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Home Publications Blogs Beat the Press Greg Mankiw Says We Need Rich People Because They Won't Spend Their Money

Greg Mankiw Says We Need Rich People Because They Won't Spend Their Money

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Monday, 23 June 2014 13:43

That's basically the punch line in a column telling us Thomas Piketty is wrong to worry about rising inequality. After a long digression on motivations for saving among the very rich, Mankiw tells readers:

"When a family saves for future generations, it provides resources to finance capital investments, like the start-up of new businesses and the expansion of old ones. Greater capital, in turn, affects the earnings of both existing capital and workers.

"Because capital is subject to diminishing returns, an increase in its supply causes each unit of capital to earn less. And because increased capital raises labor productivity, workers enjoy higher wages. In other words, by saving rather than spending, those who leave an estate to their heirs induce an unintended redistribution of income from other owners of capital toward workers."

To summarize, the story is that by saving rather than spending their money, rich people will make more capital available to firms to invest, thereby raising productivity and wages.

There are two important problems with this story. First, we are operating well below the economy's potential level of output and are likely to remain below potential for many years into the future according to most projections. This is the story of "secular stagnation" that even folks like Larry Summers have embraced in recent years.

In a context of secular stagnation, more saving is harmful. If people save rather than consume there will be less demand in the economy and less employment. If we think that secular stagnation is likely to be a persistent problem, then the fact the rich save more of their money than everyone is bad news for the economy. It will slow growth and make us all poorer.

The other point is that moderate income and middle income people did actually use to save a larger share of their income. Back in the days when wages were keeping pace with productivity growth, savings rates were considerably higher than they have been in the last two decades when the wealthy got most of the benefits of growth. It tends to be the case that people save a larger share of their income when their income is rising rapidly. This means that we don't need rich people to not spend. Moderate and middle income people will also save a substantial portion of their income during prosperous times.

 

Comments (17)Add Comment
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written by Nick Batzdorf, June 23, 2014 5:46
...not to mention that the savings rate in the USSR was something like 25% at the time it collapsed. (Looking for link to substantiate that, but I read it in a Jamie Galbraith book a few years ago.)
Piketty Is an Economist - Makiw is an Apologist ...
written by Last Mover, June 23, 2014 6:36

... as one commenter said. Awful, just awful. What, does anyone think that savings could not fund investment if the rich did not save to fund it as Dean Baker explains?

Never mind that whatever value was added to labor productivity from more capital was not collected by labor anyway, diverted by the economic predators to themselves and their heirs. If what is before us now is "raised wages", then some wages would actually be negative by now had not the rich saved what they did to "raise" them.

Never mind that Makiw is stuck on the IS curve of an IS-LM model when savings is far greater than investment at below full employment off the curve. Further, even if full employment came about and even if I rose to equal S, the 1% would still pillage and plunder the 99%.

Never mind that Mankiw is advancing the permanent consumption function of Milton Friedman to describe how the rich balance intertemporal consumption and savings over time and among heirs - not a word on the Duesenberry or Keynesian consumption function with a different explanation.

Awful, just awful.
...
written by JDM, June 23, 2014 7:25
Try an experiment (you'll need two equivalent countries for this; I'll wait while you run out and get them :): give $50 million to one or two rich people; they're already spending about as much as they want, so they save this additional money and leave it to their kids who also don't need to spend it. This is what we've been doing, and it hasn't created much growth.

Now give $50 million to a 100,000 poor people. I'll pretty much guarantee you they won't be able to save it cause they need to spend it, so it gets spent. This spending creates demand -- in fact that's what demand is, so it's more accurate to say this spending is called demand. Because there's demand companies need to hire more people to make things, move things about, sell things. Don't "want to" or "decide to", they NEED TO because if they don't another company will gladly do it. Result: growth.

This isn't news to the people who read Dean's blog, and it shouldn't be news to anyone at all, but it's apparently news to people like Greg Mankiw.
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written by Christiaan Hofman, June 24, 2014 5:40
Mankiw thinks that 1 person saving $1 million is better than a million people saving $10 each, because $1 million is more than $10. He needs some accounting lessons. Does he know what the "macro" in macro economics means?
....
written by djb, June 24, 2014 6:27
Keynes points out the flaw of mankiws thinking in 1936


Too bad mankiw never read it
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written by LSTB, June 24, 2014 8:49
"When a family saves for future generations, it provides resources to finance capital investments, like the start-up of new businesses and the expansion of old ones. Greater capital, in turn, affects the earnings of both existing capital and workers."


Saving also provides resources to speculate. This is where Rattner is half wrong. It's not that the wealthy don't spend their money on ice cream cones; it's that they "invest" it in non-produced assets that create nothing, like real estate. This is why we need to put land back into the factor analysis.
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written by skeptonomist, June 24, 2014 10:00
The role of the rich in modern capitalist economies is as investors, not consumers. These economies are based on mass consumption. The question of how much rich people should spend is not the critical one. The more important questions are how the benefits of production are distributed - that is income inequality, and whether capital is being invested properly for long-term growth instead of short-term profit for the capitalists. Having rich people spend more is not a solution to current problems. Mankiw's piece seems to be a kind of red herring to take attention away from the real problems (it is behind a pay wall).
Dumber Than A Rock
written by dilbert dogbert, June 24, 2014 10:05
Re: "Back in the days when wages were keeping pace with productivity growth, savings rates were considerably higher than they have been in the last two decades when the wealthy got most of the benefits of growth."

