INDIVIDUAL PORTRAITS: The Consumption Function, APC and MPC: Let us
examine these three concepts by looking at ‘real-life’ examples of
American households: EXAMPLE #1: “Tom Green has lost his job, and,
for a few months, his family is spending more money that they are
earning in net income, perhaps ‘living off of past savings’ or
diving more deeply into credit card debt”. We will examine how this
person’s net income does not drop to zero for the year, or even in
half. There are some ‘safety net’ programs that he and his family
may qualify for, including Medicaid (in our state it is called
mediCAL), food stamps, housing programs, and unemployment
insurance. This ‘portrait’ of Tom Green carries with it extra
significance, as our country has been hit by a wave of layoffs
never seen in its history: in just four weeks, in April, 2020, 22
million people filed claims for unemployment insurance,
overwhelming the benefits system in our country. Tens of millions
more workers lost their jobs and DID NOT file claims with our
government. Millions more workers have lost their jobs since that
time. Our government has responded by greatly expanding
unemployment insurance benefits as part of a $2.2 trillion stimulus
program passed and implemented by our federal government to address
the human misery created by the pandemic and the recession. Tens of
millions of workers have lost their jobs in America in 2020. This
expansion of benefits, which includes covering workers who had not
been covered previously, including many ‘gig economy’ workers and
many self-employed workers, may be a permanent change in the way
benefits are delivered to workers who have lost their jobs. This
may be a good thing. You have to form your own opinion on this
matter. The extra $600 per week that SOME laid-off workers may
receive--- IN ADDITION TO OTHER BENEFITS a laid-off worker may
receive ---may last for only four months—or they may be extended.
Unemployment benefits vary from state to state, and usually last
for about 26 weeks. They were extended to 99 weeks for some workers
in some states during the 2008-2009 recession. This may happen
again if the recession of 2020 drags on for several months and even
years. Let’s say the Tom Green family earned $61,000 in gross
income in 2019 (this will drop for 2020), paid $21,000 in taxes,
earned $40,000 n net income in 2019, spent $38,500 and saved $1,500
in 2019. He loses his job on April 1, 2020, and let’s say he finds
another job on July 1, 2020. His family will suffer a drop in net
income from 2019 to 2020. Even before the pandemic, this would
happen to at least 4 million families in this country each month.
Before the pandemic, let’s say that in a normal month, 4 million
jobs in the U.S. would be ‘lost’, or ‘destroyed’, and perhaps 4.2
million jobs would be created, for a NET job GAIN of +200,000 jobs
in a typical month. Obviously, these numbers would vary from month
to month. Thus, the Tom Green household will see their net income
come in at $3,333 per month for the first three months of the year,
that is, $10,000 for the period Jan 1 to March 31, then drop to $0,
in theory, for the three months of April, May and June. He secures
another job on July 1, 2020, which pays him a net income of $3,000
per month. Thus, he suffers a ‘pay cut’ in a sense. By July 1, he
is just happy to find another job! His income for the six months
from July 1 to Dec. 31 is ($3,000 per month) x (six months) =
$18,000. In theory, this would put him in a situation where his
family earned $40,000 in net income in 2019 and only $28,000 in net
income in 2020. He will ‘move down’ the Consumption function, if
you wanted to graph it that way. What may be lost in all of this
drama is that, at least before the pandemic, Mr. Green may have
gone from “Job A” which HAD a health insurance program to “Job B”
which DOES NOT have a health insurance program at work. The U.S. is
the only ‘major industrialized’ nation where if a worker loses his
job, he often loses his health insurance as well. Obamacare was
passed by the House and the Senate in 2010---we are celebrating the
10th anniversary--- owing to TENS of millions of Tom Greens losing
their ‘old’ jobs, getting new jobs, but losing their health
insurance plans in the process. In America, many new jobs are
created by small businesses (until March 2020) and often these
employers do not offer health insurance plans at work for their
workers. During those three months between jobs, and after July 1,
2020, Tom Green must make the decision as to whether to BUY health
insurance from a provider. If he lives in our state, Covered
California will help him pay the monthly premiums for health
insurance by paying for some, or even all, of his monthly payments.
This may not be true in many states in the South and the Midwest.
