Household Income, Demand, and Saving: Deriving Macro Data with Micro Data Concepts Barry Cynamon

Frontiers of Measuring Household Economic Behavior Federal Reserve Bank of Boston, April 27, 2015

Acknowledgements Multi-year research project linking household finances and economic growth

Acknowledgements Multi-year research project linking household finances and economic growth

• Joint work with Steve Fazzari • Generous support from INET • Opinions are mine and not those of the Fed

This Session Reconciling macro and micro estimates of U.S. household income and expenditures

This Session Reconciling macro and micro estimates of U.S. household income and expenditures • Understand how the aggregate measures are distributed • Validate survey measures comparing to trusted aggregate measures • Learn from aggregates consistent with micro data concepts

Motivation for Measurement

INEQUALITY AND CONSUMPTION “Inequality, the Great Recession, and Slow Recovery” Forthcoming in the Cambridge Journal of Economics Working paper available at SSRN: http://ssrn.com/abstract=2205524

The Original Goal Investigate relationship between income inequality and Great Recession

The Original Goal Investigate relationship between income inequality and Great Recession • Rich have lower propensity to consume – (Maki and Palumbo 2001)

• Increasing share of income flowing toward rich – (Piketty and Saez, 2003; CBO, 2013; Johnson and Smeeding, 2014)

• Downward pressure on aggregate consumption ?

Increasing share of income flowing toward rich Income share of the top 5% of US households 40%

35%

30%

25%

20%

15% 1960

1964

1968

1972

1976

1980

Source: The World Top Incomes Database

1984

1988

1992

1996

2000

2004

2008

2012

Consumption Drove Economic Growth Consumption share of GDP 70%

65%

60%

55% 1960

1964

1968

1972

1976

1980

1984

Source: BEA National Income and Product Accounts

1988

1992

1996

2000

2004

2008

2012

Households Doubled their Leverage Debt to income ratio of US households 140%

120%

100%

80%

60%

40% 1960

1964

1968

1972

1976

1980

1984

Source: FRB Financial Accounts of the United States

1988

1992

1996

2000

2004

2008

2012

Initial Plan Find a micro data set with income and consumption expenditure

Initial Plan Find a micro data set with income and consumption expenditure • SCF: oversamples wealthy, but no consumption data • CPS: annual and large sample, but no consumption

• CE: fails to match aggregate data in level or trend – Under-reporting especially among higher income households (Sabelhaus, Johnson, Ash, Swanson, Garner, Greenlees, Henderson, 2013)

Revised Plan Use a mix of aggregate and micro data to generate results at “group” level

Revised Plan Use a mix of aggregate and micro data to generate results at “group” level • SCF: for distribution of balance sheet accounts • CPS: for distribution of income

• National accounts: for authoritative time series

Maki and Palumbo (2001) Assets and Liabilities

Aggregate

Stocks

Flows

FAOTUS

FAOTUS

Income

NIPA disposable personal income

Micro

SCF

*identification

CPS

shares interpolated linearly between waves

assume flows proportional to holdings

money income

• Numbers add up to net worth and saving for the personal sector published in the FAOTUS • Distribution matches the SCF in every survey year

Revised Plan ii M&P for group-level saving numbers and then back out consumption numbers

Revised Plan ii M&P for group-level saving numbers and then back out consumption numbers • Mark Zandi provided us with saving rate information derived using the M&P approach • First, we adjusted those FAOTUS saving numbers to match NIPA saving numbers • Then we allocated NIPA transfers and interest between our groups so we could back out “group” consumption

Revised Plan ii M&P for group-level saving numbers and then back out consumption numbers Disposable Income Outlays

− Saving = Outlays

= Consumption

+ Transfers + Interest

Disposable Consumption = − Saving − Income

Transfers −

Interest

The Story Non-rich took on debt to maintain consumption, which delayed the effect of rising inequality

The Story Non-rich took on debt to maintain consumption, which delayed the effect of rising inequality Before Great Recession:

• Debt to income ratio of non-rich grew before GR • Consumption rate of non-rich stable or rising After Great Recession:

• Consumption of rich only has recovered

• Per capita, real GDP far below trend after Great Recession

The Story Non-rich took on debt to maintain consumption, which delayed the effect of rising inequality Before Great Recession:

