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There's many arguments in this thread to the effect that if Americans had more money they'd just spend more, and not save, with others claiming the opposite is

by avar 8y ago

There's many arguments in this thread to the effect that if Americans had more money they'd just spend more, and not save, with others claiming the opposite is true. I found it interesting that the recent Trump tax cuts offered the rare opportunity to get some empirical data on that question, because they had the effect that people were getting more of their paycheck. If 80% of people were desperately trying to save, but couldn't, you'd expect that consumption would stay the same, and the savings rate would go up. But if they were just didn't care to save and would by and large fit their consumption to their income you'd expect consumption to go up, while the savings rate stayed level. There's a recent episode of Planet Money discussing the Q2 US GDP growth that goes into this a bit, consumption went up as a result of the tax cuts: https://www.npr.org/sections/money/2018/07/27/633230414/gdp-omg https://www.npr.org/sections/money/2018/07/27/633230414/gdp-... However, they don't break that down at all. It's conceivable that consumption just went up with 20% of the population, but this is presumably an easy question to answer. There's a bunch of items like clothing which people will make last if they have to, but if they feel like they have more discretionary income will spend more on. Did consumption in those categories go up in a way that indicates that people living paycheck-to-paycheck were now spending more?

nickthemagicman 8y ago
I'd be interested in looking at the categories of this increased consumption as well. Maybe they bought needed underwear they couldn't afford before or something that's a necessity. Maybe they bought a laptop which provides them massive value as far as information goes. We have to be careful of interpreting these results based on what we 'expect'.
- avar 8y ago
  Maybe I just have a simplistic view of these things, but I don't see how given sufficient data across the economy you couldn't tease out whether people were overspending or truly living at the limit. After all, just "living paycheck to paycheck" says nothing about your income per-se. You could make several millions/year and struggle to pay your NYC penthouse mortgage and the loan on your Ferrari. But the image that's invoked when you read that phrase is not someone who's absurdly rich and living beyond his means, but someone who's poor and struggling to make rent on their apartment or paying for their car. In aggregate, if all those people would make $500 less a month you'd expect a significant spike in foreclosures, evictions, bankruptcies etc. It would look much like the 2007-2009 recession. Or, if they truly weren't living beyond their means and were all given a $500 lottery ticket how that money gets spent says a lot about their situation. Does such an injection of cash into the economy e.g. reduce the foreclosure ratio? That would indicate that people weren't truly living beyond their means. Or does it only show an increase in consumer spending without any meaningful change in such numbers? Then it's more likely that those people were just bad financial planners, or just haven't thought to save any of their income.
  - nickthemagicman 8y ago
    I agree with everything you just said. Paycheck-to-paycheck is subjective, you need more data to explain the situation. This would be really interesting data to mine cross correlate if you can find good sources.

by avar 8y ago

nickthemagicman 8y ago

I'd be interested in looking at the categories of this increased consumption as well. Maybe they bought needed underwear they couldn't afford before or something that's a necessity. Maybe they bought a laptop which provides them massive value as far as information goes. We have to be careful of interpreting these results based on what we 'expect'.

avar 8y ago
Maybe I just have a simplistic view of these things, but I don't see how given sufficient data across the economy you couldn't tease out whether people were overspending or truly living at the limit. After all, just "living paycheck to paycheck" says nothing about your income per-se. You could make several millions/year and struggle to pay your NYC penthouse mortgage and the loan on your Ferrari. But the image that's invoked when you read that phrase is not someone who's absurdly rich and living beyond his means, but someone who's poor and struggling to make rent on their apartment or paying for their car. In aggregate, if all those people would make $500 less a month you'd expect a significant spike in foreclosures, evictions, bankruptcies etc. It would look much like the 2007-2009 recession. Or, if they truly weren't living beyond their means and were all given a $500 lottery ticket how that money gets spent says a lot about their situation. Does such an injection of cash into the economy e.g. reduce the foreclosure ratio? That would indicate that people weren't truly living beyond their means. Or does it only show an increase in consumer spending without any meaningful change in such numbers? Then it's more likely that those people were just bad financial planners, or just haven't thought to save any of their income.
- nickthemagicman 8y ago
  I agree with everything you just said. Paycheck-to-paycheck is subjective, you need more data to explain the situation. This would be really interesting data to mine cross correlate if you can find good sources.