It is a shame that this does in fact vary from state to state, as
health care is obviously a national issue and a national goal.
During the three months between jobs, Green’s income may not drop
to $0 for many reasons. REASON #1: Green and his family MAY qualify
for unemployment insurance benefits. Now, we discussed the
incredible expansion of benefits for this incredible year. Yet, in
years before 2020, and perhaps, in years after 2020, Green must get
past FOUR RED LIGHTS--- or HURDLES--- in order to get that $330 per
week in weekly unemployment benefits (this could be higher or
lower---- $330 per week is the amount my friend collected a few
years ago)--- please remember that the extra $600 per week offered
to SOME workers for four months is unusual, and not the historical
average, and possibly a “one-shot” deal. In order to collect
benefits, in normal times, Tom Green must overcome four hurdles.
HURDLE # 1. Mr. Green must work at a certain job—a job that is part
of the unemployment insurance (U ins.) system. Some jobs are, some
are not. Before March 2020, less that half of all workers could
collect U ins. benefits when their jobs ended---I recall being very
surprised when I learned this. Now, maybe that ratio has changed
forever. EVEN NOW, most farmworkers DO not and CAN not collect
these benefits if and when their jobs end. Our governor has
allocated some funds for these workers as a SPECIAL program. That
simply proves my point. Now, maybe some of these workers are
‘undocumented’. One may argue that they still deserve benefits if
and when their jobs are terminated. You have to form your own
opinion on this matter. Our system of food production and
distribution COULD NOT OPERATE without these workers. HURDLE #2: He
must work there for a certain number of hours each week, and for a
certain amount of time. I have had SO many students tell me that
they were let go JUST before they were to ‘vest’ and qualify for
benefits---some employers can be real jerks. Sometimes an employer
will keep a worker under 32 hours per week --- or less or
more---just so that they do not qualify for benefits—medical as
well. HURDLE #3: Green’s employment must end for certain reasons---
and not other reasons. It is complicated, but generally, if Green’s
job ends owing to a downturn in business activity, he may qualify.
If he loses his job because he is constantly late, takes two hours
for lunch, and comes in every Friday drunk, or stoned, or BOTH….
then he will not qualify for benefits. If there is some dispute
over this issue, then Green may ‘fight’ his
employer---ex-employer—over the issue in front of some arbitrator
assigned to resolve the dispute. The employer may fight his claim
(in normal times), as the employer does not want HER premiums to
rise—this may increase her costs of doing business. HURDLE #4:
GREEN MUST STEP FORWARD and make a claim! Many workers clear the
first three hurdles but not the fourth! 2020 is a tragic example of
how DIFFICULT it can be for a worker to GET THROUGH to the
EDD---the agency that processes claims. The worker in this case is
disoriented, depressed, lonely--- he just lost his job. It may take
SEVERAL ATTEMPTS to get through—by phone, online, or in person.
Green must try over and over in order to succeed. If all four
hurdles are cleared, Green may receive this payment of $330 per
week or about $1,400 per month---for those three months between
jobs. If so, his net income does not drop from $40,000 in 2019 to
$28,000 in 2020, it drops from $40,000 to $32,400---still a huge
drop. However, two more elements come into play: Tom Green may be
part of a TWO INCOME household. If he is, then his job loss will
cause a drop in the family’s income, to be sure, but the drop will
be of a lesser magnitude. It is so easy to ‘see’ a household
earning $61,000 per year and just assume that this involves one
person earning about $30 an hour at work. Often, the household
consists of TWO people, each earning $15 an hour at work. If this
is the case with the Tom green household, then the drop in income
is not as severe. Even if the other wage earner is bringing in
$1,000 per month, the drop in income is ‘cushioned’, so to speak.
