What produces great economic inequality?

[Bomb#20]

"The Millionaire Next Door" advocates what is essentially a miser strategy, living a life of self-imposed poverty.

That's not really an accurate characterization; but never mind that...

But if everybody tried to be misers, then the economy would collapse from lack of consumer demand. Contrary to what many right-wingers seem to think, consumers don't get their money off of money trees.

If everybody decided to save money by living in tents, the housing industry would collapse and everybody employed in it would be out of work. If everybody decided to save money by not traveling, the travel industry would collapse and everybody employed in it would be out of work. If everybody decided to save money by using cast-off junk as furniture, then the furniture industry would collapse and everybody employed in it would be out of work. Etc.

The result: mass unemployment and an inability to pursue that strategy.

Why do you believe that? If everybody decided to do without horses and get around on bicycles or streetcars, yes, the horse-dealing business would collapse and everybody employed in it would be out of work, true; but why would you imagine you can extrapolate that to the whole economy? I don't see a lot of horses around, and yet people are generally buying and selling a lot more than they did back in horse-riding days.

If everybody chose to live frugally, why would you assume demand would fall, rather than simply being redirected to buying different stuff from before? If everybody is someday persuaded by the TMND strategy and they all start doing without new cars as long as their old cars still work, it will probably be because they want to invest their money instead -- which is to say, because they want to spend it: on production of something* people still want to buy.

(* Probably production of something other than cars.)

 

[Derec]

What one finds is a weak correlation with a LOT of scatter, not a strong correlation with no scatter, what Trausti seems to be advocating.

Human beings are complex things with a lotta ins, lotta outs and lotta what-have-yous. Lots of variables too that cannot be easily controlled for.
So a lot of scatter is to be expected.

 

[Derec]

If everybody chose to live frugally, why would you assume demand would fall, rather than simply being redirected to buying different stuff from before? If everybody is someday persuaded by the TMND strategy and they all start doing without new cars as long as their old cars still work, it will probably be because they want to invest their money instead -- which is to say, because they want to spend it: on production of something* people still want to buy.

(* Probably production of something other than cars.)

If you live more frugally, you spend less overall on goods and services. Investing is not the same as spending.
And if everybody did likewise, those investments would not do nearly as well as otherwise, as people would spend less, and thus the businesses you invest in would make less profits because they sell less stuff.

 

[Axulus]

If everybody chose to live frugally, why would you assume demand would fall, rather than simply being redirected to buying different stuff from before? If everybody is someday persuaded by the TMND strategy and they all start doing without new cars as long as their old cars still work, it will probably be because they want to invest their money instead -- which is to say, because they want to spend it: on production of something* people still want to buy.

(* Probably production of something other than cars.)

If you live more frugally, you spend less overall on goods and services. Investing is not the same as spending.
And if everybody did likewise, those investments would not do nearly as well as otherwise, as people would spend less, and thus the businesses you invest in would make less profits because they sell less stuff.

Selling less stuff to _consumers_. Doesn't mean that business spending/investment couldn't make up for a significant chunk of that. We'd probably see firms investing a greater chunk into capital and R&D, assuming that the frugal individuals weren't also super risk averse.

 

[Derec]

Selling less stuff to _consumers_. Doesn't mean that business spending/investment couldn't make up for a significant chunk of that. We'd probably see firms investing a greater chunk into capital and R&D, assuming that the frugal individuals weren't also super risk averse.

If companies selling to consumers are selling less stuff, then companies selling to businesses will sell less to them too. Consumers are terminal acceptors of goods and services.

 

[Axulus]

Selling less stuff to _consumers_. Doesn't mean that business spending/investment couldn't make up for a significant chunk of that. We'd probably see firms investing a greater chunk into capital and R&D, assuming that the frugal individuals weren't also super risk averse.

If companies selling to consumers are selling less stuff, then companies selling to businesses will sell less to them too. Consumers are terminal acceptors of goods and services.

If consumers are frugal, it means that companies will need to find ways to innovate by spending on R&D to lower costs. They will sell goods/services at low cost and companies will innovate to reduce costs and automate as much as possible, for which there will be plenty of cheap capital available to purchase automation.

