“Story #3: I like to summarize articles and books in simple words. This is one of them”
Article link: https://microeconomicinsights.org/wealthy-hand-to-mouth-households-key-to-understanding-the-impacts-of-fiscal-stimulus/
This article argues about how targeting the wealthy “hand-to-mouth” consumers in fiscal stimulus policies would smooth the recession.
Now, let me start by the importance of fiscal stimulus. Fiscal Stimulus policies are based on the idea that temporary public transfers to households or a temporary reduction in their tax would increase consumption expenditures. This would lead to higher demand for goods therefore demand for production which leads to stronger labor demand and eventually better economy.
But, do we believe in the effectiveness of fiscal stimulus policies?
Theoretically speaking, permanent income hypothesis suggests that people base their consumption on the long-lived, stable component of their incomes, not on short-lived, temporary fluctuations. So, these fiscal stimulus payments are largely saved. But, the data suggests that there are many “hand-to-mouth” consumers who do not follow the permanent income hypothesis. So, fiscal stimulus policies can be effective when targeted towards “hand-to-mouth” consumers. But, who are the hand-to-mouth consumers?
Traditionally, “hand-to-mouth” consumers are mostly poor and fiscal stimulus programs have been targeted towards households with lower incomes since they are thought to spend their transfers quickly. But the recent research, by Kaplan and Violante, finds there are “wealthy hand-to-mouth” consumers as well. Wealthy hand-to-mouth is not a permanent character of an individual. These people are hand-to-mouth but wealthy because their wealth is not easily accessible and may have high transaction costs. Moreover, according to the estimates, wealthy hand-to-mouth consumers have the highest marginal propensity to consume. So, with a fair amount of stimulus payments they spend the same as the poor hand-to-mouth consumers. But, since they have the same illiquid wealth invested in housing and retirement accounts which are similar to non-hand-to-mouth households, they will access their savings despite the high transaction costs in the severe recession. So, the research finds that it would be more effective to give stimulus payments to the wealthy hand-to-mouth consumers during mild recessions.
Thank you for reading,
Have a good day my friends,
Uranchimeg
