This would ordinarily be diagnosed as an aggregate demand deficit and solved with additional money—it falls under the category of things that NGDP level targeting ought to solve unless there is something not further specified going on.
A genuine (possibly very stupid) question, since I have practically no knowledge about macroeconomics: when I think of my own preferences, I feel like I pretty much already have all the things that can be bought with money and that I might want. Yes, I would like to have somewhat more money, but mostly so that I could increase my savings to give me more of a safety cushion in case I ever need it, and of course to donate to altruistic aims. If I did start earning a lot more, there are very few things that I imagine would change WRT my own quality of life: maybe I’d eat out a little more, and possibly visit friends in distant countries more often, but for the most part I just don’t have any desires that I’m currently unable to fulfill because of not having the money for it.
Now my question is, if it happened that I was actually the typical case, who basically had no unfilled preferences of the kind that could be filled with extra money—and I freely admit that I might be very atypical in this respect, but supposing that I wasn’t… then how would extra money solve the resulting lack of growth in demand, if everyone was basically already content with what they had?
Ah, right. The first response that came to mind was “well, I might already have everything that I want, but what about those poor or unemployed folks we’re worried about”—but of course, if there are such people with unsatisfied desires, then obviously that means that there’s still an unmet demand that the increased production can help meet, and the extra money is so that the poor people can actually buy the fruits of that additional production? Thanks, that makes sense.
Don’t forget about status goods. It’s pretty much hardwired into humans to be competitive and one of the ways to compete is by having a bigger/shinier/better thing. Note: it’s comparative, not absolute, so you can (and do) get into status fights which have no natural stopping point. Your desire is to be bigger than the other guy, and he has the same desire, so you both just escalate.
For a real-life example look at superyachts owned by billionaires :-)
Do there exist any studies on how much money people actually spend on pure status pursuits? People keep mentioning that phenomenon, so I must assume that it exists, but I practically never seem to run into it in my own life, so I’m curious to what extent that’s just me living in a bubble or not recognizing such purchases. (People putting money into stuff like collectible games does come close, but even that feels more like spending money on a hobby rather than on pure status, especially given that I used to enjoy collecting some CCGs even when I didn’t know of anyone else who played them.)
Do there exist any studies on how much money people actually spend on pure status pursuits?
I don’t know but I also think that such studies would have major problems with data. In a way, whether you’re buying utility or status is about intent. Let’s say I like fishing and want a new boat. I can buy a 12′ boat or a 18′ boat. The 18′ one is more powerful, convenient, but also more expensive. It’s also bigger than my neighbor’s 16′ boat. I pick the 18′ boat—how do you determine which role my desire to trump my neighbor played in my decision to get the bigger one?
In practical terms status competitions seem to take off when people have nothing useful to do with their money (aka once they personally pass into post-scarcity era). Or, of course, if they really want status.
Well, I can tell you that as a general rule, if you give more money to the rich, they do not spend much more money then they would anyway. There has been economics research on this; basically, if you’re trying to stimulate the economy during a recession, the govenrment can spend more money, or it can give tax breaks to the poor, the middle class, or the rich. Out of all of those options, giving tax breaks to the rich has the smallest stimulus impact, because if someone is already rich then increasing their income doesn’t affect their spending very much. It has some impact, but it’s small.
Sure. If you want to look up economic research about this, the main thing you would want to to look for is what they call the MPC, the “marginal propensity to consume”; that is, if you add 1 more dollar to someone’s income, how much will their consumption increase. It’s generally somewhere between 1 and 0, 1 being “you give someone another dollar in income and they spend all of it” and 0 being “the spend none of it”. Generally speaking, MPC tends to decline the more income someone has.
Here was one study, done in Italy in 2012 on the subject.
We find that households with low cash-on-hand exhibit a much higher MPC than affluent households, which is in agreement with models with precautionary savings where income risk plays an important role. The results have important implications for the evaluation of fiscal policy, and for predicting household responses to tax reforms and redistributive policies. In particular, we find that a debt-financed increase in transfers
of 1 percent of national disposable income targeted to the bottom decile of the cash-on-hand distribution would increase aggregate consumption by 0.82 percent. Furthermore, we find that redistributing 1% of national disposable from the top to the bottom decile of the income distribution would boost aggregate consumption by 0.1%.
It’s worth mentioning that while the “marginal propensity to consume declines with income” idea is something that was assumed by Keynes and is part of Keynesian economic, it is something that others have contested. There is a lot of debate, for example, on the difference between “windfall income” and “permanent income” and how each affects MPC. But in general, if you look in most economic textbooks, the model you usually see is a sloping curve, where as income goes up MPC drops; it never goes quite to zero, there is usually some increase in consumption as you increase income, but it falls quite close to zero as income rises. The consumption function usually looks something like this:
Perhaps. In practice, though, it seems like there does seem to come a point where adding more money doesn’t necessarily increase demand significantly; if you already have a million dollars a year income, and that increases by a factor of 20, you probably aren’t going to use 20 times as many consumer goods or services.
Maybe advances in technology are going to create enough new types goods and services so that increasing demand can keep up with increases in production, but I’m not sure that that’s guaranteed to happen. If it doesn’t, it seems like there is some upper limit where enough stuff is produced for everyone without needing more then a fraction of the population to produce it.
