Lower-income households saw a disproportionate increase in savings and then a rebound in spending during the first few months of the pandemic thanks in large part to the federal government’s relief programs, which helped ease the economic downturn, according to a new study published.
Those in the lowest income quartile, earning less than $27,000, had the largest increase in savings, going from having approximately $2,000 in savings pre-pandemic to $3,000 in May, according to household bank account data analyzed by scholars from the University of Chicago, Princeton University, and the JPMorgan Chase Institute.
“The fact that the poorest households are saving more percentage-wise than richer households is fairly surprising,” said Joseph Vavra, an associate professor of economics at the University of Chicago and one of the authors of the study.
Savings for low-income households went up by 25%, and savings for higher income households went up by 15% when looking at year-to-year changes, Vavra said. Higher income households are those with incomes approximately $58,000 and greater.
“This is big when you consider these people are the most likely to be losing their jobs, losing much more of their income compared to high-income households. That’s what makes it surprising,” said Vavra.
The study shows that there is suggestive evidence that this occurred because of federal government relief programs like the $1,200 stimulus checks, the expanded unemployment insurance, and the small-business relief program known as the Paycheck Protection Program — all of which are a result of the $2.3 trillion CARES Act coronavirus legislation passed by Congress in March.
Vavra said that during the initial stages of the pandemic, everyone cut their spending, but lower income households cut their spending more than others, which caused their savings to rise. Then, when the government relief programs started kicking in, low-income households, which were helped the most by these programs, were then able to spend more money as a result of the aid.
The study shows that low-income households’ savings rose in conjunction with the dispersal of government relief programs. This suggests the government programs had a positive effect on the savings and spending of low-income households, said Vavra.
One of the conclusions the study came to, Vavra said, was that while spending is increasing and the economy is on the path to recovery, the economy is still much worse than the worst period of the Great Recession.
“We are nowhere near back to normal, so we should be really cautious about phasing out government help too soon. We should be nervous about cutting back on spending too much,” Vavra said.
Vavra said that people should be open to continued government spending and using “automatic triggers” to provide more or less financial aid depending on employment levels and economic growth. This is also the strategy that a bipartisan group of prominent economists suggested earlier in June.
According to another new economic study, consumer behavior has been and will continue to depend mostly on individual choices in relation to coronavirus fears or lack thereof rather than government lockdown orders.
The study, authored by University of Chicago professor and former economic adviser to President Barack Obama Austan Goolsbee and another Chicago professor, Chad Syverson, confirms what President Trump’s economic adviser Tomas Philipson said last month. Philipson said during an interview with the Washington Examiner that voluntary caution, not state lockdown orders, drove the shutdown in commerce when the coronavirus hit. Furthermore, individual confidence to go out and spend will drive growth now, not lockdown orders being lifted by the government.
Goolsbee’s study shows that while consumer spending overall fell by 60 percentage points, government lockdowns explain only 7 percentage points of this. The study used cellphone records and data on customer visits to more than 2.25 million individual businesses across 110 different industries to draw its conclusions.
Although the government shutdown orders had little impact on spending overall, the study found they did have a significant effect in reallocating consumer activity away from “nonessential” to “essential” businesses — from restaurants and bars to groceries and other food sellers.