Finally, let’s say that the Green household will see a drop in
gross income of $4,000 for the year. His family will earn $57,000
in 2020, as compared to $61,000 in 2019, for example. IS HIS FAMILY
REALLY ‘OUT’ THAT $4,000? Not really: half of that ‘missing’ $4,000
WOULD HAVE BEEN TAXED by the five major taxes, FIT, FICA, SIT,
sales and special. His family earns $57,000 in gross income but
pays only (roughly) $19,000 in combined taxes, to net about
$38,000, instead of $40,000. I am telling you, when Tom Green
settles down to prepare his 2020 taxes in April 2021, he will be
convinced that the numbers are incorrect! “How could my family have
‘lost’ ONLY $4,000 from 2019 to 2020???” “There must be some
mistake!” Now, even though his family’s net income dropped by
$2,000 for the year, his family very well may not have cut back on
their SPENDING by exactly that amount. This depends upon the
family. There is a good chance that his family’s APC has risen
above .96---he and his family could easily be spending more than
their net income for the next several months—they have ‘suffered’ a
10% drop in monthly income---but will they cut back on their
SPENDING by 10%? Probably not. LONG TERM, the most salient fact
here is that he and his family STARTED the year with a health
insurance plan at work covered by Job A, and he ENDED it WITHOUT
one in Job B. HE MUST STEP FORWARD AND ACT to obtain a health
insurance policy---we try to ‘reach out’ to Mr. Green in our state
AND CONVINCE HIM TO SIGN UP FOR HEALTH INSURANCE THROUGH COVERED
CALIFORNIA. He will be surprised at how much help he can get from
our state government! PORTRAIT #2: “The widow Smith can ‘barely
make ends meet’ by living off of the interest generated by her
wealth, yet she NEVER DARES to ‘spend down’ the wealth itself. The
widow Smith may be used to represent the tens of millions of senior
citizens living in our country, over 70 million of whom earn a
social security benefit payment averaging about $1,500 per month.
Let’s start with a model wherein she does not received these
benefits---let’s say, for some reason, she is not ‘in the system’.
In theory, let’s say she has $500,000 in wealth, deposited in at
least two bank accounts, earning 3% interest (these are long-term
certificates of deposit that are ‘coming due’ soon. She will NOT
get a 3% interest rate when she turns the money over). In theory,
this $15,000 in net income would be BARELY enough for her to
survive—we may think she would earn $15,000 per year in net income
and spend $15,000 per year in consumption, for an APC measure of
1.00----after all, it is only $1,250 per month for her to live on.
My BIGGEST question about her life is: what is her HOUSING
situation? Let’s say she lives in a house that is ‘paid off’---
free and clear—no mortgage, and no monthly rent payments. She
visits a ‘trusts and estates’ attorney to draw up her living trust,
as she knows she will die soon – pretty heavy stuff. The widow
informs her attorney about her wealth, her three children, how she
does not want any of her wealth to transfer to the third child, who
is a disappointment---like a said, heavy stuff. The attorney grows
tired, as it is late in the day, and blurts out to the widow: “You
know, widow Smith, you should take a cruise around the world (this
is before Feb., 2020)--- it will cost about $20,000” --- and the
widow Smith is SHOCKED! “Are you OUT OF YOUR MIND?? I would make
$15,000 in net income and spend $35,000 in spending for the year!
My wealth would drop, by $20,000, thus my YEARLY INTEREST INCOME
WOULD BE LOWER FOREVER!!”… and the attorney says something that she
will regret: “Listen up, old lady--- you can spend $20,000 a year
more than you earn for the rest of your life---my actuarial tables
here tell me you have 14 more years to live---you will die long
before you run out of money!”---and, while this may be true, this
is NOT what the widow, or any old person EVER wants to hear. In
fact, she will NOT run her life so that her life savings draws
down… down… down… $500K….. $480K… $460K… $440K…. damn! I BETTER DIE
SOON ! BEFORE I RUN OUT OF SAVINGS!!! No--- the widow Smith wants
to see her wealth RISE over time! So she spends only $13,000 per
year in consumption---spending--- under 90% of her net income! In
fact, her APC comes in at $13,000 divided by $15,000 = .867! The
widow saves over 13% of her income! She is a super saver! And this
is quite common among older people. She could be sitting on $1.5
million in savings, and EVEN I WOULD TELL HER she could ‘spend it
down’—and she still will not do it! Now, most likely, the widow
will receive social security benefits, but that may be less that
$1500 per month—remember, that number is the median—half of all
Americans receive less than that amount each month. She may
receive, say, $900 a month in SS benefits, and another $350 per
month from a small pension, for a total of $1250 per month. The
widow Smith is ABOVE THE POVERTY LINE! A household of one falls
below the poverty line if that person earns below $11,000 (roughly)
in income! Incredible! The poverty line is a very low line!
