New research summarized by Noah Smith:
“Friedman’s theory
says that people’s consumption isn’t affected by how much they earn day-to-day.
Instead, what they care about is how much they expect to earn during a
lifetime. …
Unfortunately,
intuition based on incorrect theories can lead us astray. Economists have known
for a while that this theory doesn’t fit the facts. When people get a windfall,
they tend to spend some of it immediately. So economists have tried to patch up
Friedman’s theory, using a couple of plausible fixes. People might respond to
temporary income changes because they’re unable to borrow -- if you want to
spend more, but you’ve maxed out your credit cards and your home-equity credit
line, a windfall from the government might free you from the tyranny of the
bank. Lots of economists view credit constraints as a simple, minimally
invasive way to save Friedman’s basic idea.
But as economists
get better and better data, they’re finding that even this modification isn’t
enough. A new study by Peter Ganong and Pascal Noel shows that consumer
behavior is more short term than almost any mainstream model predicts.”Related:
The Curse of Econ 101 by James Kwak