I have not read the underlying paper, but this summary seemed interesting enough to pass along, via Evan Soltas:
In a new working paper, Ricardo Reis of Columbia University and Alisdair McKay of Boston University…find that stabilizing aggregate disposable income plays a “negligible role” in stabilizing the economy as a whole. Transfer payments can indeed stabilize output, they find, but mainly through a different channel — not by changing disposable income in the aggregate, but by changing its distribution. Fiscal policy, in other words, is all about inequality.
“It’s the redistribution that has a lot of kick,” Reis said in an interview. “The usual argument for transfers is basically Keynesian. We find that has very low impact in our model.”
Reis and McKay reach this conclusion by building a complex macroeconomic model calibrated to U.S. data, but the intuition isn’t all that complicated. Transfer payments yield the highest amount of stabilization per dollar when focused on people who can’t effectively insure themselves against macroeconomic volatility — namely, people with little savings to draw on and limited opportunities to borrow.
…They also find — this is a surprise — that fiscal policy as currently designed does little to stabilize the economy. The most effective transfer programs, Reis says, constitute a small share of all transfers. “When we look at the whole set of stabilizers in the U.S., it turns out that even though food stamps are a plus, all of the other ones have near-zero impact. That means we’re not stabilizing very much,” Reis said.
If distribution matters above and beyond the disposable income variable, that might imply that the sectoral composition of fiscal policy is quite important and that sectoral factors are an important part of any stabilization (or non-stabilization) story.