An excellent historical analogy to Miles’s Federal Lines of Credit proposal are the 1931 loans to World War I veterans that I discussed in a guest blog post in August. As I described then, in 1924, Congress promised to pay World War I veterans a large bonus in 1945. When the Depression threw many out of work, veterans lobbied for early payment of the bonus. Congress acquiesced in 1931 by allowing veterans to borrow up to 50 percent of the value of their bonus. The main chapter of my dissertation focuses on the larger payment to veterans that occurred in 1936. In this blog post, I summarize my paper and discuss its possible implications for the success of a Federal Lines of Credit program.
Despite their ability to take loans after 1931, veterans continued to demand immediate cash payment of the entire, non-discounted, value of their bonus. Tens of thousands camped out in Washington, DC from May to July 1932 to lobby Congress and the President for immediate payment (see picture). Rather than agree to their demands, President Hoover allowed General Douglas MacArthur to use soldiers and tanks to evict the veterans from Washington. Soldiers burned down veterans’ shacks in Anacostia. This forcible eviction provoked a political reaction that helped propel Franklin Roosevelt to victory the next year.
Although popular history often emphasizes Roosevelt’s New Deal spending, FDR was in fact a deficit hawk, who raised taxes as much as he increased spending. Consequently, Roosevelt opposed payment of the bonus. But eventually, in January 1936, widespread popular support led Congress to override Roosevelt’s veto and authorize payment.
In June 1936 the typical veteran received $550, more than annual per capita income and enough money to buy a new car. In aggregate, the Federal government issued 3.2 million veterans bonds worth $1.8 billion or 2% of GDP. As a share of the economy, bonus payments were roughly the same size as the American Recovery and Reinvestment Act (the Obama stimulus) in 2009.
This payment had a loan component analogous to a Federal Lines of Credit program since it allowed veterans access to money in 1936 that they were supposed to receive in 1945. Furthermore, taking the money as cash in 1936 came with an interest rate penalty: veterans were issued bonds in $50 denominations and could cash as many or as few of them as they desired. If they held the bonds, they would receive 3 percent interest every year until 1945. Just as one pays interest when one borrows money from a bank, veterans had to forgo interest if they chose to cash their bonus in 1936.
But the 1936 legislation also was an outright gift, since it increased the present value of veterans’ lifetime income. In particular the legislation forgave interest on loans that they had taken against the bonus, and gave veterans in 1936 the same nominal sum they had been supposed to receive in 1945. In my paper, I calculate that for the typical veteran roughly half the bonus amount received in June 1936 was an increase in present value lifetime income.
Effects of the bonus
Out of the $1.8 billion of bonds issued to veterans through June 30, 1936, $1.2 billion were cashed in June and July 1936. A further 200 million were redeemed in late summer and fall. Thus 80 percent of the dollar value of the bonds was cashed in 1936. This in itself suggests large effects from giving veterans access to cash; more generally, it suggests that a program giving individuals access to low interest rate loans, as Federal Lines of Credit would do, can be quite popular.
My paper explores whether and how veterans spent this money. The primary source of evidence is a household consumption survey administered by the Works Progress Administration and the Bureau of Labor Statistics in 1935 and 1936. By exploiting variation in when households were surveyed and in the likelihood that a household included a veteran, I estimate a marginal propensity to consume (MPC) out of the bonus of 0.7, meaning that out of every dollar of bonus bonds received, the typical veteran spent 70 cents. This result is confirmed by other, independent, sources of evidence.
Interestingly, an MPC of 0.7 is as large as that measured from the 2001 tax rebates and 2008 stimulus payments, programs that did not have a loan component. If veterans’ spending were only influenced by the part of the bonus that represented a change in the present value of their lifetime income, then it would be almost impossible to explain the amount of spending I observe. An MPC of 0.7 out of the total bonus implies a MPC out of the increment to lifetime income of about 1.4 (since the increment to lifetime income was roughly half the bonus amount). This is implausible. Instead, the much more likely explanation is that veterans’ spent more in 1936, not only because their lifetime income was higher, but because the bonus meant access to a low interest rate loan at a time when liquidity constraints were pervasive.