PORTRAIT #3: The Schultz family is SO RICH… that they used the
‘extra’ money thet ‘earned’ in 2019, as compared to 2018, to
‘invest’ in a limited partnership for oil drilling”. Let’s put the
Schultz family at a gross income of $160,000 in 2018, minus $60,000
in taxes, for a net income in 2018 of $100,000. Life is good at
$100,000: we see TWO nice cars in the driveway, a nice house, great
food, medical care—all a family needs and most of what it wants.
They spend $80,000 in 2018, and save $20,000 in 2018. Their APC is
.80 in 2018. They enjoy a rise in net income of +$10,000 in 2019,
as the family may be headed by a worker who is highly paid, perhaps
a Vice President, who earns a $10,000 ‘end of the year’ bonus. Or
she is a partner in a law firm or accounting firm, and the partners
vote themselves a bonus at the end of the year. The entire idea
behind the concept “APC drops as income rises” is that this family
SAVES THE ENTIRE $10,000 in “extra” income earned in 2019. They
want for NOTHING. The extra $10,000 arrives at the end of the
year—perhaps not as a surprise, but perhaps as a bonus that could
not be guaranteed. This high income family has a great ABILITY to
save this extra $10,000, and they have a great INCENTIVE to save
it: AN ACTUAL HUMAN BEING IS TELLING THEM, FACE TO FACE, TO SAVE
THAT MONEY! They have their own ‘personal savings coach’---whom
they PAY—to advise them to save the money instead of spending it.
They have things to spend the money on. They want a new car--- that
2020 Tesla is so pretty. Their 2016 Tesla is getting old. The
neighbors are talking. Friends are refusing to go to lunch with
them because their car is so old…okay… I am being silly. Yet, they
DO have things they want to buy. They exercise some ‘discipline’ by
NOT buying the newest toy. If they save the entire amount, their
MPC on the extra $10,000 is: (a rise in spending of $0) divided by
(a rise in net income of +$10,000) = a 0.00 MPC. Their APC drops
from .80 in 2018 to: (spending of $80,000) divided by (net income
of $110,000) = .73 APC---- “proof”--- if you will---that APC drops
as income rises. I would like to point out that this $10,000 will
be ‘accounted for’ as household savings---yet, later in the year,
as this limited partnership uses the money to drill for oil, we
will call that $10,000 part of BUSINESS SPENDING. We will discuss
business spending a little later in the course. PORTRAIT #4:
“Inflation has made the Jones family ‘feel so poor’… that they are
now saving an EXTRA $100 per week”----this is kind of a trick
question, or trick portrait, as inflation causes MOST American
families to SAVE LESS MONEY over time, not more—well, to be more
specific, the fact that a family’s pay raise DOES NOT KEEP UP WITH
INFLATION over time helps explain the drop in the average household
savings rate. Let’s say that this family earns $61,000 in gross
income, pays $21,000 in taxes, clears $40,000 in net income, and,
before this ‘great awakening’, spends $38,500 and saves $1,500 per
year. We have established this model as the ‘typical’ American
household. This works out to a monthly net income of $3,333 per
month, and a monthly spending level of $3,208 per month. What would
it take for this family to save ANOTHER $100 per week, or $5,200
per year, or $430 per month? Let’s look at this on a monthly basis:
in order for this family, or any family, to save $430 a month more,
they would have to spend $430 a month LESS. The drop in spending of
$430 per month would involve a lot more than this family simply not
going out to dinner--- it is a 13% drop in spending! Housing costs
tend to be stable—they do not drop from month to month. Food costs
are rising every year, and every month. The ONLY fact situation
that I can see to explain this is if this family has a $430 per
month car payment--- and it ends! Imagine that! 25 years ago, the
average car payment was for about 48 months. Now, the average
payment plan spans 67 months, with many car loans taking 84 months
or longer to pay off. Some luxury cars may have 120 month payment
plans. What is my point? THERE ARE FEWER FAMILIES IN AMERICA EVERY
YEAR WHO WILL BE IN THIS SITUATION. Thus, the savings rate drops,
and continues to drop. Let’s say that we are in ‘normal times’.
