Trickle-Down Transfer Dust
I was about to write a nice, pleasant post detailing the best business-themed books I’ve read since I became interested in pursuing an MBA (about three years ago) but first, I have to get something off my chest. One of the better finance/business blogs that I follow, The Big Picture (run by the fantastic Barry Ritholtz), which has admirably been on the sane side of the economics so far, linked to this piece of nonsense by Casey B. Mulligan in their 10 Mid-Week PM Reads yesterday:
Trickle-Down Fairy Dust (New York Times)
Generally, transfers do not expand the economy, regardless of whether the recipients are rich or poor. Rather, they confer benefits that are limited to the direct recipients of those transfers.
Coming out swinging, I see. Ok, since you don’t link to any supporting evidence for this I assume you’re going to explain how you came to this momentous conclusion. Let’s see… nope. This is just straight up laziness, Casey. Look, even I can do it.
In our model, the transfers’ multiplier is positive due to two channels. The first is a neoclassical channel, whereby those workers who bear the burden of funding the transfers respond by increasing their labour supply, thus boosting employment and output. The second is a Keynesian channel, whereby transferring resources from households with low marginal propensity to consume to those with a high one boosts aggregate demand and so raises output.
We find that the transfers’ multiplier is below the gross multiplier for purchases, but well above the net purchases’ multiplier. From the perspective of this model, fiscal spending on transfers can boost the economy in a recession. But, crucially, this is only the case if the transfer is well-targeted, moving resources between just the right groups of people in the economy.
And they even included your neoclassical model. Come on, this is simple stuff: if resources are moved from groups with higher propensities to save to those with lower propensities to save (i.e. households struggling in this depression living paycheck to paycheck or have no paycheck at all) aggregate spending is boosted along with the economy as a whole. You can argue the moral implications of such a policy but the the economics are pretty straight forward.
Casey, however, apparently doesn’t even accept the assumption that wealthier households have higher propensities to save:
Transfers may change the composition of spending to the extent that the benefiting group spends its resources differently than the financing group.
But changing the composition of spending is not the same as changing the total.
You sure about that?
Do the Rich Save More? (Journal of Political Economy)
We find first, like previous researchers, a strong positive relationship between current income and saving rates across all income groups, including the very highest income categories. Second, and more important, we continue to find a positive correlation when we use proxies for permanent income such as education, lagged and future earnings, and measures of consumption. Estimated saving rates range from zero for the bottom quintile of the income distribution to more than 25 percent of income for the top quintile. The positive relationship is equally strong or even more pronounced when we include imputed Social Security saving and pension contributions. Among the elderly, we find little evidence of dissaving and some suggestive evidence of slightly higher saving rates among high- income households. In sum, our results suggest strongly that the rich do save more; more broadly, we find that saving rates increase across the entire income distribution. In addition, we present evidence suggesting that the marginal propensity to save is greater for higher-income households than for lower-income households.
But wait, it gets better! (worse?) Casey goes on to suggest that “Even if a transfer from one group to another did increase aggregate spending and output,” more customers are actually bad for business:
Even if a transfer from one group to another did increase aggregate spending and output, the second flaw of trickle- down theory is that the additional spending confers benefits beyond the direct beneficiaries of a transfer.
You might think that more spending on, say, groceries would benefit grocers and the farmers who supply them. It’s true that a grocer receives funds when a new customer comes to his register. But he also has to provide more groceries or have one of his other customers get by with fewer groceries, and groceries are not free to supply. The funds a seller receives from a new customer may just offset the total costs of the goods provided to the customer, so the seller is hardly better off.
Am I actually reading this? Apparently in Casey’s world, businesses, indeed grocery stores, should be putting signs up by their doors saying “Sorry, no new customers. We have enough already.” Where does the concept of growing a business fit into this bizarro world? It doesn’t. Apparently most of what I learned so far in my MBA program is completely backwards. Good to know, sir. Also,the very idea that someone buying groceries with transfer money is quite literally taking the food out of other, apparently more deserving, customers’ mouths is as absurd as it is mendacious. Then again, what can you expect from an economist that can’t remember the difference between the federal funds rate and the discount rate. Yes, you read that right.
That this nonsense was linked to by the very respectable Barry Ritholtz hurts enough, but the fact that Casey is actually a regular contributor to the New York Times, the same New York Times that prints the perspicacious Paul Krugman, is baffling and sad.