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 Seahorse tails could inspire new generation of robots
03.07.2015 | Clemson University

nachricht Is Marriage Good or Bad for the Figure?
29.06.2015 | Max-Planck-Institut für Bildungsforschung

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: Light-induced Magnetic Waves in Materials Engineered at the Atomic Scale

Researchers explore ultrafast control of magnetism across interfaces: A new study discovers how the sudden excitation of lattice vibrations in a crystal can trigger a change of the magnetic properties of an atomically-thin layer that lies on its surface.

A research team, led by scientists of the Max Planck Institute for the Structure and Dynamics of Matter at CFEL in Hamburg, the University of Oxford, and the...

Im Focus: Viaducts with wind turbines, the new renewable energy source

Wind turbines could be installed under some of the biggest bridges on the road network to produce electricity. So it is confirmed by calculations carried out by a European researchers team, that have taken a viaduct in the Canary Islands as a reference. This concept could be applied in heavily built-up territories or natural areas with new constructions limitations.

The Juncal Viaduct, in Gran Canaria, has served as a reference for Spanish and British researchers to verify that the wind blowing between the pillars on this...

Im Focus: X-rays and electrons join forces to map catalytic reactions in real-time

New technique combines electron microscopy and synchrotron X-rays to track chemical reactions under real operating conditions

A new technique pioneered at the U.S. Department of Energy's Brookhaven National Laboratory reveals atomic-scale changes during catalytic reactions in real...

Im Focus: Iron: A biological element?

Think of an object made of iron: An I-beam, a car frame, a nail. Now imagine that half of the iron in that object owes its existence to bacteria living two and a half billion years ago.

Think of an object made of iron: An I-beam, a car frame, a nail. Now imagine that half of the iron in that object owes its existence to bacteria living two and...

Im Focus: Thousands of Droplets for Diagnostics

Researchers develop new method enabling DNA molecules to be counted in just 30 minutes

A team of scientists including PhD student Friedrich Schuler from the Laboratory of MEMS Applications at the Department of Microsystems Engineering (IMTEK) of...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

World Conference on Regenerative Medicine in Leipzig: Last chance to submit abstracts until 2 July

25.06.2015 | Event News

World Conference on Regenerative Medicine: Abstract Submission has been extended to 24 June

16.06.2015 | Event News

MUSE hosting Europe’s largest science communication conference

11.06.2015 | Event News

 
Latest News

Imaging could improve treatment of people with COPD

07.07.2015 | Health and Medicine

UNC researchers find 2 biomarkers linked to severe heart disease

07.07.2015 | Health and Medicine

Could black phosphorus be the next silicon?

07.07.2015 | Materials Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>