5 ms·

Federal Reserve Bank of San Francisco, even after massaging the numbers by suggesting measurement issues may account for differences, shows a 30% difference bet

Federal Reserve Bank of San Francisco, even after massaging the numbers by suggesting measurement issues may account for differences, shows a 30% difference between poor and rich in terms of average propensity to consume. https://www.frbsf.org/economic-research/publications/economic-letter/2015/june/income-redistribution-policy-economic-stimulus/ https://www.frbsf.org/economic-research/publications/economi...

WalterBright 8y ago
That paper makes the fundamental error I am talking about. It assumes that if rich people aren't spending on consumption, they are hoarding cash. It then makes economic sense to redistribute that hoarded cash in order to put the money to use. But the rich aren't hoarding cash. They're investing it. The money is put to use. The rich do not have pallets of cash in the basement. You'd think that professional bankers would understand this. Here's the salient quote from the paper: "Surveys show low-income households tend to spend a larger share of their income than high-income households. Because of this, temporarily redistributing income from the rich to the poor could stimulate consumption and, through that, the economy as a whole." Yup, that's the "rich people hoard cash" theory.
- xg15 8y ago
  > But the rich aren't hoarding cash. They're investing it. The money is put to use. The rich do not have pallets of cash in the basement. As a general statement, that's just as much an assumption as the GP's claim. Where are the studies to back it? I could certainly imagine situations where someone owns a lot of wealth but never developed the skill to manage it - classical example being inheritance. Also (unrelated to the argument), "investing" != "put to good use". If an investor chooses the strategy that gives themselves the best ROI that doesn't mean the investment is necessarily beneficial for anyone else. (Except in an abstract "stimulating the economy" sense. But if that is all you want, you could just spend all your money continuously digging holes and filling them again.)
  - WalterBright 8y ago
    Even putting your money in a checking account causes it to be spent into the economy (as the bank loans it out). There's no rational reason to borrow money and make a pile out of it. Even people who operate cash businesses (like casinos) rush to deposit the cash in a bank ASAP. > If an investor chooses the strategy that gives themselves the best ROI that doesn't mean the investment is necessarily beneficial for anyone else. Actually, it does mean just that. An investment is giving someone else money to do something productive with that money. That person will take their cut, and so benefit.
    - salawat 8y ago
      Why always hand it over to someone else? You can't say that tons of investment is always a good thing. Look at the Dairy industry in the United States. Wal-Mart has vertically integrated the dairy industry into itself, as a result, many smaller regional farmers no longer have a market at all since there is no way to compete with someone who is so well integrated that they can SELL AT A LOSS in dairy, yet compensate by making up for it with social engineering via loss-leading. https://www.nbcnews.com/news/us-news/best-advice-u-s-dairy-farmers-sell-out-fast-you-n887941 https://www.nbcnews.com/news/us-news/best-advice-u-s-dairy-f... You CANNOT sit idly by and say that investment is ALWAYS a positive societal good when by definition, the "rational invester" (read: paperclip maximizer for ROI) will naturally tend to converge on creating monolithic structures, which, by their nature as "rational corporate actors" act as, again, paperclip maximizers for profits. Balance sheets do NOT accurately convey the full story of economic processes at work creating tangible effects in the real world, any more than meteorological climate models do. If you take into account side effects caused by collectively funded (via rational investment methodologies) creating monolithic