Comments on Kerwin Charles and Melvin Stephens by HC120807091854

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									Kerwin Charles and Melvin Stephens

   “The Level and Composition of
Consumption over the Business Cycle”


  Comments by Christopher Jencks
           June 9, 2005
             Main Findings
• Mean expenditures hardly changed
  between 1988 and 2000 for any income
  group in the Consumer Expenditure
  Survey (CEX).
• Expenditures in top three income quartiles
  were not affected by the business cycle.
• In the bottom income quartile, a 2 point
  swing in unemployment only changed
  expenditures by about 6 percent.
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          Problem I: Trends
• Hard to believe that living standards were
  no higher in 2000 than in 1988.
• Comparisons between the CEX and the
  National Income and Product Accounts
  (NIPA) suggest that CEX underestimates
  spending in many categories.
• This problem may have gotten worse
  between 1988 and 2000, although CEX
  and NIPA definitions differ (medical care).
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                 Quarterly expenditures in 2000 dollars: NIPA versus CEX
$18,000
                                                                                 $15,835
$16,000
                    NIPA personal consumption expenditure per household
$14,000
          $12,478
$12,000

$10,000
          $8,300       CEX total expenditure per consumer unit                   $8,200
 $8,000

 $6,000


 $4,000

 $2,000

    $0
          1988         1990        1992         1994         1996         1998    2000


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           Problem II:
     Recessions have changed
• Historically, a recession meant both higher
  unemployment and lower consumption.
• But this pattern changed in the 1990s.
• The 1990-91 recession involved an
  unusually small drop in consumption.
• The 2001-02 recession involved no drop at
  all in consumption (although rise slowed).
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            Mean Quarterly Personal Consumption Expenditure per
               Household: 1969 to 2004 in chained 2000 dollars
$18,000

$16,000

$14,000


$12,000

$10,000

 $8,000


 $6,000

 $4,000

 $2,000

    $0
     1969      1974-75    1980-82            1991             2001 2004


                                                                          6
          What’s going on?
In the 2001-02 GDP fell in only two quarters
and consumption never fell. Employment
leveled off because:
  More consumer goods were imported,
  Productivity rose
  Domestic investment fell.
Unemployment rose because:
  Net immigration remained high
  New native job seekers exceeded retirees
                                               7
Why doesn’t higher unemployment still
       lower consumption?
Many trends predict that unemployment
should lower consumption more than in past
  • Savings rate is down.
  • Unemployment insurance coverage is
    down.
  • Unsecured borrowing fell from 1990 to
    1993 (Is this consistent with industry
    data?)


                                             8
Why doesn’t higher unemployment still
   lower consumption? -- (cont.)
 Asset values matter more than saving
    rates for consumption smoothing
 Secured borrowing may have risen in
    1991-92 and 2002-2003
 Is the two earner family protective? How?
 Could inter-family transfers have risen?
 Did macroeconomic policy change in
     ways that protected more consumers?
                                              9
       Conclusions about paper
• Need more checks on validity of CEX trend data
  for expenditures. Check NIPA.
• Need data on whether CEX incomes fell in early
  1990s and rose late 1990s.
• Need to define “treatment.”
• Estimate effect of “treatment” on cash and
  noncash income, total expenditure, and types of
  expenditure
• Spell out how people protect themselves from
  downturns, and see why lowest quartile fares
  worst, if it does. Is it just low assets?
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