Expenditure and Wealth Data in the PSID

The PSID is a longitudinal panel of individuals and households from 1968 to present in a series of annual, and later biannual, interview waves. The original sample included approxi- mately 5000 families and has been supplemented over time as the original sample members and their children have formed new households and gotten married. Interviews collect a variety of data on income, labor, and financial information in addition to consumption data available after 1999. This paper focuses on a sample of 2-year waves from 1999 to 2011 containing the new consumer expenditure modules and including over 7000 families tracked over the period. It also uses a longer panel from 1984-2011 on home values and mortgage debt to estimate the prevalence of home equity extraction.

The PSID is used in this study for several reasons. First, the longitudinal nature of the PSID offers several benefits over alternate datasets on consumption such as the Consumer Expenditure Survey (CES). Households in the CES are interviewed for at most 4 quarters before they are rotated out of the sample. This makes the analysis of long-run consumption responses rather difficult. Given that a large time and effort cost is associated with refi- nancing or acquiring new home-equity-based credit, it is unlikely that the full response to a house-price change is observed within this one year span. Furthermore, unlike the CES, households are tracked across moves allowing for the analysis of wealth effects arising from up-sizing or down-sizing housing wealth. The PSID allows the ability to track individu- als over a longer period and better track consumption changes in response to house price changes, refinancing, and moves that may have occurred over a year ago.

Secondly, the PSID offers a superior survey design with higher response rates and accuracy than the CES and other surveys. For example, the households are allowed to choose a reporting period for expenditures. This prevents households from having to scale up mort- gage payments or grocery bills to annual amounts, and instead report them on a weekly or monthly basis. Furthermore, non-response households are provided the opportunity to report ranges of possible expenditure amounts through the use of “unfolding brackets” al- lowing the PSID to provide imputed consumption measures for non-response households. Finally, the survey non-response rate is extremely low with over 97% responding to most consumption questions. Altogether, this likely reduces measurement error and non-response bias relative to other surveys.

The start of the sample period is constrained by the availability of comprehensive consump- tion data. Prior to 1999, the PSID only contained limited information on food, housing, and child-care costs. While several studies have used these measures to impute broader measures of spending (Cooper, 2010), such methods have been criticized in the literature. For example, Attanasio and Weber (1995) show that the elasticity of intertemporal substitution is poorly estimated when using food as a proxy for total non-durable expenditures. This is caused by non-separability of food from other expenditures, the fact that food is a necessity while other goods are not, and the fact that the relative prices of food fluctuate over time. Since business-cycle fluctuations in imputed aggregate spending values are likely driven by food expenditures rather than demographics, these measures are poorly suited for the purposes of this paper.

Starting in 1999, the PSID began collecting data on several broad categories of household spending. In addition to food, housing, and childcare questions asked prior to 1999, ques-

tions on transportation expenditures, education, and healthcare were added.22 _{The baseline}

consumption measure used in this study is an aggregate of all consumption categories asked in the PSID as of 1999. These include total spending on food, shelter, transportation, ed- ucation, childcare, and health. Together, these categories comprise 72% of expenditures reported in the Consumer Expenditures Survey (CES) and align closely with each spending category over the time frame (Geng Li, 2010).

In addition to consumption data, the PSID provides data on sources of household income and wealth in higher detail than the CES. Households are asked questions about pre-tax income from jobs, businesses, and assets for the head, spouse, and other members of the household. These numbers are aggregated to a family-level pre-tax income. Due to changes in the PSID’s procedures for imputing tax liabilities across waves, I use NBER’s TaxSim program to consistently estimate federal and state tax liabilities for each household based on their filing status, pre-tax labor and asset income, and various deductions reported in the survey. After-tax income, as estimated by the TaxSim program, are used as the primary measure of income. Use of pre-tax income levels does not affect results substantively.

The PSID also includes wealth supplements asked every 5 years prior to 1999 and in each 2-year wave thereafter. These questions collected data on both levels and changes in the family unit’s net wealth in cash and liquid assets, stocks, annuities/pensions, real estate, businesses, vehicles, and other savings or debt. These variables provide a picture of the household’s financial and housing wealth and debts, and allow me to better control for variations in non-housing wealth over time.

22_{A more comprehensive set of measures were added in 2005, including home repairs and furnishings,}

clothing, vacation trips, and recreation. These categories comprise nearly all spending covered by the CES, but are only available during the short time-frame from 2005-2011. Unfortunately, these data provide only a limited time series that overlaps largely with a single economic downturn.