industry-consuming behemoths, then the idea the rich are "hoarding money" makes perfect sense. Wal-Mart in this case is doubling down on automation, and keeping what payroll it pays low, so it's not actually acting to distribute wealth back to those who are so strapped they can't even think of investing, because they need to put the next meal on the table. EVEN if they could statistically speaking, the most wealthy are the most likely to be able to pick up what stock they'd have to sell, because stock doesn"t put food on the table. This creates a situation where regardless of who's hand the money is actually in, the outcome is the same. Monolithic businesses will be invested in, they'll integrate until they start creating value deserts in their space, and in order to contribute to continuing growth figures, will optimize away liabilities by minimizing workforce or salary. The only one's benefiting being those already on board. Does it "GENERALLY" work well though? Yes and no. Yes, given the absence of any actors large enough to create value deserts through excessive vertical integration? Yes! It does! No. I'm the sense that that isn't what the market seems to produce though. Companies will diversify, merge, or employ externalization of negative outcomes EXACTLY to accomplish making themselves the best looking target for investors. At some point, enough has to be enough. The economy is one of the few process spaces where eternal growth is EXPECTED. No living system constrained by finite resource and time CAN grow indefinitely without causing major systemic upsets. An equivalent solution to what Wal-Mart is doing could be achieved with networks of smaller less "fiscally efficient" distribution centers doing business with fewer monolithic industrial behemoths. This keeps the barrier to entry lower, leads to more opportunities for job creation, and increases financial mobility overall. This is something that CAN't exist with uncontrolled maximization of ROI by investors, and profits by corporation. At some point enough HAS to be enough. Maybe I'm not an economist, but I've seen enough complex systems to recognize when blind spots exist in current modeling. This is something I see never get addressed.
- JumpCrisscross 8y ago
  > they are hoarding cash I don’t think anyone assumes anyone is hoarding cash. It’s just a time to deployment question. A dollar flowing into a wealthy person’s account may take a week or two to get loaned out or fielded into an investment, and another week or two to pay the investment manager or begin facilitating the purchase of goods and services. A dollar dropped into an empty checking account may buy food that day from an establishment which will sweep it out to a supplier the next day. Our financial system is efficient, but the last time I saw a statistic for the figure, it takes about two weeks for the average checking account deposit to get turned into a mortgage.
  - WalterBright 8y ago
    What happens when you buy something with cash? The vendor deposits the money in his bank account. Same thing.
- snarfybarfy 8y ago
  Consumption != Investment Imagine a world where everyone put 99% of his income into investments. There would be nothing to invest in, because nobody was consuming. And by this definition the poor are definitely putting the money to better use because they cause the economy to grow by spending it all. The rich are currently facing an asset price inflation because there is too much money wanting to be invested and not enough consumption for all those assets to be put to good use.
- lsiebert 8y ago
  Consumed money is more stimulative of the economy then money that is invested, because consumed money first circulates 1 or more times, and then is likely invested as well, whereas directly invested money doesn't circulate before it's invested. It's like saying that a formula 1 race isn't faster then a car parked on the start line because it ends up at the same place. It ignores the times the car goes around the track. It also presumes that a choice of an investment is as good as the free market in distributing capital effectively.

