Assessing Proposed CE Redesign Options:

Implications for Academic Economic Research

Mel Stephens

University of Michigan

October 26, 2011
CE Redesign Options

• Both options provide creative approaches for addressing the

concerns which underlie the redesign.

• Major undertaking in a short period of time

• My discussion is in my role as an academic researcher who is

an end user of the CE data.

• I will confine my comments to a very limited set of issues.

Stephens University of Michigan CE Redesign October 26, 2011 2/10
Economic Research Using the CE Data

• Research topics using the CE include (but are not limited to)

• Estimation of demand systems

• Measuring inequality using consumption rather than income

• Distributions of expenditures

• by demographics

• by program participation

• Alternative methods of computing trends in prices

• Testing the Life-cycle/Permanent Income Hypothesis

• Proposed redesigns affect elements of the survey that have

common implications across these topics

• However, will focus on the last topic for this discussion

Stephens University of Michigan CE Redesign October 26, 2011 3/10
The Life-cycle/Permanent Income Hypothesis (LCPIH)

• This theoretical framework has a few important assumptions.

• Consumers are forward-looking: expectations of future income

as well as current income and assets affect decisions today

• Consumers care about their future circumstances: they equally

enjoy consumption today and (discounted) in the future.

• Consumers have rational expectations.

• A variety of implications emerge:

• Expected vs. unexpected income changes

• Transitory vs. permanent income changes

• Consumption is a preferred measure of well-being over income.

Stephens University of Michigan CE Redesign October 26, 2011 4/10
Testing the LCPIH with the CE Data

• Using the CE Quarterly Interview Survey

• The impact of tax refunds on household consumption

• The impact of social security taxes on household consumption

• The impact of tax rebates on household consumption

• Using the CE Diary Survey

• The impact of social security checks on household consumption

Stephens University of Michigan CE Redesign October 26, 2011 5/10
Features of the Redesigns: Altering the Panel Component

• Both redesigns maintain the panel feature of the data

1 Two quarterly expenditure observations one year apart

2 Three monthly expenditure observations six months apart

• Affects examination of short-run changes using a panel

• Response to tax rebates requires observations closer together.

• Perhaps implement a repeated cross-sectional data design.

• Synthetic cohorts provide an panel alternative in the UK

• Cannot exploit idiosyncratic variation with cohort aggregates.

• Research continues but questions and methods evolve.

Stephens University of Michigan CE Redesign October 26, 2011 6/10
Features of the Redesigns: Collecting All Expenditures

• Both redesigns retain the feature of collecting all expenditure

categories from all households

1 Maintains format of both an interview and a diary survey

2 An integrated interview format with feature of both

• Theoretical framework aligns with non-durable consumption

• Durable consumption presents empirical challenges.

• Cannot rely on Y − S = C

• Much research does not distinguish bananas vs. fruit vs. food

• Little discussion of using global expenditure categories which

might address non-response issues

• Tests of LCPIH need all expenditures from everyone

• Imputing expenditures using income artificially violates LCPIH

Stephens University of Michigan CE Redesign October 26, 2011 7/10
Features of the Redesigns: Labor Force/Income Data

• Neither redesign addresses labor force and income data

• Currently collected in the second and fifth interviews

• Corresponds to the year prior to the survey

• Does not match period of expenditure collection

• Collection period differences influence research topics

• Cannot study how labor market events such as unemployment

and retirement affect within-household consumption

• Consumption in lowest decile is over twice as large as income

• Cannot apply balance edit methods in field

• Tests of LCPIH require alternate information to construct

income changes since such data is lacking

• E.g., create income change due to Social Security tax change

based on total earnings

• Added module on timing of tax rebate receipt

Stephens University of Michigan CE Redesign October 26, 2011 8/10
Features of the Redesigns: Addressing Non-Response

• Current participation rate in both CE surveys is roughly 75%.

• Triggers non-response bias analysis under OMB guidelines

• Participation rate is lower in Canada, 62%, and UK, 51%

• Redesign 1 similar to Canada; Redesign 2 similar to UK

• Neither fully addresses survey participation implications

• Both advocate to collect, scan, mail, e-mail, etc. receipts

• Both advocate use of financial records

• Both advocate maintaining a panel component

• Impact on participation rate is still unknown

• Use of these technologies is to reduce item non-response

• Human component affecting diaries now still will matter

• Research typically ignores participation and item non-response

• Need to address in estimation may increase with redesign

Stephens University of Michigan CE Redesign October 26, 2011 9/10
Discussion

• Both teams should be commended for their efforts.

• Redesign raises a number of issues for researchers.

• Research methods may need to adapt.

• Trade-offs in questions that can and cannot be asked.

• Development and/or implementation of different

methodologies may be required relative to prior CE studies.

• Changes to the collection of non-expenditure items may

broaden the research topics that can be investigated.

Stephens University of Michigan CE Redesign October 26, 2011 10/10