Thursday, December 19, 2013

A disputed statement is a weak link in a chain of argument

At The Economist, R.A. quotes from an earlier column:

Another theory holds that high savings reflect a cramping of consumption due to rising inequality of incomes. The share of income earned by the top 1% began climbing in the early 1980s and now stands close to the record set in 1928. Rich households save more than poorer ones. A paper published this year by Barry Cynamon of the St Louis Fed and Steven Fazzari of Washington University in St Louis estimates that prolific saving by the top 5% has been suppressing demand since the mid-1980s. That squeeze was mostly offset by increased borrowing by the bottom 95%, they find. America and Britain, unlike Germany and Japan, saw rapid growth in private debt in the 2000s...

The assertion that

Rich households save more than poorer ones.

is something that makes perfect sense to me, but apparently is unsupported by evidence. Of course, Cynamon and Fazzari disagree.

Like Krugman, I’d like to agree. Unlike most everybody with a stick in this fire, I don't know enough about it to contradict anybody. For the sake of this post, however, let's suppose Krugman is wrong, Cynamon and Fazzari are right. So here's where we stand:

[P]rolific saving by the top 5% has been suppressing demand since the mid-1980s. That squeeze was mostly offset by increased borrowing by the bottom 95% [as evidenced by the] rapid growth in private debt in the 2000s.

Let's consider these two groups, the 5% and the 95%. Let's presume income inequality was stable from World War Two until 1980. For simplicity, assume that the income of the 95% was just equal to the income of the 5% before 1980; each group received half of GDP. After 1980 let's suppose income shifts by 1% of GDP each year -- the income of the 95% falls by 1% of GDP and that of the 5% rises by a like amount.

Sounds like an economic model to me. After 25 years of 1% transfers from the 95% to the 5%, half of the 95%'s annual income has shifted allegiance.

But I still don't like the disputed line "Rich households save more than poorer ones." Disputed lines don't make strong arguments.

In a post I didn't recommend, Larry Summers put the five-versus-ninety-five thing in terms I like much better, when he referred to "high-spending debtors" and "low-spending creditors." In such terms, one need not quibble over evidence.


Jazzbumpa said...

Also, note your Krugman link is 11 months old. Recently, he's been more open to the inequality --> secular stagnation idea, as new evidence, or perhaps, more convincing arguments have been presented.

Steve Randy Waldman, while talking recently about the economics of inequality, mentioned in passing that the poor die with negative wealth.

Doesn’t this imply that their spending needs were greater than their ability to spend?

Doesn’t that suggest that if they had a little more, they would spend every penny of it?

A little cash in the hands of people with a negative savings rate is going to get spent on necessities that they lack. You don't need a model or a theory, just a little knowledge of real people in the real world.

Maybe they get a third meal one day a week, a better pair of shoes for the kids or a new pair more often, a five-year-old instead of a seven-year-old used car.

Still – the economic and the moral considerations converge at the low income level. It’s true that economics is not a morality play. However well or ill we understand it, econ, as a natural phenomenon, is a brute force, like gravity. That’s why humans with a moral compass need to intervene.

We don’t let gravity keep us from building bridges.


The Arthurian said...

If we understand it ill, Jazz, the bridge fails. Not even the best intentions are more powerful than econ as a natural phenomenon.

Jazzbumpa said...

The bridge has been failing for 4 decades. Some of it is due to poor understanding, and some of it is due to deliberately redistributing wealth to the top at everyone else's expense.