Alaskans Get an Annual Check from the State. How Do They Spend It?
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Finance & Accounting Economics May 4, 2017

Alaskans Get an Annual Check from the State. How Do They Spend It?

The answer depends on a family’s income, but not in the way many economists expected.

Wealthier Alaskans use annual dividend payments as fun money?

Based on the research of

Lorenz Kueng

Let’s say the government sent everyone a check for a thousand dollars each year. Would people spend the money immediately or squirrel most of it away? And how does this differ for families with higher versus lower annual incomes?

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This is not a hypo­thet­i­cal ques­tion. In Alas­ka, most res­i­dents receive annu­al div­i­dend pay­ments from the state’s Alas­ka Per­ma­nent Fund (APF). The fund, estab­lished in the 1970s, gen­er­ates the mon­ey by invest­ing oil-relat­ed rev­enue. While the div­i­dend amount fluc­tu­ates from year to year, the media’s fore­casts are gen­er­al­ly accu­rate, and the offi­cial num­ber is announced short­ly before checks are issued each Octo­ber. For Alaskans, the APF offers a fair­ly pre­dictable source of extra income.

The state’s unique sit­u­a­tion allowed Lorenz Kueng, an assis­tant pro­fes­sor of finance at the Kel­logg School, to test some ideas about con­sumer spend­ing. Under­stand­ing how peo­ple respond to a check from the gov­ern­ment could help pol­i­cy­mak­ers design more effec­tive eco­nom­ic stim­u­lus pro­grams, which are geared toward infus­ing the econ­o­my with a lot of con­sumer spend­ing all at once. 

Increased spend­ing boosts demand for prod­ucts and ser­vices and can thus affect employ­ment, invest­ments, and inter­est rates. Yet, if peo­ple are squir­rel­ing their mon­ey away, then the spend­ing boost might not happen. 

Kueng found that Alaskans tend to spend a good chunk of their div­i­dend checks quick­ly — thus pro­vid­ing a clear eco­nom­ic stim­u­lus. But much of that is dri­ven by rich­er house­holds. The results con­tra­dict an assump­tion among many econ­o­mists that low­er-income peo­ple, who have less sav­ings and cred­it, are more like­ly to spend the mon­ey right away. 

This is one of the old­est ques­tions in empir­i­cal eco­nom­ics. It’s at the heart of a lot of the dis­agree­ments in the profession.”

Even if it is not com­ing from the expect­ed demo­graph­ic, the study sug­gests that, at least in this par­tic­u­lar sce­nario, these gov­ern­ment checks have a large impact on the local economy.

Every year, high­er-income house­holds pro­vide a lot of stim­u­lus to the Alaskan econ­o­my,” Kueng says. 

Spend or Save?

Kueng’s research address­es the long-debat­ed ques­tion of how con­sumers respond to changes in income. This is one of the old­est ques­tions in empir­i­cal eco­nom­ics,” Kueng says. It’s at the heart of a lot of the dis­agree­ments in the profession.” 

In the 1930s, econ­o­mist John May­nard Keynes sug­gest­ed that peo­ple spent a fair­ly con­stant frac­tion of any mon­ey that came their way. For instance, if a per­son usu­al­ly spent 30% of his salary and then received a $1,000 bonus, he would spend about $300 of that payment. 

A cou­ple decades lat­er, econ­o­mist Mil­ton Fried­man argued that con­sumers were more for­ward-look­ing. Instead of spend­ing extra income right away, they would try to smooth out spend­ing over a longer time peri­od. This idea is called the per­ma­nent income hypoth­e­sis.” The hypoth­e­sis also con­tends that con­sumers start spend­ing extra when they learn that their long-term income may increase, which can hap­pen before they actu­al­ly receive that money. 

The cur­rent con­sen­sus lies some­where between those two the­o­ries, Kueng says. Some researchers have report­ed that peo­ple do spend a sub­stan­tial frac­tion of eco­nom­ic stim­u­lus pay­ments from the gov­ern­ment imme­di­ate­ly after receiv­ing them. But this spend­ing is often con­cen­trat­ed among poor­er house­holds. So per­haps their behav­ior could be due to a lack of sav­ings and cred­it, and not because they were choos­ing not to be for­ward-look­ing. Plus those checks were fair­ly small — typ­i­cal­ly a few hun­dred dol­lars per house­hold. If the pay­ments were big­ger, per­haps con­sumers would be more ratio­nal and spend less of the money. 

Enter the APF. The pro­gram pro­vides a good test of this lat­ter argu­ment because the checks are quite large, typ­i­cal­ly about $1,000 to $2,000 per per­son and about $4,000 for the typ­i­cal Alaskan house­hold. Anoth­er advan­tage is that Kueng could bet­ter sep­a­rate the effects of the pay­ments from oth­er fac­tors. Spend­ing pat­terns after a stim­u­lus pro­gram might part­ly reflect the cri­sis that led to the stim­u­lus in the first place, but the APF div­i­dends are less close­ly tied to the economy. 

