Friday, November 15, 2013

Time Horizons Across Classes

FLG thought this was an interesting piece of data:
[P]eople differ in one crucial way. “The marginal propensity to consume,” according to the paper, “is substantially larger for low-wealth than for high-wealth households.” Rich people behave like the hyperrational agent. They plan for the future. They save during a stimulus, thinking about the taxes to come. And they can borrow during a fiscal contraction.
Poor people are what economists call “borrowing constrained.” They tend to have more needs than are being met, so when money arrives, they spend it. When the government stops spending and credit is hard to come by, the mythical everyman, like the rich person, continues to spend. But most real people don’t have access to credit, and they hunker down. Carroll’s findings have been confirmed by other academics in the last two years who looked at Italian and U.S. data.

FLG has a question about the causality implied above.  Isn't it just as reasonable to argue that people who plan for the future would build wealth and thus be rich.  As in being rich doesn't cause somebody to have a lower marginal propensity to consume, but rather having a lower marginal propensity to consume (.i.e the person saves more) makes them rich?

FLG gets how if you look at the different populations at a point in time - here are rich people, here are poor people, that at that moment the issue is borrowing constraints, but what led up to it is the question.


The Ancient said...

I've been thinking recently -- prompted by auction house prices -- that today's very rich tend to have something in common: They made their money very, very quickly -- at least by the standards of the previous 150 years.

I don't know whether this is relevant or not.

FLG said...

I think the present very rich are different from the present merely rich and past very rich.

The merely rich I imagine as an executive at a successful company. Six figure income, over years, saved up.

The very rich differ from previous versions, I'd argue, because they owe their wealth to the Greenspan put. Either directly as market participants, hedge fund managers etc, or accessing the capital markets to exit, Silicon Valley-types.

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