Tuesday, March 12, 2013

Noah Smith thinks frugality is the answer to wealth inequality - that seems to me like putting the cart before the horse

Kate pointed out this column by Noah to me with the comment "the closing line is what made me the maddest". That line was:
"In the short run, wealth equality is closely tied to income equality. But in the long run, it's all about thrift, frugality, and saving -- in other words, cheapness. If America's middle-class and poor people learn to be more cheap, then in 30 years, we will see a very different distribution of wealth."
In my opinion this sort of thing is part common sense and part missing-the-forest-for-the-trees, and since it comes in the form of scolding low income families I can definitely agree with Kate's reaction.

Assuming practically by definition that the average person is not going to beat the market when they put their wealth to work, building wealth boils down to income and savings. Getting middle and low income families to save more is a worthwhile thing to do, particularly if it involves light-touch interventions of the sort Noah describes. I've been involved in some research on this at the Urban Institute around the problems of low-income families' usage of potentially dangerous alternative financial services. Dealing with income and expenditure shocks in a way that is more commensurate with building wealth is of course a good idea for anyone.

The problem with all this is that low income families really aren't living paycheck to paycheck because of any inherent problem with saving - it's because that's about as far as the paycheck will go. The margin on which low income families are clearly the most constrained is the income side, not the expenditure side. That's why we call them "low income" rather than "low saving" families. If modern American society demonstrated its capacity to generate full employment, good education across the skills distribution, and jobs that offer the prospect of upward mobility then maybe the first thing I would reach for would be frugality too. But it seems far more likely that savings rates are very much a function of the balance of your needs (defined by your society, of course - we could all save a lot by living in mud huts) and your income. When the opportunity to earn income increases, not only savings but savings rates are going to naturally increase. Squeezing more savings out of a given income seems to me to put the cart before the horse.

Now we can definitely get into national savings conversations. I don't think we want East Asian savings rates, which in a lot of ways are a function of (and a requirement for) their growth trajectory (when you grow fast your income grows faster than your tastes and those savings are required to make capital investments) Still, if you wanted to say we need a higher savings rate that might be a reasonable thing to talk about.

But if you're talking about wealth building for low income families, focusing on the savings rate rather than income seems to me to put the cart before the horse. The focus ought to be (1.) full employment, (2.) an education system that isn't bifurcated and provides a good set of mid-level skills, (3.) an economy that creates jobs for mid-level skills workers. If we work for this we don't even need to think in terms of large-scale redistribution; we can stick to a safety net. Of course funding this with a progressive tax system wouldn't hurt.

6 comments:

  1. Noah Smith: "In the short run, wealth equality is closely tied to income equality. But in the long run, it's all about thrift, frugality, and saving -- in other words, cheapness. If America's middle-class and poor people learn to be more cheap, then in 30 years, we will see a very different distribution of wealth."

    That's a non-sequitur, and Smith should know that. It's also a way of blaming the victim, and Smith should know that, too. "If only the downtrodden would accept their fate with circumspection and frugality, then their children will be prosperous." Sure, it's better than debt-peonage, but it is not a solution to the problem.

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  2. I thought it had long been established that using one's capital to buy cheaply offers far greater returns on equity than any form of investment.

    Instead of buying a roll of TP a week, buying in bulk at 30% of the per item cost, etc.

    Has this all now changed?

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  5. JK Rowling must have had a great savings rate while on the dole then.

    ReplyDelete

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