Saturday, May 18, 2013

Is Wikipedia pulling my leg?

Scott Sumner says "give up on that MPC stuff, it was discredited decades ago".

Paul Krugman says

It’s true that at any given point in time the rich have much higher savings rates than the poor. Since Milton Friedman, however, we’ve know that this fact is to an important degree a sort of statistical illusion. Consumer spending tends to reflect expected income over an extended period.

So that gets us to Milton Friedman.

From the Handbook of consumer finance research, edited by Jing Jian Xiao, this note:

So that gets us to the permanent income hypothesis.

The Friedman reference is to: A theory of the consumption function. Princeton, NJ: Princeton University Press.

Note that the excerpt from the Handbook of consumer finance research is based on "perceived future income"... On expectations. I'm not big on expectations.

Anyway, this is some of what Wikipedia has to say on the Permanent Income Hypothesis:

The permanent income hypothesis (PIH) is a theory of consumption that was developed by the American economist Milton Friedman...

Friedman concluded that the individual will consume a constant proportion of his/her permanent income; and that low income earners have a higher propensity to consume; and high income earners have a higher transitory element to their income and a lower than average propensity to consume.

1. "low income earners have a higher propensity to consume"
2. "high income earners have ... a lower than average propensity to consume"

Sounds to me like it supports the idea of the Marginal Propensity to Consume.

Is Wikipedia pulling my leg?


Greg said...

I find it amazing how many people thought Friedman was some sort of Svengali or something. He sounds more and more like a huckster the more you read him.

Adjust their spending to their "perceived" future income?? Permanent income is "believed" to be what people can count on with "confidence"?

Perceptions, beliefs, confidence, fairies, boogie men.

Come up with story, look at charts, show how charts fit your story, get Nobel prize.

Jerry said...

I don't think it has much to do with "expectations" ... there is just an amount that you need to spend in order to survive. And then there is a second amount, that is significantly higher, that is what you need to spend in order to get by reasonably comfortably.

Anybody who is at or below the first threshold spends 100% (or more) of his income. I suspect that almost everybody who is at or below the second threshold also spends just about 100%.

The top couple deciles are above those thresholds, and so they don't need to spend everything to get by, so they can save it.

It seems obvious to me, but i guess maybe it's something that would never occur to the "just borrow money from your parents" politicians.

Jerry said...

I think that's also why those same guys love sales taxes and "value added taxes" ... those push almost the entire tax burden onto people who have no choice but to spend all of their income in an attempt to get by.

Greg said...

Very good points Jerry

Another problem with these guys is that they think when you are borrowing from a bank you are just borrowing from EVERYONES parents and of course the post loan balance sheets can make it look exactly like that.

Here is what I mean;

Person A gets a loan of 10,000 his bank account is now 10,000 more. Next day he spends it to car dealer B so A's bank account falls by 10,000 but B's rises by 10,000. Now no matter what happens to the money after B gets it it will stay in the banking system as a deposit somewhere so the entire system has 10000 more, "savings" has increased. Lets assume it just stays in B's account

So next day Friedman looks and says "see B's saving funded As loan. We need savers or else people cant get loans" When in fact it was A's loan that provided the funds for B to save

Amazing how many things that seem obvious to most people are explained away by the Sumners of the world as just illusions. Nick Rowe likes to tell people "macro is hard". We cant possibly get this we are trying to simplify it too much.