Inequality, spending, and GDP

In this article in the New Republic, economists Alan Auerbach and Lawrence Kotlikoff give empirical evidence that the rich spend less in proportion to their wealth than the less well off.

3114c4f1245834a98303e801cbf1c9b8d304b13dAlthough, their article is about how inequality is not as bad as we think if we compare how much people spend rather than their wealth, their conclusion implies that if we made wealth more equal overall spending would go up since the rich are not spending to their full potential. In fact, only in the highest quintile does wealth exceed spending. Thus, the spending of the lower four quintiles is wealth limited and thus would increase if they had more wealth. Now, Rick Gerkin would argue that GDP growth would not increase or may even slow if wealth were redistributed because savings and investment would decrease but that is a separate issue. The bottom line is that there would be an immediate GDP boost if wealth were made equal.

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9 thoughts on “Inequality, spending, and GDP

  1. The correct question is not just what percentage of that rich of their money but the total percentage of all spending that comes from the rich and what the sensitivities are relative to this number. This is the same question for taxes. Even thought the rich in some cases pay a less percentage of the their income on taxes they still contribute the vast majority of all taxes received by the Federal government.

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  2. @kevinmoore The numbers in the graph are total contribution to economy, so it is exactly what you want. You are absolutely correct that the upper middle class pay most of the taxes.

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  3. I wonder how they measure wealth—–i saw that article and if i recall it was basic government data—census, or something. I imagine alot of wealth consists of land, which would be nard to redistribute, though one could i guess do it simply via a wealth tax (as some have proposed). The rich pay m,ost federal taxes because they make most of the mioney—the top 10% make about 40-50% of total income; it used to be the top 20% controlled that. ; There is no consensus about an optimal distribution of income—some rich promote higher taxes, others want lower. These are all political problems in reality—about power of who sets wages. (The so-called marginal utility of work—ie how much product people actually produce —is pretty arbitrary, and a set of conventioins. This has been discussed by S Bowles and H Gintis (SFi) and mentioned in passing by Krugman in NYTs, among many others. . In this world building prisons contribuites to GDP, and hence even crime does. The private prison industry which contracts out from government is lobbying congress for example tio keep marijuana illegal, so they have people to lock up (using tax money of course that supports them).
    If i recall Kotlikoff is an advocate of the ‘fair tax’—abolition of all taxes except the sales tax. That would not affect the distribution of wealth, it appears to me—it would just encourage the wealthy to park their wealth in sturff they dont sell like land, maybe art, etc.
    Some wealth is also in the stock market—theoretically some of this is used for start ups—technological innovation, or expansion. Its hard to know what value these activities have. Like the web, a mixed blessing.

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  4. Decreasing marginal propensity to consume was never in dispute. The real question is what the implications of an instantaneous NGDP increase would be.

    First, my usual “The Fed moves last” critique makes an NGDP change produced by fiscal policy mostly irrelevant. But even if fiscal policy really was driving NGDP, does such an NGDP increase by such a redistribution mechanism desirable qua NGDP increase? Unless this increase is associated with increased productivity or hours worked (and it could be, but that’s hardly implied here), there will be no increase in RGDP, and so the entire increase in NGDP will be purely inflationary. I don’t know if you mean to imply that the “GDP growth” you are touting here is real rather than nominal, but I think your readers would assume that implication, and that would be incorrect.

    This criticism is totally distinct from the consumption/savings tradeoff I brought up before, when I thought you were trying to make a long run RGDP argument. Now I’m afraid you’re making a short-run NGDP argument, which might be entirely vacuous. Kind of like when people say things like “GDP = C + I + G + (X-M), therefore we should increase $variable$ and GDP will increase”, which is an old fallacy.

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  5. @Mart I don’t really know their methodology since I didn’t read the original paper. It seems like they combine a spending survey with tax data.

    @Rick Actually, I do believe there is a lot of slack in the economy. Workforce participation is low and has steadily decreased for the past decade or more. This is partly due to a shift in demographics but also due to a lack of aggregate demand. Thus, I really do think there will be a real increase in number of hours worked and not just an increase in inflation. I think this disagreement boils down to the difference between a Keynesian and new classical macroeconomics viewpoint. Maybe I’m deluded but I think it is more than just an accounting identity although I am certainly not immune to being vacuous.

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  6. This is sort of irrelevant but i looked at the wikipedia (my bible) article on Koltikoff. It descibes his idea of ‘the general relativity of fiscal language’—making an analogy between Einstein’s ideas and economics. There are quite a few analogies like this—lee smolin and others on ‘gauge theory of economics’, and eric weissman (also perimeter institute) applying differential geometry a la einstein to economic systems (an earlier variant was by Sato on ‘symmetry in economics’), and others on information geometry and statistical mechanics.

    These seem to be so far removed from policy issues and standard economic modeling but I find them interesting. (A qualititative discussion using such analogies is also in ‘capital as power’ http://www.bn.archives.yorku.ca — bichler and nitzan, basically a reformulation of marx’s capital which generated alot of disputes—as has Piketty’s treatment of capital).

