There has been considerable discussion lately about the phenomenon of increasing concentration of income and wealth, and whether it might be good policy to collect more taxes from wealthy citizens. The standard theory of saving behaviour, known as the ‘Life Cycle’ hypothesis, is not helpful for this debate, nor does the model explain why Bill Gates and Warren Buffet are giving away almost all their wealth before they die, just as steel tycoon Andrew Carnegie (1835-1919) did a century ago.I've just been thinking about this. Personally, I think a sizable percentage of the wealthy are just naturally hoarders. They just won't spend much money, regardless of how much they have. Likewise, some poor people couldn't save money if they were handed a giant pile of dough. As far as stimulation of the economy goes, giving someone like myself a tax cut isn't going to do anything but potentially overvalue the stock market. Giving more money to folks with very little income, on the other hand, will definitely stimulate the economy. Put another way, if somebody handed me $1 million today, I would put that money in the bank and "invest" in some stocks or maybe buy a farm. I would still drive the same 2005 Ford Focus I am currently driving, at least until it seizes up or I run out of replacement parts. Give somebody else $1 million, and I bet they spend most of it. Who is better for the economy, the hoarder or the spender?
The Life Cycle model assumes that the only purpose of saving (accumulation of wealth through sacrifice of consumption) is to finance future consumption. Johns Hopkins economist Christopher D. Carroll in 1997 showed how and why “the model greatly underpredicts the amount of wealth held by the households at the top of the wealth distribution”. His essay is as relevant today as it was 15 years ago.
Monday, June 11, 2012
Why Do The Wealthy Save?
Larry Willimore looks to an old essay to look at savings by the wealthy (h/t Mark Thoma):
Subscribe to:
Post Comments (Atom)
Sustainability is the better question. What is better over a long period of time. Since poor people do not hire people I would argue that what your saying is a bit short sighted. It's the same reason people who win the lottery go broke (quickly) more times than not. So, your right, giving the poor lots of free money would stimulate the economy but when the money runs out we're right back where we started. Obama tried it. The economy has barely budged and we're how much farther in debt? Fortunately, unless something comes out of the Romney closet or he picks a real dumbass for a VP, Republicans will get their shot at repairing the damage. God help us if we continue down the current route and end up like Europe.
ReplyDeleteBush tried giving rich people money, WTF did that do? Made them richer. Did it create jobs? Fuck no. When you give poor people money, they spend it and it ends up back with the rich people, whom you tax and give the money back to the poor. The money the poor are spending keeps people working for the rich people. Lather, rinse, repeat.
ReplyDeleteYes, maybe Romney will lead us to the austerity promised land.