There is no reason why consumer spending couldn't drop by, say, 10% of GDP and have investment spending increase by 10% of GDP over time, and for there to also be lower debt levels and higher equity levels. Additionally, once frugal individuals build up enough savings they'll actually end up spending more later in life since they would have wealth built up through savings/investment returns and little debt service, allowing them to consume more.

Alternatively or in combination, we might see work weeks reduced in number of hours and leisure time increase.

 

[DBT]

Low income earners may not be able to afford reduced working hours unless their hourly pay rate is increased to the point that their income is not reduced by working a shorter week. A higher rate of pay combined with shorter working hours, perhaps achieved by more efficient work practices and higher productivity.

 

[laughing dog]

Even if consumer spending in the US dropped by 10%, as long as investment spending on physical assets (equipment and structures) and exports increased by 10%, overall production and GDP would remain constant.

 

[TV and credit cards]

Selling less stuff to _consumers_. Doesn't mean that business spending/investment couldn't make up for a significant chunk of that. We'd probably see firms investing a greater chunk into capital and R&D, assuming that the frugal individuals weren't also super risk averse.

If companies selling to consumers are selling less stuff, then companies selling to businesses will sell less to them too. Consumers are terminal acceptors of goods and services.

If consumers are frugal, it means that companies will need to find ways to innovate by spending on R&D to lower costs. They will sell goods/services at low cost and companies will innovate to reduce costs and automate as much as possible, for which there will be plenty of cheap capital available to purchase automation.

There is no reason why consumer spending couldn't drop by, say, 10% of GDP and have investment spending increase by 10% of GDP over time, and for there to also be lower debt levels and higher equity levels. Additionally, once frugal individuals build up enough savings they'll actually end up spending more later in life since they would have wealth built up through savings/investment returns and little debt service, allowing them to consume more.

Alternatively or in combination, we might see work weeks reduced in number of hours and leisure time increase.

Bold: Not necessarily. Anecdotally, what I've seen is people who are frugal without an end goal (e.g., children's education, extensive travel later in life) cannot spend. They have spent their entire lives watching their savings grow and reaching some particular age does not trigger a desire to spend. Their savings is their "precious". Not all find enjoyment through spending. These people find contentment in the security that their savings brings. They are as John Goodman so eloquently put it in the remake of The Gambler in a "position of fuck you". And sitting at the red light in your fifteen year old Corrolla next to dickhead in his Mercedes knowing dickhead only looks wealthy because he spends all his money and then some doing just that, trying to look wealthy.

The Millionaire Next Door is not about being miserly, not for me it wasn't. It largely just brought to my attention that the suit leaving the office has no more net worth than the cleaning lady he just past. One lost paycheck for either one of them means they do not pay their bills. It taught me there are those who, in spite of their income, will spend their entire lives in debt up to their eyeballs, always one paycheck away from ruin. And there is that minority that regardless of their income will save. They cannot help themselves any more that those addicted to spending. They crave the security wealth brings.
The reader's job is to find a healthy balance, a position they are comfortable with.

 

[Bomb#20]

If you live more frugally, you spend less overall on goods and services. Investing is not the same as spending.

How do you figure? When you invest, either you lend money at interest or you buy equity. If you lend money at interest, why the heck would the borrower pay you interest, unless he needs your money to buy something with it? If you buy equity, why the heck would the seller give you a percentage of his future profits, unless he needs your money to buy something with it? Investing is spending; you're just delegating the nitty gritty details of the spending to the people you're investing your money with.

 

[Canard DuJour]

Selling less stuff to _consumers_. Doesn't mean that business spending/investment couldn't make up for a significant chunk of that. We'd probably see firms investing a greater chunk into capital and R&D, assuming that the frugal individuals weren't also super risk averse.

If companies selling to consumers are selling less stuff, then companies selling to businesses will sell less to them too. Consumers are terminal acceptors of goods and services.

If consumers are frugal, it means that companies will need to find ways to innovate by spending on R&D to lower costs. They will sell goods/services at low cost and companies will innovate to reduce costs and automate as much as possible, for which there will be plenty of cheap capital available to purchase automation.

