Posted by: Josh Lehner | August 2, 2019

Fun Friday: Marginal Propensity to Consume

One question our office gets quite frequently about the kicker is what sort of economic impact does it have. After all we are returning hundreds of millions, if not a billion, dollars to taxpayers who likely did not budget the kicker into their household finances. They’re certainly going to spend some of it, increasing consumer spending and stimulating the economy to some degree.

Previously our office used a 2015 study from Carroll, Slacalek, Tokuoka, and White that looked at what economists call the marginal propensity to consume (MPC). If you received $100 today, how much of that would you spend relatively quickly? The answer depends upon a household’s situation in terms of income, savings, wealth and the like.

Well, now is a good time to revisit those MPC estimates given not only is there another kicker in the pipeline but also the first round of Scharfstein v BP West Coast Product settlement checks just hit the mailboxes of 1.7 million Oregonians. See The Oregonian for more on the case, but the checks are for $91.94 each, with a second round coming next summer.

I was first alerted to the settlement checks by Pete Danko of the Portland Business Journal a couple months ago when he was wondering about their economic impact. As it turns out, Carroll et al. do have a somewhat newer and certainly more in-depth paper exploring how MPC changes given the point in the business cycle, and variations on household wealth.

In the table below I mock up some rough estimates of how much of the settlement checks are expected to be spent this year based on two of the model specifications in the new paper. The first is based on household income and the economy being in expansion. The second is based on household income and liquid financial assets which is a better measure of households ability to pay today given illiquid assets, like home equity, are harder to tap if needed.

Note that lower-income households have higher MPC as they are living paycheck-to-paycheck. However research in recent years has found that quite a few higher-income households are also living paycheck-to-paycheck and thus will spend more of their unexpected windfall than previously thought. Carroll et al build this into their liquid asset results, although all of their model specifications find that the economy-wide MPC is higher than their earlier work showed.

That said, much of the settlement checks will still be saved. The macro impacts are relatively small given the size of the overall economy and household decisions. The near-term bump in total consumer spending in Oregon this year due to the settlement checks is in the 0.02-0.04% range. However, if we think Oregonians will spend their unexpected windfall mostly on discretionary items like going out to eat or a new pair of shoes, then we will likely see a noticeable increase (0.1-0.3%) within these categories. Having a little bit of extra money in your pocket is always nice, especially as we head into the weekend. I hope you enjoy yours!


  1. […] Source: Fun Friday: Marginal Propensity to Consume | Oregon Office of Economic Analysis […]

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