Wednesday, February 11, 2009

CNN Pundits Claim Poor Have a Zero Marginal Propensity to Consume

Full disclosure – every time I have to endure listening to Ali Velshi opine on economic matters – I want to scream. So before we discuss his latest, let’s let Brad DeLong have the microphone:

With the exception of the wingnuts in the neo-Hooverite caucus, both Republican and Democratic economic advisors were telling their legislative principles by late fall that a fiscal boost would be a good thing--Republican economists saying that they would prefer tax cuts targetted toward people with a high propensity to spend out of income, Democratic economists saying that they would prefer direct spending on shovel-ready projects. Barack Obama proposes a bipartisan compromise: do some tax cuts and some spending, with a 35-65 split because, after all, the Democrats won the election.

That is a very nice summary of the political debate so which people have a high propensity to spend. Well – don’t listen to a CNN pundit:

On No Bias, No Bull, Brown asserted: "Food stamps, unemployment benefits not likely to stimulate the economy because these are the people who are in the most dire straits spending the bare minimum." After Velshi replied, "That's right," Brown stated, "So the stimulus part comes from the big spending package that we're going to talk about." Velshi responded: "Right. And, you know, maybe the $500 or $1,000 you get per family. But you're absolutely right. There are some of these things that are more about recovery than stimulus. The administration likes to call it a recovery bill. If you're giving food stamps and you're giving unemployment benefits, that's not stimulus; that's simply helping people out who are in a lot of trouble."

I’ll grant that a household with low income will not be consuming as much as say Bill Gates and his family. But the issue is not the absolute level of consumption per person but rather the marginal propensity to consume, that is, how much of each extra dollar of disposable income will be spent. Ricardian Equivalence types – that is those permanent income types who also impose the long-run government budget constraint in their consumption model – might tell you that tax cuts for those who are not borrowing constrained will not increase consumption. But when Campbell Brown talks about “people who are in the most dire straits”, I would suggest she is talking about people who are borrowing constrained.

If Ali Velshi understood economics, he would have told Ms. Brown that the issue is the marginal propensity to consume, which would imply she had this exactly backwards. Then again – Ali is not an economist getting his degree in religious studies. So why does CNN put this economic know nothing on as some sort of expert in business and economics?


kevin quinn said...

PGL: I saw this exchange and meant to post about it but you beat me to it. I wanted to title it "Pig-ignorant economic commentary from CNN!"

Ken Houghton said...

"So why does CNN put this economic know nothing on as some sort of expert in business and economics?"

Because Amity Shlaes wasn't available?

Bernard said...

For the same reason they put uninformed political operatives on to debate the stimulus bill by hurling slogans?

flotron9 said...

Commercial News Network is just another mass media brainwashing outlet for the oligarchy.

They all are. Boycot commercial media.

TheTrucker said...

We should start today on inserting classical economics as a required understanding before a high school diploma is awarded. In 10 years the people themselves will remove the lunatics from all public discourse. Complaining about the universities or the economics profession is just whining, A huge segment of the population never enters a university. Yet these people buy cars and soap and tires and they vote in large numbers.