Pre­dictable Payments

To gath­er data, Kueng turned to a per­son­al finance web­site where peo­ple logged spend­ing by link­ing their cred­it-card accounts, as well as bank-account deposits, includ­ing the div­i­dend checks. He obtained anonymized records on 1,379 Alaskan house­holds from 2010 to 2014; anoth­er 2,191 house­holds in Wash­ing­ton state act­ed as a con­trol group. 

Then Kueng exam­ined spend­ing on ser­vices, such as health care and enter­tain­ment, and so-called non-durable” items that were like­ly to be con­sumed quick­ly, such as food, alco­hol, and cloth­ing. This left out long-last­ing durable” items, such as cars and fur­ni­ture, which he exclud­ed from the study because it would not be clear whether con­sumers bought them in response to the checks or if they would have pur­chased them at some point over the next sev­er­al years anyway. 

He found that on aver­age, Alaskans spent 28% of the div­i­dend check on non-durable items and ser­vices with­in three months of receiv­ing the check. That frac­tion is com­pa­ra­ble to the amount that con­sumers were report­ed to spend from the small­er checks issued as part of pro­grams such as the 2001 and 2008 Bush tax rebates. 

In addi­tion, Kueng found no evi­dence that peo­ple start­ed spend­ing more in antic­i­pa­tion of the Octo­ber pay­ments. He did not see an uptick in the sum­mer, when the media start­ed pre­dict­ing the amount of that year’s div­i­dend, or in Sep­tem­ber, when the amount was for­mal­ly announced. 

Those results con­tra­dict the tenet of the per­ma­nent income hypoth­e­sis that sug­gests that con­sumers change their spend­ing behav­ior when they receive new infor­ma­tion about their income. If that were the case, peo­ple with suf­fi­cient sav­ings and cred­it would have increased their spend­ing in the months lead­ing up to the div­i­dend check. What Kueng saw in the data is clear­ly going against that,” he says. 

Fun Mon­ey

How­ev­er, not all house­holds respond­ed the same way. 

Kueng divid­ed them into five groups based on income, with the rich­est group earn­ing an aver­age of $104,000 per per­son annu­al­ly and the poor­est an aver­age of $16,000. The wealth­i­est house­holds spent an aver­age of 61% of the check in the first quar­ter after receiv­ing it, while those at the bot­tom of the eco­nom­ic lad­der spent only 12%. 

At first, Kueng was sur­prised. But upon fur­ther reflec­tion, he real­ized that house­holds were exhibit­ing near-ratio­nal­i­ty.” Peo­ple may act slight­ly irra­tional­ly — for instance, spend­ing a wind­fall all at once instead of sav­ing it — if the con­se­quences are not severe. They only make mis­takes if it doesn’t mat­ter much for them,” he says. In this case, the rich might treat the div­i­dend check like fun mon­ey that they spend friv­o­lous­ly once a year. 

They could eas­i­ly save it or they could eas­i­ly spend it, and it wouldn’t mat­ter either way,” he says. Low­er-income house­holds, on the oth­er hand, might depend so heav­i­ly on the extra mon­ey that they behave more fru­gal­ly and save most of the pay­ment for crit­i­cal expens­es that will arise later. 

More research is need­ed to under­stand the rea­sons behind the rich house­holds’ behav­ior, Kueng says. It is pos­si­ble that the annu­al div­i­dend has become a social event among Alaskans. Per­haps wealthy peo­ple cel­e­brate each year by going out for a fan­cy meal or shop­ping togeth­er, he spec­u­lates. If so, this might not make it the best vehi­cle for pre­dict­ing respons­es to fed­er­al eco­nom­ic stim­u­lus payments. 

Still, the results cast doubt on sim­plis­tic pol­i­cy rec­om­men­da­tions that all stim­u­lus pay­ments should be tar­get­ed at low­er-income house­holds, he says. 

You’re try­ing to give it to peo­ple that you think are most like­ly to spend it,” he says. That’s why they usu­al­ly tend to tar­get low­er-income households.” 

In addi­tion, hand­ing out stim­u­lus checks to rich peo­ple would be polit­i­cal­ly unpop­u­lar. But he says, we can­not eas­i­ly dis­miss high-income house­holds as not pro­vid­ing any stimulus.” 

About the Writer

Roberta Kwok is a freelance science writer based near Seattle.

About the Research

Kueng, Lorenz. 2015. “Explaining Consumption Excess Sensitivity with Near-Rationality: Evidence from Large Predetermined Payments.” NBER Working Paper No. 21772.

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