• Debt to income ratio of non-rich grew before GR • Consumption rate of non-rich stable or rising After Great Recession:

• Consumption of rich only has recovered

• Per capita, real GDP far below trend after Great Recession

Debt to income ratio of non-rich increased 200%

175%

150%

125%

100%

75%

50%

25%

Bottom 95% Top 5% Source: FRB Survey of Consumer Finances, data provided by Romain Ranciere

Consumption rate of non-rich stable or rising 100%

95%

90%

85%

80%

75%

Consumption Rate 95%

Consumption Rate 5%

Outlay Rate 95%

Outlay Rate 5%

Source: Cynamon and Fazzari (2015)

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

70%

Consumption of rich has recovered; that of non-rich has not Index of Real Consumption, Bottom 95% and Top 5% (1989=100) 260 240 220 200 180 160 140 120 100

Bottom 95%

Source: Data from Cynamon and Fazzari (2015)

Top 5%

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

80

GDP well below trend after Great Recession Per capita, real GDP, chained dollars (exponential trend) $65,000

$50,000

$35,000

$20,000

$5,000 1960

1964

1968

1972

1976

Source: BEA National Product Accounts

1980

1984

1988

1992

1996

2000

2004

2008

2012

Measurement Exercise

MEASURING DEMAND “Household Income, Demand, and Saving: Deriving Macro Data with Micro Data Concepts” Forthcoming in the Review of Income and Wealth Working paper available at SSRN: http://ssrn.com/abstract=2211896

Motivation Reconcile macro and micro estimates of U.S. household income and expenditures

Motivation i Reconcile macro and micro estimates of U.S. household income and expenditures • Maki and Palumbo (2001) reliant on consistent concepts – CPS income distribution applied to NIPA disposable personal income – SCF net worth distribution applied to FAOTUS balance sheet

• But there are inconsistencies between micro and macro data – Not just sampling error; important conceptual differences

• Previous efforts to match NIPA and survey income – Katz (2012), Bosworth et al. (2007)

1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

0.70 0.70

0.60 0.60

PSID

1.10

1.00

0.90

0.80

0.70

Pre-tax income data from surveys well below 100% of NIPA personal income

0.60 2012

0.80

2009

0.80

2006

0.90

2003

0.90

2000

1.00

1997

1.00

1994

1.10 1.10

1991

CPS

1988

2012

2009

2006

2003

2000

1997

1994

1991

1988

1985

1982

1979

1976

1973

1970

1967

Comparisons to Survey Data SCF

Motivation ii Reconcile macro and micro estimates of U.S. household income and expenditures • Might learn from macro measures adjusted to match micro concepts – PCE vs. what households actually spend – Different definitions of saving may tell different stories

Objective Measure the flows of purchasing power under the control of the household • Eliminate imputed value of services in consumption – Example: Imputed rent

• Eliminate spending not controlled by households – Example: Medicare

Objective Measure the flows of purchasing power under the control of the household • Household financial flows the way households actually see these flows

• Concept likely to correspond better with flows households report on surveys

Key Identity • Accounting identity maintained before and after adjustments: Disposable Household Transfers Financial Income = Consumption + Investment + & Interest + Saving

• Identity holds in NIPA – Household investment not distinguished from financial saving

• Adjustments to consumption or income require balancing change elsewhere

Housing Example (2013 $billions) Disp. Income

Cons. HH Invest. Trans. & Int.

Implicit Rent

- 1326

- 1326

Intermediate Inputs

+ 152

+ 152

Mortgage Interest

+ 334

Depreciation

+ 312

New Construction

Fin. Saving

+ 334 + 312 + 426

- 426

Single-Family Homes

Broker commissions Total

+ 105 - 105 - 528

- 1068 + 321

+ 334

- 115

• Eliminate “rent home to yourself” business

Other Important Adjustments • About 40 separate adjustments • Remove non profit institutions that serve households

• Free financial services • Medical care – Employer and government, not households

• Retirement accounting – Exclude contributions by employers and government to defined benefit plans – Include benefits from DB plans

