Nature” that LHPP can also serve as a biomarker for the diagnosis and prognosis of liver cancer.
The incidence of liver cancer, also known as hepatocellular carcinoma, is steadily increasing. In the last twenty years, the number of cases has almost doubled...
In just a few weeks from now, the Chinese space station Tiangong-1 will re-enter the Earth's atmosphere where it will to a large extent burn up. It is possible that some debris will reach the Earth's surface. Tiangong-1 is orbiting the Earth uncontrolled at a speed of approx. 29,000 km/h.Currently the prognosis relating to the time of impact currently lies within a window of several days. The scientists at Fraunhofer FHR have already been monitoring Tiangong-1 for a number of weeks with their TIRA system, one of the most powerful space observation radars in the world, with a view to supporting the German Space Situational Awareness Center and the ESA with their re-entry forecasts.
Following the loss of radio contact with Tiangong-1 in 2016 and due to the low orbital height, it is now inevitable that the Chinese space station will...
Fraunhofer Institute for Organic Electronics, Electron Beam and Plasma Technology FEP, provider of research and development services for OLED lighting solutions, announces the founding of the “OLED Licht Forum” and presents latest OLED design and lighting solutions during light+building, from March 18th – 23rd, 2018 in Frankfurt a.M./Germany, at booth no. F91 in Hall 4.0.
They are united in their passion for OLED (organic light emitting diodes) lighting with all of its unique facets and application possibilities. Thus experts in...
A new scenario seeking to explain how Mars' putative oceans came and went over the last 4 billion years implies that the oceans formed several hundred million...
23.03.2018 | Event News
19.03.2018 | Event News
16.03.2018 | Event News
23.03.2018 | Materials Sciences
23.03.2018 | Agricultural and Forestry Science
23.03.2018 | Physics and Astronomy