This article takes a proactive stance on the current economic crisis by providing an unbiased evaluation of the success of both “debt-financed fiscal packages” and “redistributive programs” at spurring consumption in the US. These estimates on the growth of aggregate consumption are unique because they take into consideration the heterogeneity of the marginal propensity to consume, as the marginal propensity to consume is inversely related to a household’s cash-on-hand. I think that the evaluation of fiscal policy on consumption is considerably more realistic when such heterogeneity in marginal propensity to consume is included in the data analysis. Using this heterogeneous model, aggregate consumption grows the most (0.82%) as a result of a government transfer that targets the bottom 10% of the population rather than the entire population. This is compared to a situation in which the same government transfer is enacted with a homogenous model, spurring a less impressive 0.62% increase in aggregate consumption. The 0.20% difference between these two cases demonstrates that there is potential to augment an existing increase in consumption spurred by fiscal policy solely with the inclusion of the heterogeneous model of marginal propensity to consume. Since consumption makes up roughly 70% of GDP, a small increase in aggregate consumer spending of 0.20% will lead to larger increases in GDP compared with a similar increase in investment spending, government spending or net exports.
I enjoyed how succinctly and clearly this explains the varying degrees of marginal propensity to consume across income levels. As Barb already explained, the heterogenous model produced a more accurate depiction of stimulus effects. The points the author's make seem to be quite intuitive though, and I'm not entirely sure what they are trying to prove. This leads me to ponder many related questions. Are debt based programs or redistributive programs more popular? Are there arguments for both debt based and redistributive programs? This article seems to just be an introduction to what I'm sure is a very expansive literature set on the effectiveness of different stimulus packages.
I enjoyed this article because it relates directly to decisions that both the United States and European countries have to make involving the debt crisis. The ending of the article I found to be the most interesting, as it talked about the effects of different stimulus plans on the marginal propensity to consume. From the article it seems to giving out unemployment benefits is more effective than wealth distribution in terms of increasing the marginal propensity to consume. I found this to be interesting considering the Occupy Wall Street movement in 2011. The poor/unemployed felt as if the "1%" should give up more of their wealth to the poor/unemployed to help stimulate the economy. However, according to this article, it is almost 10x more effective for the government to provide money to the poor/unemployed than for the wealthy to do it.
Luigi Pistaferri starts off this article recognizing there are different approaches to "counteracting the Great Recession." He wants to compare two types of stimulus packages. (debt-financed fiscal packages vs. redistributive programs that maintain the public deficit unchanged) The first distinction he makes when analyzing these two packages is that we need to think about the MPC. The MPC is not the same for every person across the country, wealthier people have a wider range to consume even if taxed more because they have more income. Because of this, we need to focus on models of liquidity constraints with a heterogenous MPC. How much debt a household has could have an affect on the how much the stimulus packages work. If households are in debt, they could use extra money to just pay off debts rather than consuming. The article includes a graph to show the fact that chances in income have different impacts on people's lives. The conclusion is that houses with low amounts of cash on hand will have a higher MPC. We need to be able to use this to determine how effective a stimulus package could be in certain areas.
I enjoyed this article because it clearly states the experiments and empirical evidence behind the fiscal policy in European countries such as Italy. The most interesting thing I found was how much higher the MPC for poorer families was than richer families. Granted it is understood that poorer families must devote a much greater percentage of income to consumption than richer families because food and bills and necessities make up a much larger portion. However, the MPC of richer families being around 30% was much lower than I expected. The take home of the article clearly addresses the different fiscal policies and impacts, and provides insight into the stimulus of the economy