Figure 1: Coping with a "Financial Emergency"
Notes The question comes from the 2022 wave of the Federal Reserve Board's Survey of Consumer Finances (SCF). Specifically, the question (x7775) asks: "If tomorrow you experienced a financial
emergency that left you unable to pay all of your bills, how would you deal with it?" We disaggregated the responses to this question based on another question within the survey (x7510): "Over the past year, would you say that your (family's) income spending exceeded your (family's) income, that it
was about the same as your income, or that you spent less than your income?" We denote a `saver' as those who answered that their income exceeded their spending; the `constrained' (liquidity constrained) are those who responded that income and spending were about equal. Note that `savers' and
'constrained' refer to an intertemporal optimization framework: consumers who have spending equaling income are at a kink in the budget line, which, while it could happen by chance, we interpret as being liquidity constrained.
In this figure, we collect data from the 2022 Survey of Consumer Finances (SCF), Federal Reserve Board of Governors. We create vertical bar charts representing the shares of survey participations who choose specific response options to the question: “If tomorrow you experienced a financial emergency that left you unable to pay all of your bills, how would you deal with it?”. The response options are options to draw down savings; work more; borrow money; delay payments or to cut back on spending. The evidence is presented for two groups: “Credit Constrained” (dark gray bars) – Those who report in the SCF that their spending either exceeded or was equivalent to their income; and for “Saver” (light gray bars) – Those who report in the SCF that their income exceeded their spending. Among both the groups, the highest share of respondents report that they would draw down savings (40% for Credit Constrained, 68% for Savers). This second-most cited response was to work more (30% for Credit Constrained and 20% for Savers). This was followed by the share who said they would borrow more, they would postpone payments, and they could cut back on spending, respectively.
Figure 2: County-Level Example from Massachusetts: New Hampshire's 2009 Ceiling
Notes: The quasi-experimental research design is a difference-in-differences methodology. The treated group consists of Massachusetts workers who live "close
to" New Hampshire, where `close' is defined as having the geographic centroid of their county within 25 miles of the geographic centroid of the county of a state that has a restrictive interest rate ceiling in place; the ceiling is passed within the sample period, thereby exposing these workers to
the treatment. The control group is Massachusetts workers who live "close to" a state that has no such restrictive interest rate ceiling in place. Essex County, Massachusetts has its geographic center within (approximately) 25 miles of a Rockingham County, New Hampshire. Bristol County,
Massachusetts has its geographic center within 25 miles of Bristol County, Rhode Island. New Hampshire implemented (and enforced) a restrictive interest rate ceiling on small-dollar loans in 2009, while Rhode Island implemented so such restrictive legislation. All other Massachusetts counties are
eliminated from our samples because they received the treatment--a binding interest rate ceiling--in the pre-sample period: Massachusetts's interest rate ceiling goes back to 1898. Map credit: www.mapchart.net
In this figure, we show a map of two Massachusetts (MA) counties Essex and Bristol, to provide an example explaining how two counties from a state that has always prohibited payday lending could enter our difference-in-differences empirical framework as a part of the control group and as a part of the treated pool. To elaborate, Essex county, Massachusetts is located near the state of New Hampshire (its geographic center within 25 miles of Rockingham County, New Hampshire). While Bristol County, Massachusetts has its geographic center within 25 miles of Bristol County, Rhode Island. While New Hampshire implemented (and enforced) a restrictive interest rate ceiling on small-dollar loans in 2009, Rhode Island (a payday permissive state) implemented no such restrictive legislation. Therefore, while residents of Bristol, MA have the choice to access payday loans from their neighboring state Rhode Island, residents in Essex county, MA had access to payday lending in New Hampshire until 2009, but their access got restricted when New Hampshire imposed a prohibitive interest rate ceiling on small-dollar loans in 2009. As such, in our empirical analysis, Essex county residents would be a part of the treatment group and Briston county residents would be a part of the control group.