I suppose some firms might do that but, in aggregate, investment tends to be "cyclical", i.e. firms invest less when consumers spend less/save more. Hence central banks adjust interest rates countercyclically.

The idea that consumers saving more - i.e. spending less - means more "loanable funds" for investment is based on the debunked model of banks as intermediaries between savers and borrowers. As a recent Bank of England paper put it:

In fact, when households choose to save more money in bank accounts, those deposits come simply at the expense of deposits that would have otherwise gone to companies in payment for goods and services. Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money.

https://www.bankofengland.co.uk/-/m...hash=9A8788FD44A62D8BB927123544205CE476E01654

​

There is no reason why consumer spending couldn't drop by, say, 10% of GDP and have investment spending increase by 10% of GDP over time, and for there to also be lower debt levels and higher equity levels. Additionally, once frugal individuals build up enough savings they'll actually end up spending more later in life since they would have wealth built up through savings/investment returns and little debt service, allowing them to consume more.

But then consumer spending in aggregate isn't dropping.

 

[Loren Pechtel]

If everybody chose to live frugally, why would you assume demand would fall, rather than simply being redirected to buying different stuff from before? If everybody is someday persuaded by the TMND strategy and they all start doing without new cars as long as their old cars still work, it will probably be because they want to invest their money instead -- which is to say, because they want to spend it: on production of something* people still want to buy.

(* Probably production of something other than cars.)

If you live more frugally, you spend less overall on goods and services. Investing is not the same as spending.
And if everybody did likewise, those investments would not do nearly as well as otherwise, as people would spend less, and thus the businesses you invest in would make less profits because they sell less stuff.

Selling less stuff to _consumers_. Doesn't mean that business spending/investment couldn't make up for a significant chunk of that. We'd probably see firms investing a greater chunk into capital and R&D, assuming that the frugal individuals weren't also super risk averse.

Business in the end makes it's money selling to consumers.

Note, however, the long term result: People are saving more, there is more capital available to business, the cost of capital goes down, businesses do more investing in tools etc, more is available and the standard of living rises.

It's the same thing as any 4X game--the more you put into your economy the bigger your military becomes in the end.

 

[Loren Pechtel]

Bold: Not necessarily. Anecdotally, what I've seen is people who are frugal without an end goal (e.g., children's education, extensive travel later in life) cannot spend. They have spent their entire lives watching their savings grow and reaching some particular age does not trigger a desire to spend. Their savings is their "precious". Not all find enjoyment through spending. These people find contentment in the security that their savings brings. They are as John Goodman so eloquently put it in the remake of The Gambler in a "position of fuck you". And sitting at the red light in your fifteen year old Corrolla next to dickhead in his Mercedes knowing dickhead only looks wealthy because he spends all his money and then some doing just that, trying to look wealthy.

I think you're only half right here--Mr. Corolla will never spend like Mr. Mercedes but that does not mean they will not spend. It is unlikely they will ever deplete their savings but as the price of things becomes a sufficiently small percentage of their wealth they'll spend on them if they see actual value. Just because they don't spend on flashy stuff doesn't mean they don't spend on useful stuff or hobbies.

The Millionaire Next Door is not about being miserly, not for me it wasn't. It largely just brought to my attention that the suit leaving the office has no more net worth than the cleaning lady he just past. One lost paycheck for either one of them means they do not pay their bills. It taught me there are those who, in spite of their income, will spend their entire lives in debt up to their eyeballs, always one paycheck away from ruin. And there is that minority that regardless of their income will save. They cannot help themselves any more that those addicted to spending. They crave the security wealth brings.
The reader's job is to find a healthy balance, a position they are comfortable with.

Yes. I've known too many of those suits not worth much more than the cleaning lady. Two such I used to know are now dead for reasons that wouldn't have happened had they been more frugal.

