Harry Moroz

Defending The Rump Stimulus II

In response to my post on the stimulative impact of unemployment insurance, Matt Mitchell at Mercatus responds that:

[Research on the Great Recession shows that] low income people are more likely to be unemployed; and according to the Sahm, Shapiro, and Slemrod study, low-income workers seem not to have high marginal propensity to consume. Putting these two facts together, I would be surprised if unemployment insurance were particularly stimulative.

But again, Mitchell elides the important point: the relevant group here is the unemployed and their relevant characteristic is their unemployment, not whether they are wealthy or poor. How could we apply the characteristics of “low-income workers [who] seem not to have high marginal propensity to consume” to “low income people [who] are more likely to be unemployed”? The one group is workers and the other the unemployed!

Further, I find it highly dubious that “low-income workers” who “seem not to have a high marginal propensity to consume” would not alter their spending habits if they became “poor” unemployed workers. As I wrote in my previous post, research shows that in the absence of unemployment insurance, the unemployed decrease spending by more than 20 percent.

Finally, I would note that it is not as if the Sahm study shows that low-income workers did not spend their rebate checks at all while wealthier households did. The spend rate for the three lowest income categories was 20 percent, 22 percent, and 17 percent; for the wealthiest category it was 26 percent.

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Posted at 4:24 PM, Jul 22, 2010 in
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