Why did people hoard cash during COVID and then spend like crazy right after?
Background
Consumption is both the simplest and most contested piece of macro. Everyone agrees it is the biggest GDP component. The disagreement is about what drives it -- and that disagreement has direct consequences for how we evaluate tax cuts, transfer payments, and monetary policy transmission.
The gap between theory and data is real. Euler-equation-based models assume forward-looking optimization. Empirical evidence shows that a substantial share of spending tracks current income, which matters a great deal for fiscal multiplier estimates.
What it covers
Household consumption typically accounts for 65-70% of U.S. GDP. The decision to consume or save determines how much demand the economy generates in the short run and how much capital it accumulates for the long run.
Keynes emphasized the marginal propensity to consume: the fraction of additional income that gets spent. Friedman's permanent income hypothesis and Modigliani's life-cycle hypothesis both argued that households smooth consumption over time, responding less to temporary income changes than Keynes assumed. Modern behavioral research adds liquidity constraints, precautionary motives, and present bias to the picture.
Open question
When household spending changes, is it driven by income, wealth, interest rates, confidence, credit access, or a shift in how people think about the future?