 

[Bomb#20]

To whatever extent consuming is necessary to keep a person alive, or useful in making her happy, consumption is a wonderful thing. The whole point of economic activity in the first place is to make things available to be consumed. That said, it must not be forgotten that consumption is a form of destruction. The popular notion that consumption is desirable above and beyond its immediate enabling effect on the individual doing the consuming, on account of the consequent further demand for consumables inducing further economic activity, is the Broken Window Fallacy.

 

[Swammerdami]

I've finally gotten around to Piketty's book. I've only finished his general description of national capital (Parts I and II) but it was quite interesting; it may be more interesting to me than his prescription (Parts III and IV). Curious what the thoughts on Piketty were at this mb, I deployed Search ... and ended up here. This thread deals with an interesting and important topic. Some of the opinions are indeed ... interesting.


It may be best for everyone if I don't post in political threads. @ Mods - Is there a way to ban me from posting in certain sub-forums? But until that partial ban is implemented, I may as well get my toe wet!

This is why Singapore is such an impoverished backwater.

{video=youtube;}

I did you the courtesy of clicking your link, only to discover a brief bit of useless gibberish. You must be a real riot at intellectual gatherings.

...

... These results indicate that, in modern era Great Britain, genetic effects contribute towards some of the observed socioeconomic inequalities.

Just to see if we're on the same page, please write a brief essay discussing the definitional difference between 'some' and 'all.'

 

[Swammerdami]

Here's an article about the "K-shaped recovery."

Despite the pandemic and the associated contraction of the economy, the rich and super-rich are now richer than ever, and rapidly getting even richer. Asset prices, e.g. stock prices, are setting records. This is because interest rates are very low, the U.S. government is committed to printing oodles of dollars for the foreseeable future and keeping big companies propped up. This despite that millions of Americans are unemployed, lack health care, are swamped with debt, and facing foreclosure or eviction.

Their massive wealth accumulation is, in large part, obscuring the toll felt by all those who don’t enjoy the same easy access to credit or financial markets. As [total] household net worth surged to a fresh record, hundreds of thousands of businesses are estimated to have permanently shut, over 10 million Americans remain jobless, and nearly three times as many are going hungry at night.
...
... [E]conomists warn of dire social and political consequences from the dramatic widening in the gap between America’s haves and have-nots. With income inequality already near the highest in at least half a century^{Note 1}, the country’s response to the financial devastation wrought by the coronavirus raises questions about who emergency measures were designed to help, and who was left behind, they say.

“There has probably not been a better time to be wealthy in America than today,” said Peter Atwater, an adjunct professor at William & Mary who popularized the notion of a ‘K-shaped’ recovery to describe the stark split in economic fortunes. “So much of what policy makers did was to enable those that were wealthiest to rebound fastest from the pandemic.”

It would be wrong to blame this rising inequality solely on mistaken values or deliberate malice by policy makers — this is just the way the system is "rigged" — but it certainly does sharpen the case for progressive policies.

Note 1 - I think the "in at least half a century" is due to data accumulation beginning 1970. In fact the last time America had inequality this severe was at least 88 years ago (excluding a brief pre-War GINI bulge 1940-41).

 

[DBT]

People, first and foremost, tend to look after themselves and their own no matter their position in society. Who is better able to do that than those most able to influence policy makers or set policy, the high end of town, big business and their lobbyists. Human nature 101.

 

[bilby]

Here's an article about the "K-shaped recovery."

Despite the pandemic and the associated contraction of the economy, the rich and super-rich are now richer than ever, and rapidly getting even richer. Asset prices, e.g. stock prices, are setting records. This is because interest rates are very low, the U.S. government is committed to printing oodles of dollars for the foreseeable future and keeping big companies propped up. This despite that millions of Americans are unemployed, lack health care, are swamped with debt, and facing foreclosure or eviction.

Their massive wealth accumulation is, in large part, obscuring the toll felt by all those who don’t enjoy the same easy access to credit or financial markets. As [total] household net worth surged to a fresh record, hundreds of thousands of businesses are estimated to have permanently shut, over 10 million Americans remain jobless, and nearly three times as many are going hungry at night.
...
... [E]conomists warn of dire social and political consequences from the dramatic widening in the gap between America’s haves and have-nots. With income inequality already near the highest in at least half a century^{Note 1}, the country’s response to the financial devastation wrought by the coronavirus raises questions about who emergency measures were designed to help, and who was left behind, they say.

