Monday, January 28, 2013

Krugman points out

Krugman's Graph: Overall Private Saving as a Share of GDP

Krugman points out this graph that shows "The trend before the crisis was down, not up". Krugman points out that overall "saving dropped as inequality rose". Krugman points out that the graph contradicts our belief that "the rich spend too little of their income." So it seems.

Confronted with this evidence, what are our options? We can accept the graph, and abandon what we think we know about the spending of the rich.

Or we can raise an eyebrow at the graph, and fail to jump to conclusion: Look for more evidence, and meanwhile try to figure out what Krugman's graph is showing us.

The latter is my lot.

I do not come naked to this fight. I have the MPC -- the Marginal Propensity to Consume. The MPC says that as income goes up, saving goes up faster. So in an economy confronted by growing inequality, people at the high end will be saving more. This is standard fare. But Krugman's graph seems not to show it. I wonder why.


Greg said...

Not sure where to start here.

Not sure what the graph is really measuring to be honest... GPSave/GDP? The Gross product saved as percentage of GDP? This does not sound like a monetary analysis more like a look at real goods.

This could likely mean we were simply consuming more during that time (which we were). If we are net consuming then saving will fall........ by definition.

No one is saying that everyone wasnt consuming during the run up to the crisis, but the inequalities in incomes which occurred over the last few decades changed the MEANS of consumption to be different for the 1% and the 99%

The real question then becomes .....How were we consuming? Out of debt for the average person, lots of it, relative to their income. So why did they feel comfortable taking on so much debt relative to income? Because that which they were buying was going to increase in value sooooooo much they would easily offset the debt when they sold it. Ill buy a 400,000$ house today and push myself to my debt to income limit for a while (get house poor) if I think that in three years Ill have a 700,000$ house I can sell, pay off the 400,000 and keep 300,000

Now it must be said I think, that in fact we always consume out of our income. It simply a matter of whether we are spending our income on yesterdays consumption or todays consumption. Ideally we are spending most of our income on todays consumption (and saving for tomorrows too) not yesterdays. When we spend too much of our income paying yesterdays bills we cant get as much today.

Greg said...

Oh and BTW..... the answer to the "paying too many of yesterdays bills today" problem is NOT, cut everyones incomes so it makes paying all bills, yesterdays AND todays, harder.