13 September 2010
Do you remember when Bush called on all of us to go shopping after 9/11? Do you hear the incessant complaint from economists that we aren't spending enough to keep the economy moving? Well, I realized this weekend that they're kind of right - the problem is that the focus is wrong.
This is in part related to my Economic Principle No. 1. Basically, economies do well when wealth keeps moving. I argued before that every economic system except lassaiz-faire capitalism has a mechanism for keeping wealth flowing despite its tendency to pool. That's why I think the economists, and even Bush, were right in calling for more spending, but where I think they went wrong was in who they asked to do the spending. They want ordinary people - middle class and lower - to get out there and do some shopping. We are the consumers, in their minds, and the richer folks are the investors (the job creators or whatever they choose to call it). But the lines between consumer and investor (if such categories even exist) aren't that distinct. The focus should really be on where wealth is pooling and ways to liberate that wealth.
The wealthiest 1% of Americans control about 40% of the financial wealth of the nation (source). The wealthiest 20% control about 93% of the nations wealth. That leaves about 7% for the rest of us - the bottom 80%. Let's make it a bit more concrete - if there were $100 million dollars worth of wealth in the US, then the top 1% (or roughly 3 million Americans) would get to split about $40 million - that averages to about $13 per person. The next 19% (or about 57 million Americans) would get to split about $50 million - that's an average of about $0.87 per person. The rest of us (or about 240 million Americans) have to split about $7 million - that's an average of about $0.03 per person.
Let's continue this simplified analysis further. Let's say that each group saves about 10% of its wealth (a ridiculous amount considering that most people on the bottom bracket don't have much in savings at all, and those at the top probably have significantly more than 10%, but we're simplifying here so we'll go with it). That means that the wealthiest 1% would have roughly $4,000,000 in savings. The next 19% would have roughly $5,000,000 in savings between them. And the bottom 80% - the rest of us - would have about $700,000 in savings. If each group were to liberate - i.e. spend, invest, give away, tax, etc. - 1% of their savings the amounts would be $40,000; $50,000, and $7,000 respectively.
So who should be spending? First of all, most people in that lower 80% bracket do spend their money. They spend it because they have to. In most cases, they do not have any more money to spend. But it seems clear to me, even though this is a very simplified explanation, that if the wealthiest 20% of Americans were to open their pocketbooks and put just a very small percentage of their pool back into the economic flow, it would have significantly greater effect than the rest of us struggling to put a few dollars here and there into the economy. However, those folks can afford to sit on their pools of wealth and wait out the economic storm, while the rest of us flounder and struggle from one day to the next. This is why tax-and-spend liberalism makes some sense - it's the only way to liberate those pools of wealth and get them flowing once again (assuming it's spent on the right kinds of things, and not just given back to the wealthy).