Other Important Adjustments Disposable Income

Consumption

Transfers & Interest

Financial Saving

Owner-Occupied Housing

-4%

-9%

81%

-19%

Financial Services

-6%

-2%

Defined Benefit Pensions

-1%

Third-Party Paid Medical Services

-13%

-14%

Non-Profit Sector

-1%

-4%

Other

-2%

Adjusted Data

73%

Category

-76% -27%

61%

8% -30%

70%

242%

-44%

Note: Household investment excluded form table, because it has no clear personal sector counterpart in the NIPA

Adjusted measures: real, per capita $40,000

Disposable Income

$5,000

Transfers and Interest

$35,000 $4,000

$30,000 $25,000

$3,000

$20,000 $2,000

$15,000 $10,000

$1,000

$5,000 $0 19481953195819631968197319781983198819931998200320082013

$40,000

$0 19481953195819631968197319781983198819931998200320082013

Disposable Personal Income

Personal Interest and Transfers

Adjusted Disposable Income

Adjusted Transfers and Interest

Consumption

$4,000

$35,000

$3,000

$30,000

$2,000

$25,000

$1,000

$20,000

$0

$15,000

-$1,000

$10,000

-$2,000

$5,000

-$3,000

$0 19481953195819631968197319781983198819931998200320082013 Personal Consumption Expenditures Household Demand Adjusted Consumption

Saving

-$4,000 19481953195819631968197319781983198819931998200320082013 Personal Saving Adjusted Gross Household Saving Financial Saving

Comparisons to Survey Data

PSID 1.10 1.00 0.90 0.80 0.70

1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

0.60

Note: All measures shown pre-tax; CBO net realized capital gains added to adjusted disposable income to match SCF, which includes realized gains.

2012

2009

2006

2003

2000

1997

1994

SCF

1991

2012

2009

2006

2003

2000

1997

0.60 1994

0.60 1991

0.70

1988

0.70

1985

0.80

1982

0.80

1979

0.90

1976

0.90

1973

1.00

1970

1.00

1967

1.10

1.10

1988

CPS

Expenditure Shares of Income 115% 110%

105% 100% 95% 90% 85% 80%

75% 0% 70% 1948

1953

1958 1963 1968 Adjusted Consumption

1973 1978 1983 Household Investment

1988 1993 1998 2003 Adjusted Transfers and Interest

2008

2013

Bigger Collapse: Cash Flow Measure Demand Rates: NIPA Definition and Adjusted 102%

100% 98% 96% 94% 92% 90% 88% 86% 84%

NIPA PCE / NIPA DPI

Adj HH Dem / Adj DPI

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

1976

1974

1972

1970

1968

1966

1964

1962

1960

1958

1956

1954

1952

1950

1948

82%

New saving rate concepts 15%

10%

5%

0%

-5%

-10%

-15% 1948

1953

1958 1963 NIPA Saving Rate

1968

1973 1978 1983 1988 Adj. Gross Household Saving Rate

1993 1998 2003 2008 Adj. Financial Saving Rate

2013

Future Directions 1. Use the Maki and Palumbo procedure with micro-consistent aggregate income and saving series; see if the results change –

Wondering if anybody at the Board would like to team up with us

2. Investigate the business cycle properties of the microconsistent aggregate consumption series –

Would like to generate quarterly-frequency numbers

3. Exploit panel structure of PSID to see if story of rising balance sheet fragility among non-rich followed by discrete fall in consumption during GR holds up at household level –

Joint work with Daniel Cooper

Future Directions 1. Use the Maki and Palumbo procedure with micro-consistent aggregate income and saving series; see if the results change –

Wondering if anybody at the Board would like to team up with us

2. Investigate the business cycle properties of the microconsistent aggregate consumption series –

Would like to generate quarterly-frequency numbers

3. Exploit panel structure of PSID to see if story of rising balance sheet fragility among non-rich followed by discrete fall in consumption during GR holds up at household level –

Joint work with Daniel Cooper

Future Directions 1. Use the Maki and Palumbo procedure with micro-consistent aggregate income and saving series; see if the results change –

Wondering if anybody at the Board would like to team up with us

2. Investigate the business cycle properties of the microconsistent aggregate consumption series –

Would like to generate quarterly-frequency numbers

3. Exploit panel structure of PSID to see if story of rising balance sheet fragility among non-rich followed by discrete fall in consumption during GR holds up at household level –

Joint work with Daniel Cooper