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Ashok Rao busts me for being lazy this morning, and he has me dead to rights. I blithely waved away a further discussion of what would actually happen if there was a large secular increase in aggregate saving on the part of the poor. I was lazy about this, and in my defense, I was using “economic disequlibirum” as a stand-in for saying “a) I’m at the office, b) I didn’t think it was entirely relevant to the final conclusion of my post, and c) I was feeling lazy.”
So now that, at the very least, condition a) has been relieved, let’s take a look at Ashok’s point. He notes – quite correctly – that 1) even if you make unrealistically egalitarian assumptions about the initial wealth distribution that increased saving by the poor doesn’t affect the ratio very much, and the more broad point that 2) the wealth gap between rich and poor will continue to increase so long as the rich save at a higher rate than the poor regardless of the initial distribution. Both of these are correct, but they do end up being somewhat tangential to the real question re: the effect on the economy on a substantial secular increase in the social desire to save.
This is, in fact, a much disputed question in economics, and what effects it might have (and whether that effect depends on whether current conditions are recessionary and whether we’re at the ZLB) are not the subject of much consensus. As a general point, though, Americans used to save much more, so if we decided to save more now, in all actuality it may not have much economic impact at all.
But just because things used to be one way doesn’t mean that, under current conditions, they could just be that way again – a lot has changed since the 1970s and perhaps it might not be so simple to revert back to saving that much. Tangentially, I’m really not a huge fan of the distinction between “saving” and “consuming” anyway, so maybe I’m not the perfect person to be breaking this down, but what the heck, let’s give it a shot:
What happens to the economy when the poor start saving more depends on what “savings” is in this context. Let’s start with some real data – the lowest quintile of Americans take home 3.4% of national income, and therefore a 1% increase in the savings rate of “the poor” (defining that as coterminous with the bottom quintile of earners, which is totally not actually correct) would result in an increase in the total national savings rate of .034%. So we’re talking pretty small taters, frankly, which is really the key issue.
But beyond that, we can still discuss the theoretical side, which truly does depend on what “savings” means. If it means “putting the money into deposit accounts at banks” then the aggregate effect of those savings depends on whether it increases loaned funds from that bank in an amount that equals or exceeds the forgone consumption. The reason the “paradox of thrift” doesn’t always hold is that the saved money “has to go somewhere” which means it could (though not will) become someone else’s consumption (of perhaps a more durable good) that will offset the loss in more short-term oriented consumptions. So the “disequilibirum” that results could be a net loss in output and/or it could be a sectoral shift in output, and how disequilibirum-izing you think that is depends on how PSST-y you think the economy is or more broadly how inflexible it his, how high transaction and discovery costs are, how rooted labor markets are, that kind of thing.
Anyway, the point is, while this is theoretically all interesting, my two conclusions from Ashok’s post are a) the net short-term economic impact of even a substantial shift in the savings preferences of the poor will be small and b) I still think the conclusion of my prior post was right because it wasn’t dependent on whether or not a) is true.
So I already commented on Ashok Rao’s blog re: the content of Ryan Enos’ op-ed in The Washington Postre: racial polarization and partisan preferences, but after more careful examination following Noah Smith’s call for Richard Florida to refute it, I realized that a substantial part of the op-ed is not only wrong-headed but dishonest as well. He writes:
In that same year, I examined the voting of Latinos in Los Angeles and found that those who lived near predominantly African American neighborhoods were far less likely to vote for Obama than Latinos who lived farther away — suggesting that contact with their African American neighbors may have prompted them to vote against an African American candidate.
The link is to a paper authored by Enos, which, if you read, is about the 2008 Democratic presidential primary. Putting aside (very real) questions about the paper’s internal validity, by citing it in the article without mentioning that it is about the primary and not general election vote in the context of an op-ed warning of partisan polarization, Enos can only be said to be deliberately misleading readers into believing that Latinos who live nearer to African-American neighborhoods were more likely to vote for McCain or Romney as opposed to Hillary Clinton. In fact, the same precints his paper cites as the best examples of polarization in the Democratic primary are precints that went 9-to-1 for Obama in 2012.
At the very least this calls for a substantial correction to the article.