In the Papers: Stimulus Spending, Investing And Paying Off Debt

Every Monday, the National Bureau of Economic Research, a nonprofit organization made up of some of North America’s most respected economists, releases its latest batch of working papers. The papers aren’t peer-reviewed, so their conclusions are preliminary (and occasionally flat-out wrong). But they offer an early peek into some of the research that will shape economic thinking in the years ahead. Here are a few of this week’s most interesting papers.

Authors: Christian Broda and Jonathan A. Parker

What they found: U.S. households boosted their spending by 10 percent on average when they received economic stimulus payments in 2008, with lower-income households experiencing the biggest impact. Altogether, the program raised consumer spending by about 1.3 percent in the second quarter of 2008.

Why it matters: The Economic Stimulus Act of 2008, the first major policy response to the most recent recession, provided $100 billion directly to U.S. taxpayers. The payments, which averaged about$900 per family, were meant to stimulate economic growth by promoting consumer spending. Some research, however, has suggested the program failed because people saved the money rather than spend it. Broda and Parker, however, find households did increase their spending when they received the payments, and that their spending remained somewhat elevated for several months afterward. Counter to what some economic theory would predict, consumers apparently reacted when they got the money, not when the program was announced.

Key quote: “In normal times, monetary policy is the main instrument of stabilization policy arguably because the effects of monetary policy are reasonably well understood and because central banks can react rapidly to the possibility of a recession. But monetary policy has limitations — lags in its effect, increases in inflation, and reduced efficacy when financial institutions are capital-poor or when the zero lower bound on nominal interest rates binds. At such times, fiscal policy in the form of tax rebate programs have been able to respond quickly and temporarily to economic slowdowns.”

Data they used: Nielsen Consumer Panel.

Authors: Robert L. Clark, Annamaria Lusardi, Olivia S. Mitchell

What they found: More financially knowledgeable people earn a higher return on their 401(k) retirement savings.

Why it matters: Financially savvy people tend to save more and are more likely to invest those savings in the stock market. But past studies haven’t clearly demonstrated that these people necessarily make better investment decisions. The authors look at patterns in 401(k) retirement accounts and find that more sophisticated investors do indeed get better returns on their savings. But those returns are also more volatile.

Key quote: “We show that more financially knowledgeable employees are also significantly more likely to hold stocks in their 401(k) plan portfolios. They can also anticipate significantly higher expected excess returns, which over a 30-year working career could build a retirement fund 25% larger than that of their less-knowledgeable peers. Their investment portfolios are also somewhat more volatile, exposing them to slightly more idiosyncratic risk.”

Data they used: Administrative records from an anonymous financial institution with more than 20,000 employees, as well as a survey of the same workers.

Authors: Alexander L. Brown, Joanna N. Lahey

What they found: People trying to get out of debt may be more successful if they focus on paying off small debts first, rather than prioritizing debts with the highest interest rates.

Why it matters: Standard economic theory holds that borrowers should repay high-interest debts first in order to minimize interest payments. But popular purveyors of financial advice, such as author and radio host Dave Ramsey, often recommend paying off small loans first in order to feel a sense of progress. Past research, based on data from a debt-settlement firm, has suggested this “small victories” approach can be effective. In this paper, Brown and Lahey use an experiment (unrelated to debt payment) to determine that research subjects are more motivated to complete a task if they tackle smaller, more manageable pieces first.

Key quote: “Our results indicate that the ‘small victory’ of paying off the smallest debt first may increase motivation in debt repayment. However, this increase in motivation may not offset the additional interest accrued by not paying off the highest-interest-rate debts first if there are relatively different interest rates across debts.”

Ben Casselman is FiveThirtyEight’s chief economics writer.

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