    I have no real understanding of macroeconomics though I have surveyed some of the basic models—IS-LM, etc. (My understanding is the Fed controls the money supply basically by controlling the money supply using the interest rate—sort of like a using a thermostat. (In the statistical mechanics analogy to economics used by Yakovenko (u Md), the temperature is the average income in society). I interpreted milton Friedman as saying this.

    It is pretty well known that the wealthy can ‘save’ and accumulate wealth. Poorer people live paycheck to paycheck. (Of course, the ‘pull yourself up by your bottstraps’ crowd argue the poorer should even so put something in the bank every week, however small.

    The ‘new classical view’ (i guess robert lucas and precursors—e phelps, etc.) seem to argue there is no involuntary unemployment—the system is always at equilibrium with any transitions or changes being driven by exogenous shocks; The other view is endogenous factors (eg utility functions which .are contezt dependent) are involved—i favor the latter view, though they may be mathematically indistinguishable. (There are alot of papers beginning in the 80’s with many variants of this theme—one can get any pattern by throwing in some ‘imperfect rationality’ assumptions).

    Regarding ‘slack demand’ and low workforce participation, one demographic issue is besides aging, the ‘slacker’ culture (mostly younger people) as well as ecological types. (see ‘the church of stop shopping’). In the black community there is a push to boycott things like ‘black friday’ or other big shopping events—hold on to your money, particularily since black people in usa tend to have very low savings or wealth. Many people take on debt and get more education rather than work, and also many of the jobs around are not particularily attractive.

    Some people argue shortening work hours and job sharing would actually boost GDP; more people could be employed and they would be more productive since they wouldn’t be ‘worked to death’. Indian economist Dasgupta made this point in regard to India—the poor workers there make so little money that they are malnourished, and hence not very productive. Of course, some of this may be by intention–creating what called a ‘poverty trap’ (often modeled as one of 2 stable states in a bistable system, the other state being one without poverty) will preserve the status quo, political power relations, etc.

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  7. @carson
    The cyclical part of the demand shortfall is basically over. Here are some graphs on the employment/population ratio.
    https://research.stlouisfed.org/fred2/series/LNS12300060
    http://noahpinionblog.blogspot.com/2016/02/yes-cyclicalists-really-won-bet.html (see update at bottom)

    Some care is needed to consider the right age groups, account for the rising participation of women in the workforce in the 70’s, 80’s, and 90’s, and other demographic issues like changes in the relative composition of a group like “25-54 year olds” over time. But the window for fiscal policy to address unemployment, if there was one, closed a few years ago. Is there a long-run structural decrease in employment over time? Maybe so, but even the traditional Keynesian view is that this is not a demand-side problem for fiscal policy to fix.

    That being said, I can certainly imagine a future where AI displaces so much labor that massive redistribution will be the only option to sustain demand (not to mention to keep people clothed and fed). But I don’t think that future is here quite yet.

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  8. @rick Given the anger we see across America, I just don’t see how we are at full capacity. Maybe I’m naive, but I really do think the economy could be 25% bigger if everyone was working at full capacity. You could argue that redistribution wouldn’t get us to full capacity and you probably have a point but I just think we are not firing on all cylinders.

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  9. the economy could be be 25% bigger right now if they changed the accounting system.

    robert gordon is one person (economist) who dicussed this. if you count ‘household work’ usually done by women, ‘elder care’ (taking care of older relatives) , etc. you got it.

    thinkprogress has an article too on this .

    alot of work is done that doesn’t get counted in GDP. (i hear the EU was considering adding prostitution or ‘sex work’ intio the national accounts. one of my relatives who’s mom is a very famous AIDS doctor in NYC organized a union when she was doing that in SF . ‘naked ladies unite’ —its on youtube ‘
    but there is way much more.

    Georgetown U (very corrupt place) has an employment studies center. The person who runs it says most jobs are going to be service, health care, senior citiziens, and (super) hi-tech.

    My local stores like CVS and Safeway are using computers for check out. (This way they don’t get robbed—i saw a shootout at the CVS when local people tried to take the Brink truck with the cash from CVS . extraordinarily violent. we had one last week and another one today in front of my apt. when its cold i wear a hood—people tell me to take it off but then they recognize me).

    i’m into a kind of music. in this style often you dont get paid until after you are dead. then everyone likes it (and any money you get goes to someone else).van gogh and edward munch (‘the scream’) probably didnt make no big money but there stuff sells for millions$ now. einstein took a 3000$ salary at IAS which was not poverty level but good enough. how many people in silicon valley are making millions off of einstein’s dream? he also said he was a socialist, and testified in favor of paul robeson (first black person my mom ever met when she interviewed him for her college newspaper–a visiting dignitary. the top ranked ‘north dakota agricultural college’. . she later went o u chicago for grad schooll. (oh yeah, they knew jack cowan too)

    half of the US economy is just garbage anyway. thats half the GDP. also if u look at the data—cbo, census, dept labor statistics, –bls— none of those numbers match up, but they correlate.

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