Home Economics There's No Economic Idea Too Stupid For Someone Not To Believe It

There’s No Economic Idea Too Stupid For Someone Not To Believe It

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Yes, of course, the poor folk out there are the salt of the Earth and the core of the ideals of our nation. Further, the spending of the poor is pure and sacred in a manner that the splurging of the plutocrats on yachts just isn’t. Clearly, there need be no elucidation of that.

Yet it’s still true that there’s no economic idea out there that’s too stupid for someone not to fall into the trap of believing it.

So, there is an observation that can be made, it’s about the marginal propensity to save or, it’s inverse, the marginal propensity to consume. Rich folks save some of their income. Well, that’s not actually true as quite a lot of rich folks sell off what they own to live but leave that aside. High income earners save some of their income. Poor folks don’t save. They’re so gasping for a foetid crust that every $ coming in the door gets spent immediately.

Well, OK, this isn’t true either but it’s largely true as an average across income groupings and it’s certainly true enough for economics. The poor spend a greater portion of their income, immediately, than the richer do. So, if we want government to give away money that then gets spent then we should give that money to the poor not the rich. Sounds like a plan.

Except. We’ve also got evidence that Ricardian Equivalence – or something with the same effect – holds. Which is that if folks get free money they don;t spend it, they save it. The Ricardian bit is that peeps realise that taxes will rise in the future to pay for what they’ve received, thus they save to meet the tax bill. We don’t actually have much evidence of that bit.

But we do have evidence from the last time that direct giving money to peeps stimulus was tried. Late Bush/early Obama. Stimulus checks went out and most of them seemed to be saved. A few hundred bucks is, perhaps, “special money” that gets saved. On the other hand the reduction in social security taxes was a few tens of dollars in each two weekly paycheck (the US largely still works on fortnightly paychecks). This part of the stimulus tended to be spent. A few tens of dollars is not that special money that gets spent.

So, empirically, we’d think that small amounts often – adding up to the same amount – are better than occasional big checks if stimulus is what we want to do:

One particularly effective way of increasing that multiplier would be to give cash assistance, like the $1,200 checks that went out to many Americans in the spring. Money that goes to those that need it most is generally a more successful stimulus arrangement, because those people tend to spend the money and put it back into the economy instead of saving it.

And millions of Americans are increasingly in need: According to Census Bureau data, one-third of adults in the US are having trouble paying for usual household expenses. “We know that [money] is just going to right back out the door when they get it,” said Hersh, the director of Washington Global Advisors and a research associate at the Political Economy Research Institute at the University of Massachusetts Amherst.

Aren’t progressive economists so wonderful? Arguing for exactly the opposite of what we know is true. And here is what did happen with those $1,200 stimulus checks:

They got saved. The savings rate peaked at the highest we’ve ever seen it in the modern American economy. As the Federal Reserve reported people – largely – paid down revolving debt, paid off their credit cards that is. Most of the stimulus didn’t actually happen back then in the spring. It’s happening now as consumer spending is holding up because people have usable credit balances on their cards.

We might still think it’s all sensible policy but immediate that ain’t.

Sigh. If progressive just meant people disagreeing with me on the goals and aims of policy then I’d not have such a problem with it. It’s the way that progressives disagree with reality that causes so much pain.

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9 COMMENTS

  1. If you call paying off debt as equivalent to saving (they both increase my wealth, albeit from a negative amount to a less negative amount), then that’s exactly what I do if I have a windfall* – pay off a chunk of mortgage. Whereas wages seem to disappear without thought.

    *My “windfalls” are usually a tax refund after the end of the year after I’ve submitted my return. So that’s a way of diverting income into savings. If my income was sufficiently consistent that PAYE would take exactly the right amount each month, I’d spend the remaining. Instead, at the end of the year I save the remaining.

  2. It also seems that if I get an increase in income that I expect to continue, I’m more likely to spend it because there’s another $10 coming along in 2 weeks. If my circumstances worsen I’ll divert the extra $10 every 2 weeks. Once you spend the one-time $1,200 you can’t reverse it, so saving some/all of it seems more important.

  3. In answer to the headline statement, it is quite correct, and the ones who believe it are economists. Which shows (at least to my satisfaction) that all economic theory is mere opinion and it is more based on personal prejudice than anything which can be tested or proven.

    Like Pigou taxation.

    • Yes, but we’ve just seen that stimulus checks were preferentially saved, and that’s not mere opinion. To the extent that economics explains aggregate behaviour it is, perhaps not a science, but a discipline.

  4. That’s what I did with that $1200 Santa money – paid off the last bit of my student loan. I could have paid down some credit card balance, which was at a higher interest rate, but I wanted that government loan off my back.

    With savings interest rates so low, it makes more economic sense to me to pay down debt which carries a higher interest rate, than sock $$ away in an account earning less than 1% interest. I still save a little money from each paycheck, in case I lose my job again, but anything large-ish goes toward that credit card debt.

    • In terms of the economics being talked about here, you’re still reducing your net debt / increasing your net assets, and therefore “saving”, whether pay off your debt or you stick it in an account that’s explicitly labelled as “savings”. Indeed one of the ways that higher interest rates encourage saving is they make your debt interest scarier and worth repaying faster. The key point is you didn’t consume it…

  5. This same concept is a reason why the “thinkers” should leave ordinary Americans alone to overpay their federal income taxes through the year in the expectation of receiving a refund (windfall) after the settling up process. The refund is frequently saved or used to pay down mortgage or credit card debt. People probably can’t coherently explain it to economists’ satisfaction but they know they are doing something ultimately beneficial to their financial well-being.

  6. I’m also a bit mystified how people reducing their debt or increasing their savings is viewed as a negative. And, especially if the economy is in a dodgy state, the responsible thing to do is get your house in order. “Hmm, we’re in a recession, my hours may be cut back, let’s go buy a new HDTV” – yeah, that’s what people should be thinking.

    • It’s about which problem the intervention is designed to solve.

      For medium-term economic resilience, sure, getting a bit further away from running out of spending power is a great thing. What the original article is aiming for is a jump start as things thaw from the Covid freeze. So getting cash spent now is the goal. To avoid the friction of retrenchment/hiring or bankruptcy/auction/rebranding/… and the reduced risk appetites as a result.

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