Fiscal Stimulus: Estimating Second-Round Effects from the Virus Shock,” US Economics Analyst, April 29, 2020. Joseph Briggs, David Mericle, and Ronnie Walker, “ Income Losses vs. Finally, we extend our estimates through mid-2021 by assuming that services spending will recover more quickly as mass vaccination proceeds, and that lower-income households will spend a larger share of the fiscal support they receive from the Phases 4 and 5 packages. We further adjust these estimates to match the dispersion in spending between households in high- and low-income geographies implied by the Opportunity Insights Economic Tracker. Because the virus-sensitive services that declined the most during the pandemic account for a larger share of the spending of high-income households, this approach implies that spending by high-income households declined more sharply. We project spending by income quintile through the end of 2020 by assuming that each income group’s spending in each category falls or rises as much as aggregate spending in that category. To estimate consumption across income quintiles, we start with data from the Consumer Expenditure Survey on expenditure shares by category for each income group. But the uncertainty is high, and we think the impact could plausibly turn out to be anywhere from 1pp to 3pp. Our baseline estimates imply that a bit less than 20% of the excess savings will be spent in the first year after reopening, contributing roughly 2pp to GDP growth.
We assume, for example, that most excess savings held in bank deposit accounts by low-income households will be spent, while only a tiny share of excess savings invested in illiquid assets by high-income households will be spent. We use our estimates of the distribution of excess savings to forecast the share that will be consumed when normal spending opportunities return. We further estimate that about 10% of the excess savings have been used to pay down debt, 40% have been used to buy illiquid assets, and 50% sit in the more liquid form of bank deposit accounts. We estimate that about 40% of the excess savings are held by the top quintile of the income distribution, while only about 20% are held by the bottom two quintiles combined. To gain insight into the share of excess savings that might be spent, we first estimate the shares of the excess savings held by different income groups and the form in which they hold them. Unfortunately, the era of modern economic statistics offers little useful precedent. The propensity to consume out of excess savings surely lies in between those two extremes, but it is hard to know exactly where.
Statistical models of consumer spending imply that households consume most of their current income but only a few cents per dollar of their wealth. Whether households spend a modest or large share of these pent-up savings as the economy fully reopens could be the difference between a healthy recovery and overheating. The result is that households have accumulated about $1.5tn in “excess” or “forced” savings, and we expect that to rise to about $2.4tn, or 11% of GDP, by the time that normal economic life is restored around mid-year.
Fiscal support has kept disposable income high during the pandemic, but consumption has remained depressed because many normal spending opportunities have been unavailable.
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