WalterBright 8y ago

That paper makes the fundamental error I am talking about. It assumes that if rich people aren't spending on consumption, they are hoarding cash. It then makes economic sense to redistribute that hoarded cash in order to put the money to use. But the rich aren't hoarding cash. They're investing it. The money is put to use. The rich do not have pallets of cash in the basement. You'd think that professional bankers would understand this. Here's the salient quote from the paper: "Surveys show low-income households tend to spend a larger share of their income than high-income households. Because of this, temporarily redistributing income from the rich to the poor could stimulate consumption and, through that, the economy as a whole." Yup, that's the "rich people hoard cash" theory.

xg15 8y ago
> But the rich aren't hoarding cash. They're investing it. The money is put to use. The rich do not have pallets of cash in the basement. As a general statement, that's just as much an assumption as the GP's claim. Where are the studies to back it? I could certainly imagine situations where someone owns a lot of wealth but never developed the skill to manage it - classical example being inheritance. Also (unrelated to the argument), "investing" != "put to good use". If an investor chooses the strategy that gives themselves the best ROI that doesn't mean the investment is necessarily beneficial for anyone else. (Except in an abstract "stimulating the economy" sense. But if that is all you want, you could just spend all your money continuously digging holes and filling them again.)
- WalterBright 8y ago
  Even putting your money in a checking account causes it to be spent into the economy (as the bank loans it out). There's no rational reason to borrow money and make a pile out of it. Even people who operate cash businesses (like casinos) rush to deposit the cash in a bank ASAP. > If an investor chooses the strategy that gives themselves the best ROI that doesn't mean the investment is necessarily beneficial for anyone else. Actually, it does mean just that. An investment is giving someone else money to do something productive with that money. That person will take their cut, and so benefit.
  - salawat 8y ago
    Why always hand it over to someone else? You can't say that tons of investment is always a good thing. Look at the Dairy industry in the United States. Wal-Mart has vertically integrated the dairy industry into itself, as a result, many smaller regional farmers no longer have a market at all since there is no way to compete with someone who is so well integrated that they can SELL AT A LOSS in dairy, yet compensate by making up for it with social engineering via loss-leading. https://www.nbcnews.com/news/us-news/best-advice-u-s-dairy-farmers-sell-out-fast-you-n887941 https://www.nbcnews.com/news/us-news/best-advice-u-s-dairy-f... You CANNOT sit idly by and say that investment is ALWAYS a positive societal good when by definition, the "rational invester" (read: paperclip maximizer for ROI) will naturally tend to converge on creating monolithic structures, which, by their nature as "rational corporate actors" act as, again, paperclip maximizers for profits. Balance sheets do NOT accurately convey the full story of economic processes at work creating tangible effects in the real world, any more than meteorological climate models do. If you take into account side effects caused by collectively funded (via rational investment methodologies) creating monolithic industry-consuming behemoths, then the idea the rich are "hoarding money" makes perfect sense. Wal-Mart in this case is doubling down on automation, and keeping what payroll it pays low, so it's not actually acting to distribute wealth back to those who are so strapped they can't even think of investing, because they need to put the next meal on the table. EVEN if they could statistically speaking, the most wealthy are the most likely to be able to pick up what stock they'd have to sell, because stock doesn"t put food on the table. This creates a situation where regardless of who's hand the money is actually in, the outcome is the same. Monolithic businesses will be invested in, they'll integrate until they start creating value deserts in their space, and in order to contribute to continuing growth figures, will optimize away liabilities by minimizing workforce or salary. The only one's benefiting being those already on board. Does it "GENERALLY" work well though? Yes and no. Yes, given the absence of any actors large enough to create value deserts through excessive vertical integration? Yes! It does! No. I'm the sense that that isn't what the market seems to produce though. Companies will diversify, merge, or employ externalization of negative outcomes EXACTLY to accomplish making themselves the best looking target for investors. At some point, enough has to be enough. The economy is one of the few process spaces where eternal growth is EXPECTED. No living system constrained by finite resource and time CAN grow indefinitely without causing major systemic upsets. An equivalent solution to what Wal-Mart is doing could be achieved with networks of smaller less "fiscally efficient" distribution centers doing business with fewer monolithic industrial behemoths. This keeps the barrier to entry lower, leads to more opportunities for job creation, and increases financial mobility overall. This is something that CAN't exist with uncontrolled maximization of ROI by investors, and profits by corporation. At some point enough HAS to be enough. Maybe I'm not an economist, but I've seen enough complex systems to recognize when blind spots exist in current modeling. This is something I see never get addressed.
JumpCrisscross 8y ago
> they are hoarding cash I don’t think anyone assumes anyone is hoarding cash. It’s just a time to deployment question. A dollar flowing into a wealthy person’s account may take a week or two to get loaned out or fielded into an investment, and another week or two to pay the investment manager or begin facilitating the purchase of goods and services. A dollar dropped into an empty checking account may buy food that day from an establishment which will sweep it out to a supplier the next day. Our financial system is efficient, but the last time I saw a statistic for the figure, it takes about two weeks for the average checking account deposit to get turned into a mortgage.
- WalterBright 8y ago
  What happens when you buy something with cash? The vendor deposits the money in his bank account. Same thing.
snarfybarfy 8y ago
Consumption != Investment Imagine a world where everyone put 99% of his income into investments. There would be nothing to invest in, because nobody was consuming. And by this definition the poor are definitely putting the money to better use because they cause the economy to grow by spending it all. The rich are currently facing an asset price inflation because there is too much money wanting to be invested and not enough consumption for all those assets to be put to good use.
lsiebert 8y ago
Consumed money is more stimulative of the economy then money that is invested, because consumed money first circulates 1 or more times, and then is likely invested as well, whereas directly invested money doesn't circulate before it's invested. It's like saying that a formula 1 race isn't faster then a car parked on the start line because it ends up at the same place. It ignores the times the car goes around the track. It also presumes that a choice of an investment is as good as the free market in distributing capital effectively.