“There has probably not been a better time to be wealthy in America than today,” said Peter Atwater, an adjunct professor at William & Mary who popularized the notion of a ‘K-shaped’ recovery to describe the stark split in economic fortunes. “So much of what policy makers did was to enable those that were wealthiest to rebound fastest from the pandemic.”

It would be wrong to blame this rising inequality solely on mistaken values or deliberate malice by policy makers — this is just the way the system is "rigged" — but it certainly does sharpen the case for progressive policies.

Note 1 - I think the "in at least half a century" is due to data accumulation beginning 1970. In fact the last time America had inequality this severe was at least 88 years ago (excluding a brief pre-War GINI bulge 1940-41).

LOL at 'pre-War'.

That bulge was wealthy Americans taking advantage of the opportunity to fleece both sides in the European war that had been raging since 1939.

Neutrality was extremely lucrative, particularly for those who put profits first, and ignored any moral issues that might arise from trading with any and all belligerents.

WWII started in the Asian theatre in 1936/7, and in the European theatre in 1939.

The bombing of Pearl Harbor took place in the middle of WWII. It's significance was that it ended US neutrality, not that it marked the start of the war.

 

[Harry Bosch]

People, first and foremost, tend to look after themselves and their own no matter their position in society. Who is better able to do that than those most able to influence policy makers or set policy, the high end of town, big business and their lobbyists. Human nature 101.

Oh god! Please not another thread on how and why minimum wage doesn't keep up with growth in equities. If I could, let's just summarize and move on: low skill labor wages rises slower than higher skilled labor; and both labor wages grows far less than equities. We don't need 10,000 graphs trying to show why do we?

 

[Harry Bosch]

Here's an article about the "K-shaped recovery."

Despite the pandemic and the associated contraction of the economy, the rich and super-rich are now richer than ever, and rapidly getting even richer. Asset prices, e.g. stock prices, are setting records. This is because interest rates are very low, the U.S. government is committed to printing oodles of dollars for the foreseeable future and keeping big companies propped up. This despite that millions of Americans are unemployed, lack health care, are swamped with debt, and facing foreclosure or eviction.

Their massive wealth accumulation is, in large part, obscuring the toll felt by all those who don’t enjoy the same easy access to credit or financial markets. As [total] household net worth surged to a fresh record, hundreds of thousands of businesses are estimated to have permanently shut, over 10 million Americans remain jobless, and nearly three times as many are going hungry at night.
...
... [E]conomists warn of dire social and political consequences from the dramatic widening in the gap between America’s haves and have-nots. With income inequality already near the highest in at least half a century^{Note 1}, the country’s response to the financial devastation wrought by the coronavirus raises questions about who emergency measures were designed to help, and who was left behind, they say.

“There has probably not been a better time to be wealthy in America than today,” said Peter Atwater, an adjunct professor at William & Mary who popularized the notion of a ‘K-shaped’ recovery to describe the stark split in economic fortunes. “So much of what policy makers did was to enable those that were wealthiest to rebound fastest from the pandemic.”

It would be wrong to blame this rising inequality solely on mistaken values or deliberate malice by policy makers — this is just the way the system is "rigged" — but it certainly does sharpen the case for progressive policies.

Note 1 - I think the "in at least half a century" is due to data accumulation beginning 1970. In fact the last time America had inequality this severe was at least 88 years ago (excluding a brief pre-War GINI bulge 1940-41).

LOL at 'pre-War'.

That bulge was wealthy Americans taking advantage of the opportunity to fleece both sides in the European war that had been raging since 1939.

Neutrality was extremely lucrative, particularly for those who put profits first, and ignored any moral issues that might arise from trading with any and all belligerents.

WWII started in the Asian theatre in 1936/7, and in the European theatre in 1939.

The bombing of Pearl Harbor took place in the middle of WWII. It's significance was that it ended US neutrality, not that it marked the start of the war.

Yea, life is great when there is only one manufacturer with no competition for awhile!