I think you should have expanded on this. I think it kills Mankiw's argument. If I increase my savings and get no benefit from the productivity increase - screw savings!
...
written by bananaguard, June 24, 2014 10:59
"In other words, by saving rather than spending, those who leave an estate to their heirs induce an unintended redistribution of income from other owners of capital toward workers."

This is classic Mankiw dishonesty. The whole middle section of the sentence is irrelevant to the point he's making. He could simply have written "In other words, by saving rather than spending, an unintended redistribution of income takes place from other owners of capital toward workers." See? No need for the stealth argument against inherited wealth.

He's clever enough to write a sentence that seems to argue that inherited wealth has special virtue, and when you combine that sort of cleverness with amorality, you get Mankiw.

The old wisdom about lawyers is that, when the facts are on your side, you pound the facts, and when the law is on your side, you pound the law, and when neither the facts nor the law is on your side, you pound the table. Mankiw pounded the table. He knows that we have the richest rich people in a long time, and that it has done nothing to raise incomes for the rest - the facts are against him and he doesn't mention the facts. The "law" - economic theory - in no way says inherited wealth increases growth or efficiency - so he doesn't mention economic theory except as a frame for pounding the table for inherited wealth.
Mankiws Real Mistake
written by Larry Signor, June 24, 2014 11:10
Mankiw assumes that saving by the wealthy benefits America...but not if they invest outside the US economy in global assets. Their saving/investment benefits only them, in that case. Small savers generally invest locally in banks, munis , housing, small business ventures etc. These are extremely dissimilar saving models that affect the economy in very different ways.
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written by bananaguard, June 24, 2014 11:14
"...no need for the stealth argument IN FAVOR OF inherited wealth." Sorry.
wonkblog disagrees(!)
written by Peter K., June 24, 2014 11:23
http://www.washingtonpost.com/...s-to-save/

"It's saving, not spending, that will solidify the recovery and make the country less vulnerable to another downturn, says a report released Tuesday morning by the consulting firm Oxford Economics and sponsored by retirement focused groups including AARP, the American Society of Pension Professionals & Actuaries and financial firms such as Bank of America Merrill Lynch, Natixis Global Asset Management and Putnam Investments.
...
The report from Oxford Economics notes that the average American household socks away 3.8 percent of its income. Of course, many families are struggling to save at a time when wages are flat and there are still 3.5 million people looking for work who have been jobless for six months or longer.

Researchers suggest that trend can be reversed if employers and lawmakers make it easier for people to save. Employers might boost participation in retirement savings plans if they automated the process, the report notes. That includes enrolling people and give them the ability to opt-out, instead of requiring them to opt-in to a plan. It also includes automatically escalating their saving rates each year. "What we see is that folks who are automatically enrolled, they don’t opt out more frequently than those who are not automatically enrolled," says Gary Koenig, of the AARP Public Policy Institute.

Companies may get more workers to sign up for a 401(k) plan if they nudge people through an e-mail or offer incentive to save, such as a matching contribution. But in order to meaningfully boost the savings rate, researchers noted, employers and lawmakers will need to increase access to retirement savings accounts. And lawmakers can broaden access to tax-advantaged saving vehicles by encouraging-- or requiring-- more employers to offer plans."

Howabout have labor share in productivity gains so that people make enough money so they are able to save?
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written by Benedict@Large, June 24, 2014 2:26
The flaw in Mankiw's argument is that he treats spent money as if it is money that no longer exists. Since it does continue to exist, it also continues to be available for investment.
reply to Benedict@Large
written by djb, June 24, 2014 2:35
yes the redistribution of wealth that taxing the rich gives us will lead to to more spending and therefore more income (investment plus consumption).......... but at the end, all that investment will still exist, somewhere as someones 'savings' if you will.......

it just may not be in the pocket of the superrich

but society as a whole with be richer

(that is, when we have a deficiency of aggregate demand )
redistribution
written by djb, June 24, 2014 2:41
so lets make it clear that we ARE talking about a redistribution of the wealth, from the rich to the poor and the middle class

instead of the other way around which is the redistribution too many of the wealthy advocate, ie from the poor and middle class to the rich
...
written by Jay, June 24, 2014 6:50
Mankiw is assuming that rich people will invest when there is limited demand and they will invest in capital intensive operations instead of using their excess cash for finance and real estate holdings. The rich will likely buy stocks and real estate rather than taking risky entreprenuerial gambles. If anything remotely similiar, they will buy competitors and use questionable lobbying to reduce competition or compensation to employees as well.
Mankiw assumes the existence of an 'efficient investor' gene
written by Robert Weiler, June 25, 2014 1:04
When you cut out all the sophistry, that's what is left. Mankiw apparently believes that the descendants of an ultra wealthy person will make investments that do the greatest good for the greatest number of people, and somebody that is not descended from a person of great wealth will invest less efficiently. This is the sort of nonsense that will get you a professorship at an elite university. Then again, I guess it isn't surprising that an elite institution would be four square behind elitism.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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