This would ordinarily be diagnosed as an aggregate demand deficit and solved with additional money—it falls under the category of things that NGDP level targeting ought to solve unless there is something not further specified going on.
A genuine (possibly very stupid) question, since I have practically no knowledge about macroeconomics: when I think of my own preferences, I feel like I pretty much already have all the things that can be bought with money and that I might want. Yes, I would like to have somewhat more money, but mostly so that I could increase my savings to give me more of a safety cushion in case I ever need it, and of course to donate to altruistic aims. If I did start earning a lot more, there are very few things that I imagine would change WRT my own quality of life: maybe I’d eat out a little more, and possibly visit friends in distant countries more often, but for the most part I just don’t have any desires that I’m currently unable to fulfill because of not having the money for it.
Now my question is, if it happened that I was actually the typical case, who basically had no unfilled preferences of the kind that could be filled with extra money—and I freely admit that I might be very atypical in this respect, but supposing that I wasn’t… then how would extra money solve the resulting lack of growth in demand, if everyone was basically already content with what they had?
If everyone already has everything they want, your economy is solved.
Ah, right. The first response that came to mind was “well, I might already have everything that I want, but what about those poor or unemployed folks we’re worried about”—but of course, if there are such people with unsatisfied desires, then obviously that means that there’s still an unmet demand that the increased production can help meet, and the extra money is so that the poor people can actually buy the fruits of that additional production? Thanks, that makes sense.
Don’t forget about status goods. It’s pretty much hardwired into humans to be competitive and one of the ways to compete is by having a bigger/shinier/better thing. Note: it’s comparative, not absolute, so you can (and do) get into status fights which have no natural stopping point. Your desire is to be bigger than the other guy, and he has the same desire, so you both just escalate.
For a real-life example look at superyachts owned by billionaires :-)
Do there exist any studies on how much money people actually spend on pure status pursuits? People keep mentioning that phenomenon, so I must assume that it exists, but I practically never seem to run into it in my own life, so I’m curious to what extent that’s just me living in a bubble or not recognizing such purchases. (People putting money into stuff like collectible games does come close, but even that feels more like spending money on a hobby rather than on pure status, especially given that I used to enjoy collecting some CCGs even when I didn’t know of anyone else who played them.)
I don’t know but I also think that such studies would have major problems with data. In a way, whether you’re buying utility or status is about intent. Let’s say I like fishing and want a new boat. I can buy a 12′ boat or a 18′ boat. The 18′ one is more powerful, convenient, but also more expensive. It’s also bigger than my neighbor’s 16′ boat. I pick the 18′ boat—how do you determine which role my desire to trump my neighbor played in my decision to get the bigger one?
In practical terms status competitions seem to take off when people have nothing useful to do with their money (aka once they personally pass into post-scarcity era). Or, of course, if they really want status.
Look at what Russian oligarchs are buying. Look at what the Chinese are building (see e.g. http://edition.cnn.com/2013/07/24/world/asia/china-government-building-ban/?hpt=ias_c2). Do you think Dubai built its tallest building just because they wanted so much office space on so little land?
Well, I can tell you that as a general rule, if you give more money to the rich, they do not spend much more money then they would anyway. There has been economics research on this; basically, if you’re trying to stimulate the economy during a recession, the govenrment can spend more money, or it can give tax breaks to the poor, the middle class, or the rich. Out of all of those options, giving tax breaks to the rich has the smallest stimulus impact, because if someone is already rich then increasing their income doesn’t affect their spending very much. It has some impact, but it’s small.
May I have a few links? I’d like to examine the research on this in more detail.
Sure. If you want to look up economic research about this, the main thing you would want to to look for is what they call the MPC, the “marginal propensity to consume”; that is, if you add 1 more dollar to someone’s income, how much will their consumption increase. It’s generally somewhere between 1 and 0, 1 being “you give someone another dollar in income and they spend all of it” and 0 being “the spend none of it”. Generally speaking, MPC tends to decline the more income someone has.
Here was one study, done in Italy in 2012 on the subject.
http://www.stanford.edu/~pista/MPC.pdf
It’s worth mentioning that while the “marginal propensity to consume declines with income” idea is something that was assumed by Keynes and is part of Keynesian economic, it is something that others have contested. There is a lot of debate, for example, on the difference between “windfall income” and “permanent income” and how each affects MPC. But in general, if you look in most economic textbooks, the model you usually see is a sloping curve, where as income goes up MPC drops; it never goes quite to zero, there is usually some increase in consumption as you increase income, but it falls quite close to zero as income rises. The consumption function usually looks something like this:
http://en.wikipedia.org/wiki/File:MPC.png
Perhaps. In practice, though, it seems like there does seem to come a point where adding more money doesn’t necessarily increase demand significantly; if you already have a million dollars a year income, and that increases by a factor of 20, you probably aren’t going to use 20 times as many consumer goods or services.
Maybe advances in technology are going to create enough new types goods and services so that increasing demand can keep up with increases in production, but I’m not sure that that’s guaranteed to happen. If it doesn’t, it seems like there is some upper limit where enough stuff is produced for everyone without needing more then a fraction of the population to produce it.