When this family ‘pays off’ this car, it has a huge decision to
make: it can SAVE this $430 each month… or it can go out and buy a
new car, which will cost, say, $510 per month. This is a HUGE
decision point for this family. If they do the right thing, they an
now earn $40,000 per year and spend only $33,300 per year while
saving $6,700 per year--- $5,200 more than their previous saving
level of $1,500 per year. They would be helping the U.S. economy,
as this money will be placed in the ‘loan pool’, or the financial
and capital markets, where banks, or other lenders, will lend this
same money to businesses that may build housing units or factories
with THAT MONEY--- a savings rate of 8% is more beneficial to our
economy, compared to a savings rate of 4%. Now, the Jones family is
only one family---but a rise in the U.S. savings rate will start
with one family at a time. I should mention the concept of
‘leasing’ a car. A family that leases a car will NEVER OWN that
car--- they will NEVER ‘pay it off’ and thus be in the situation of
the Jones family. If I lease a car for three years, at the end of
the lease agreement, I go back to the car dealership and lease
another car for another three years--- in theory, the car payments
never end until the day I die. This helps contribute to the drop in
the savings rate. Another way for this family to ‘pay off’ an old
loan is if they incurred STUDENT LOAN DEBT earlier in their lives.
I just read that about 45 million Americans owe about $1.6 trillion
in total student loan debt, 92% of which is backed in some way by
the federal government. This is just a bit larger than the TOTAL
CREDIT CARD DEBT owed by American households. My friend Dave
graduated from law school at Santa Clara U. owing $65,000 in
student loan debt. He has to pay about $500 per month for the next
12 years—about 144 months. This works out to a low rate of
interest, but debt is still debt. ONCE HE FINALLY PAYS OFF HIS
STUDENT LOANS, he can, in theory, ‘save’ that $500 per month.
Student loan debt is now so large that it impacts the national
economy: many people in their late 20s and 30s delay getting
married, having kids, or buying a house because they owe so much
money in student loan debt. There is a movement to ‘forgive’ some
or all of that debt, and you have to form your own opinion on this
issue. This extra $500 each month that my friend must pay… hurts
his ability To save money.
Please answer the following questions:
1. Let's say that in 2019, Mary Jones was employed all year at
a job making $61,000 in wages, that is, gross income, and, after
$21,000 was "taken out" in various taxes and fees, she was clearing
$40,000 per year in net income. Let's say that this is the only
source of income for her family. She and her family spent $39,000
and saved the other $1,000. What is her A.P.C.? Is this good for
our economy, in your opinion? Or bad? WHY? If she earns a pay raise
of $1,000 after taxes, and spends $700 of it, what is her M.P.C.?
Is this good for our economy? Or bad? Why? What happens to the
other $300?
2. In Jan. 2020 Mary Jones was earning $40,000 in net income
and spending $39,000 on a yearly basis. Mary Jones loses her job on
April 1, 2020, and regains the same job ---at the same pay
---exactly six months later on October 1, 2020. During the six
month layoff period, in the first three months, April, May and
June, she earns $600 a week in EXTRA unemployment benefits -- IN
ADDITION TO the $347 a week he earns, which is the average UI
benefit for the workers in our state. Thus, for these 13 weeks, she
earns $947 per week. In the next three months, July, August and
September, she earns $347 per week in UI benefits. She and her
family cut back on their spending by ten percent during the six
months duration of unemployment, but then they go back to spending
$39,000 on a yearly basis after he goes back to work. What is her
net income level and spending level for 2020? What is his A.P.C.
for the year?
3. Do you think that the $600 per week EXTRA in UI benefits is
overly generous? Why or why not? Should the $600 per week in EXTRA
unemployment benefits be reinstated for the tens of millions of
people who had a job in Jan. 2020 but do not have a job now? Why or
why not?
4. Millions of people who lose their jobs in America also lose
their health insurance. Should this be changed? If so, how? Is
access to medical care a right? Should it be? Why or why not?
5. What four "hurdles" must a worker overcome in order to
receive unemployment benefits, at least in theory?