Fiscal stagnation

Robust fiscal stabilisation

Recent fiscal projections for the US forecast a rising debt-GDP ratio which exceeds the peak at the end of World War II. This column shows that over the last 20 years, there is no longer evidence of a stabilising fiscal feedback, where higher projected deficits lead to more deficit reduction. It argues that the current fiscal trajectory is unstable, and adverse fiscal shocks would only worsen the prospects. However, if a gradual fiscal feedback were to be re-established, then the trajectory would be stable. This feedback would imply deficit reductions in the range of 0.5% to 1.1% of GDP over the next decade.

Consumption and Debt Response to Unanticipated Income Shocks: Evidence from a Natural Experiment in Singapore

This paper uses a unique panel dataset of consumer financial transactions to study how consumers respond to an exogenous unanticipated income shock. Consumption rose significantly after the fiscal policy announcement: during the ten subsequent months, for each $1 received, consumers on average spent $0.80. We find a strong announcement effect—19 percent of the response occurs during the first two-month announcement period via credit cards. Subsequently, consumers switched to debit cards after disbursement before finally increasing spending on credit cards in the later months. Consumers with low liquid assets or with low credit card limit experienced stronger consumption responses. (JEL D12, D14, E21)

Household Debt: Facts, Puzzles, Theories, and Policies

Borrowing decisions affect most households, with large stakes and implications for research subfields as varied as macroeconomics and industrial organization. I review theoretical and empirical work on household debt: its prevalence, level, growth, and composition, as well as various measures of consumer choice and market (in)efficiency, elasticities, and prices, including new evidence on how borrowing heterogeneity affects the distribution of the opportunity cost of consumption. I also discuss opportunities and challenges in policy evaluation. A key takeaway is that puzzles abound, and I highlight numerous avenues for further research.

European Macro Policy Network

Shaping sustainable public finances that drive full employment, prosperity, and shared growth.

annotations: La faiblesse des taux d’intérêt nous oblige à reconsidérer la politique budgétaire

Traduction française du billet de blog "Why low interest rates force us to revisit the scope and role of fiscal policy: 45 takeaways" d'Olivier Blanch

Windfall Income and the Permanent Income Hypothesis: New Evidence

This paper examines consumer response to windfall income. By using data from the 1972–73 Consumer Expenditure Surveys, an attempt was made to test Friedman's permanent income hypothesis. The results revealed that the marginal propensity to consume regular income was greater than the marginal propensity to consume windfall income for windfalls that were large relative to regular income. However, when windfall income was less than ten percent of regular income, the relationship reversed. Implications are drawn for short and long‐run fiscal policies affecting consumers

Harnessing naturally occurring data to measure the response of spending to income

Balancing your incomings and outgoings Economic theory predicts that when someone receives money should have little effect on their spending patterns. Gelman et al. constructed a data set of 60 million transactions made by 75,000 people to test this theory. People do seem to go on a mini–spending spree after they get their paychecks or pensions. However, closer inspection reveals that that's mostly explained by the convenience of linking regular payments, such as rent and utilities, to regular income. Unsurprisingly, cash-strapped people are more likely to increase their spending in response to receiving income. Science , this issue p. 212 , How do theoretical predictions of individual fiscal behaviors match up against real-world, real-time data? , This paper presents a new data infrastructure for measuring economic activity. The infrastructure records transactions and account balances, yielding measurements with scope and accuracy that have little precedent in economics. The data are drawn from a diverse population that overrepresents males and younger adults but contains large numbers of underrepresented groups. The data infrastructure permits evaluation of a benchmark theory in economics that predicts that individuals should use a combination of cash management, saving, and borrowing to make the timing of income irrelevant for the timing of spending. As in previous studies and in contrast to the predictions of the theory, there is a response of spending to the arrival of anticipated income. The data also show, however, that this apparent excess sensitivity of spending results largely from the coincident timing of regular income and regular spending. The remaining excess sensitivity is concentrated among individuals with less liquidity.

Exponential Growth Bias and Household Finance

ABSTRACT Exponential growth bias is the pervasive tendency to linearize exponential functions when assessing them intuitively. We show that exponential growth bias can explain two stylized facts in household finance: the tendency to underestimate an interest rate given other loan terms, and the tendency to underestimate a future value given other investment terms. Bias matters empirically: More‐biased households borrow more, save less, favor shorter maturities, and use and benefit more from financial advice, conditional on a rich set of household characteristics. There is little evidence that our measure of exponential growth bias merely proxies for broader financial sophistication.

Credit Crises, Precautionary Savings, and the Liquidity Trap*

Abstract We study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model. After an unexpected permanent tightening in consumers’ borrowing capacity, constrained consumers are forced to repay their debt, and unconstrained consumers increase their precautionary savings. This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices. The output drop is larger with sticky prices, if the zero lower bound prevents the interest rate from adjusting downward. Adding durable goods to the model, households take larger debt positions and the output response can be larger.

Wealth Capture Policies | Windfall Policy Atlas

What mechanisms can ensure AI-driven productivity gains are captured for the public benefit?

Qu’entend-on lorsque l’on dit que la dette publique est « insoutenable » ?

Traduction française du billet de blog « What do we mean when we say government debt is "unsustainable?" » de Jared Bernstein

Post-growth

Post-growth is an umbrella term that refers to a broad family of economic, ecological, and political perspectives responding to the limits-to-growth dilemma —the recognition that infinite economic growth is biophysically unsustainable on a finite planet. Central to post-growth thinking is the shift of the focus out of GDP growth as the main goal of the economy. Instead, well-being becomes the main objective. Post-growth puts emphasis on decoupling societal well-being from economic growth, advocating for the possibility of prosperity beyond growth.

Analytique des déficits commerciaux et de l'emploi manufacturier

traduction française du billet de blog "Analytics of trade deficits and manufacturing employment" de Paul Krugman

Gauging the Strength of China’s Economy in Uncertain Times

An update on China’s recent economic performance and policy changes, focusing on aggregate credit as a measure to gauge policy stimulus.

Replication Data for: Public Infrastructure and Economic Development: Evidence from Postal Systems

While postal systems have been central to statebuilding efforts around the globe, their contributions to development are largely unclear. We argue that the post office affected economic development in both the short and long terms. To test our argument, we combine original data on the cross-national distribution of postal systems from 1875 to 2007 with granular county-level data in the U.S. from 1850 to 2000. In both country- and county-level analyses, we show that the spread of postal systems affected economic outcomes and persisted over the long term. The results are robust across dependent variables, model specifications, and estimation strategies. We provide additional evidence that suggests these effects were generated by reducing transaction costs and strengthening social capital. Our findings highlight the role of public infrastructure in promoting economic growth, documenting a channel through which state institutions precede growth, and suggest that statebuilding efforts have longstanding effects on relevant communities.

Post-growth: the science of wellbeing within planetary boundaries

There are increasing concerns that continued economic growth in high-income countries might not be environmentally sustainable, socially beneficial, or economically achievable. In this Review, we explore the rapidly advancing field of post-growth research, which has evolved in response to these concerns. The central idea of post-growth is to replace the goal of increasing GDP with the goal of improving human wellbeing within planetary boundaries. Key advances discussed in this Review include: the development of ecological macroeconomic models that test policies for managing without growth; understanding and reducing the growth dependencies that tie social welfare to increasing GDP in the current economy; and characterising the policies and provisioning systems that would allow resource use to be reduced while improving human wellbeing.