Response of Consumer Debt to Income Shocks: The Case of Energy Booms and Busts
Abstract
Understanding how consumers respond to income and wealth shocks is a coretopic in economics. Economic theory indicates that consumers spend gains in income
differently depending upon whether they view increases as permanent or transitory in
order to smooth consumption. To test this theory, economists have often used abrupt
changes in income to estimate changes in consumption. Researchers can also leverage
quasi-natural experiments that allow for the estimation of differential effects of responses
across space and time. This paper investigates how consumers respond to local income
shocks as a result of booms and busts in oil and gas development. Oil and gas
development generates potentially large streams of income via wages and salaries to
workers and royalty income to mineral right owners. Changes in development may lead
consumers to increase their debt depending upon their exposure to income shocks. Using
quarterly information on consumer debt and oil and gas activity, I find that consumer
debt increased at a peak of $840 per capita in counties with shale endowment and
increased drilling. At the margin each well drilled was associated with $6,750 in
consumer debt. I find that the marginal response in previously undeveloped counties is
over three times higher compared to counties previously developed. My results suggest
that areas with previous development likely do a better job of internalizing that booms in
development often giving way to busts. This is consistent with consumers in these areas
viewing income shocks arising from oil and gas development as more transitory. As a
result, consumers in previously undeveloped areas may be most at risk of the irrational
exuberance that good times will continue indefinitely, and therefore, be more at risk of
default on their debt during busts in development.