Further evidence on the bonus’s effects comes from differences in the proportion of the population made up of veterans across states and cities. This variation meant significant geographic variation in bonus payments received. The figure at the top of this post juxtaposes the change in new car purchases from 1935 to 1936 in a state against the number of veterans per capita as measured in the 1930 census in that state. The slope implies that for every additional veteran in a state, roughly 0.3 more new cars were sold in 1936. In the paper, I show that this result is robust to controlling for a variety of different possible confounding variables.
A third source of evidence on veterans’ spending behavior is an unpublished survey by the American Legion that asked 42,500 veterans how they planned to use their bonus. Veterans told the American Legion that they planned to consume 40 cents out of every dollar and to spend an additional 25 cents out of every dollar on residential and business investment. Evidence from the 2001 and 2008 Bush tax rebates suggests that such ex ante surveys are likely to significantly understate the total cumulative spending response (see section 5 of my paper for more on this argument). Thus, the prospective MPC of 0.4 measured in the American Legion Survey is consistent with an actual MPC that was significantly higher.
Aggregate time series are also consistent with a large spending response. GDP grew 13.1 percent in 1936, more rapidly than in any other year of the 1930s. In the paper, I estimate that the bonus contributed 2.5 to 3 percentage points to this growth.
My results are encouraging evidence for the efficacy of Federal Lines of Credit, since they suggest that even when a large portion of a transfer payment is a loan (roughly half in the case of the veterans’ bonus), the MPC can be high. 2012 is not 1936, of course, and particular features of the 1936 economy may have contributed to unusually high spending from the bonus, specifically on durables. Still, at a minimum, my results suggest that further research on the efficacy of Federal Lines of Credit is desirable.
The Bonus March photo is from http://www.loc.gov/exhibits/treasures/images/at0058f2as.jpg
All other material is taken from my job market paper, with sources documented there. One other paper, Telser (2003), examines the 1936 bonus in detail. Telser studies a variety of time series and concludes that the bonus “brought a large measure of recovery to the economy” (p. 240).
I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research (NBER) in the Public economics group. You can follow me on twitter @omzidar.
- 2012 Alan Auerbach Baumol's cost Brad Delong Budget Capital Capital Taxation Christy Romer College Corporate Taxes david autor debt Dylan Matthews Economic Growth Economic Policy Education Emmanuel Saez Enrico Moretti Europe Finance firms Fiscal Cliff Fiscal Policy Government Government Spending Great Recession Growth Hamilton Project Healthcare Healthcare Costs Housing Housing Finance Immigration Incidence inequality Innovation Investment Jeremy Stein Jobs Labor Labor Markets Labor Share larry summers Laura Tyson Local Labor Markets Macroeconomics Medicare Middle Class mobility Monetary Policy NYTimes Pat Kline Paul Krugman Political Economy Politics Productivity Profits Raj Chetty Recovery Regulation Robots Spending States Stimulus Taxation Tax Cuts for Whom Taxes Tax Reform Technological Change Thomas Piketty Trade Unemployment Wages Wealth Yuriy Gorodnichenko
- Improving Opportunities for Economic Mobility: New Evidence and Policy Lessons
- Great to see research of my colleagues in today’s NYTimes
- What do leading economists think about Local Tax Incentives?
- Research Assistant Opportunities at Chicago Booth
- 11 Interesting Charts from the CEA’s Economic Report of the President
- Corporate Profits, Wages, and Shared Prosperity: Interview with President Obama
- Do Dividend Tax Cuts Increase Investment and Hiring?
- Evaluating Public Programs with Close Substitutes: The Case of Head Start
- One-Time Bonuses and Perks Muscle Out Pay Raises for Workers nyti.ms/1JRxt7k 1 day ago
- RT @MEDevEcon: Welcome | R Tutorial for Stata Users by Matthieu Gomez, Finance PhD student at Princeton princeton.edu/~mattg/statar/ 1 day ago
- RT @nberpubs: Chetty, Hendren, & Katz’s new paper on mobility out of poverty bit.ly/1B1Ic7U 1 day ago
- Illinois Scrambles for Solutions to a Mounting Pension Crisis nyti.ms/1eqkH3K 1 day ago
- A one-sentence letter written in support of his application to Princeton’s doctoral program in math said simply, “This man is a genius.” 2 days ago
- May 2015
- April 2015
- March 2015
- February 2015
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012