The Wall Street Journal suggests that the economy might not be affected by the credit crunch because it will mostly hit the poor. Since the poor don't spend that much, the economy can happily sail along. I was wondering how multipliers might differ by income class.
Patterson, Scott. 2007. "Has the Crunch Filtered Down to Consumers?" Wall Street Journal (18 October): p. C 1.
"Dean Maki, an economist at Barclays Capital, expects households to muddle through even as lenders get more strict. He says many of these credit problems have hit lower-income consumers, while wealthier spenders remain largely unscathed. Roughly half of consumer spending comes from the top 20% of the income bracket, Mr. Maki says."
The poor don't spend that much? Duh - that's because the poor have little income (definition of being poor). Of course the issue is the relative marginal propensities to consume and the usual conservative argument for reverse Robin Hood economics is that the poor have a higher MPC (something about faith in full employment and the benefits of more savings).
ReplyDeleteI used to think the concentration of wealth in the US would lead to a recession, even a 20's like depression. This was the reasoning behind some books in the 80's, but then the economy seemed to get better, not worse.
ReplyDeleteI now think however that this no longer applies because of the global economy. The reduction of tariffs, NAFTA, WTO, etc have enormously deregulated world markets to the point where the internal economics of countries are much less relevant.
If the US concentrates its wealth in the upper 10% of the population then the other 90% of course get poorer, and of course the bottom 30% for example poorer still. But the wealthy are not affected so much any more because they can regard this bottom 30% as like another country. It makes little difference to them whether the bottom 30% is in the US or in South America. They employ them, or not according to what the markets will pay. If the wages are too high they move their factories offshore. If the poor in the US cannot afford their products they sell their products overseas.
So a US recession or depression in a global economy may not ultimately matter much unless the rich have to pay too much welfare, and reduce their profits and competitiveness by doing this.
The strategy then of the Right may be to simply disconnect from this bottom segment of the population, make money from them if they can, give them as little welfare as possible, and treat them like a third world country. If they fall into recession it is no different to the same happening to Mexico or Africa.
This is not much different from many South American countries where the wealthy control most of the assets and shut out the poor. If those countries have an economic malaise then the middle class and above hardly notice, or take advantage of the chance to reduce wages.
The wealthy and middle class might lose some money to the subprime mortages, which would be mainly to the poorer people defaulting. They got more money however with tax cuts from the Republicans anyway, so they are probably still ahead. They probably don't sell much to the poor anyway, especially since welfare has been cut so much so there is little to lose.
The Democrats are unlikely to tamper much with free trade or give money to the poor, so this strategy is likely to continue to be successful. It's not fair to the poorer US citizens but then they are not part of the Republican base.
The central theme of The Confiscation of American Prosperity is the way that inequality fosters both instability and recession/depression regardless of the question of aggregate demand.
ReplyDeleteAnon, it appears that 'the poor' are already in recession, and I would say have been for a long time, cycle by cycle deterioration.
ReplyDeleteNot 'scientific' but this 1/19/07 article can provide a rough idea:
Poor stretching paychecks to breaking point
Story Highlights
Working poor finding it harder to pay for food
Food pantries face greater demand, less funding
Experts say situation will worsen when heating bills rise
Low income families buying more peanut butter, pasta
NEW YORK (AP) -- The calculus of living paycheck to paycheck in America is getting harder.
What used to last four days might last half that long now. Pay the gas bill, but skip breakfast. Eat less for lunch so the kids can have a healthy dinner.
Across the nation, Americans are increasingly unable to stretch their dollars to the next payday as they juggle higher rent, food and energy bills. It's starting to affect middle-income working families as well as the poor, and has reached the point of affecting day-to-day calculations of merchants like Wal-Mart Stores Inc., 7-Eleven Inc. and Family Dollar Stores Inc.
Food pantries, which distribute foodstuffs to the needy, are reporting severe shortages and reduced government funding at the very time that they are seeing a surge of new people seeking their help.
While economists debate whether the country is headed for a recession, some say the financial stress is already the worst since the last downturn at the start of this decade.
Complete article @ http://www.cnn.com/2007/LIVING/wayoflife/10/19/stretch.paychecks.ap/index.html
Barclays Capital's Maki may not be considering the concentration of financial assets among that top twenty percent and the consequences of what appears an ongoing deflation of these...or may expect this to have no effect on that groups consumption. IOW, the wealthy have substantial nominal cushion but are not immune and, from what I can gather, becoming worried about prospects. Related, weakening CEO Confidence Index:
...polling by the Chief Executive Group, CEOs were quick to cite the turmoil in U.S. Credit Markets as the main reason for the decline in confidence: When asked to rank the impact of a variety of factors on their confidence in August, 76 percent of CEOs said the performance of the credit markets was the most important factor undermining their confidence in the market. The second most important factor negatively impacting CEO confidence was Dow Jones’ performance.
Correction, that was 10/19/07.
ReplyDeleteAnon,
ReplyDeleteYour analysis perplexes me. What do the wealthy and the middle-class, which you join together as though kindred spirits, have in common? Only that both groups are not classified as poor. The big difference, however, is that the middle-class (a much larger group) is far more likely to become poor having far less depth to their assets. It would also be instructive if you could demonstrate just how much of that tax cut the middle-class enjoyed relative to the wealthy. Quite a difference per family, no?
To say nothing of the middle-class losing ground on a steadily declining income scale. The wealthy and the middle-class have nothing in common. The middle/working-class do the bidding of the wealthy in their never ending efforts to avoid joining the impoverished at their yet lower economic level.
Your reference to the "strategy of the Right" also seems misguided. It is the strategy of the corporate/managerial class, our wealthy elite, that the misguided social conservatives, what we think of as the Right(wing), that focuses
not so much on disconnecting from the bottom segment of the income distribution, but to instigate a distinction amongst the middle/working class from that bottom segment. Keeping the bottom two groups at odds just helps to retain control.