One more on inequality

From the old Krugman post, quoted in an old Interfluidity post... Something finally hit me when I was re-reading the paragraph:

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. If you take a sample of people with high incomes, you will disproportionally include people who are having an especially good year, and will therefore be saving a lot; correspondingly, a sample of people with low incomes will include many having a particularly bad year, and hence living off savings.

Look at the first sentence in that quote:

It’s true that at any given point in time the rich have much higher savings rates than the poor.

That's the important part. It makes the Marginal Propensity to Consume a correct interpretation of the facts. The rest is bullshit.

The rest of the paragraph, the reiteration of Milton Friedman, makes it sound as if, in any sample of people with high incomes, most of them will be poor people who by chance are having a good year. It doesn't really say that, of course. It says a "disproportionally" high percentage of them will be poor people having a good year.

That disproportionally high number might be two percent.


At Cafe Hayek, Boudreaux quotes from some report:

Fully 20 percent of U.S. adults become rich for parts of their lives...

The new rich have household income of $250,000 or more at some point during their working lives, putting them — if sometimes temporarily — in the top 2 percent of earners….

The excerpt also says the temporary new rich remain in the top 2% "for at least a year". I take that to mean that most of them drop out of the top 2% after little more than a year. For if most of them stayed for three years or more, the excerpt would have said that the temporary new rich remain in the top 2% for at least three years.

That, they didn't say.

Boudreaux reiterates: "fully 20 percent of Americans are, for some portion of their working lives, in the top two percent of income earners in America." (Emphasis his.)

He also quotes this, from the same report:

Even outside periods of unusual wealth, members of this group generally hover in the $100,000-plus income range, keeping them in the top 20 percent of earners.

In other words, most of these new rich, most of the 20% of earners that get a year or so in the top 2% at some point in their career, most of them come from the top 20% of earners.

Statistically, then, everybody in the top 20% gets a year or so in the top 2% and also, maybe 2% of everybody else.


"If you take a sample of people with high incomes," Krugman says, "you will disproportionally include people who are having an especially good year..."

Disproportionally, yeah. But few.

In my opinion it is ridiculous to suppose that people moving briefly into the top 2% are the only ones who save more than average.