Bleg: What’s Wrong with the MPC/Spending-Velocity Argument?
I’ve ground the axe quite a bit over the years for the argument that Kevin Drum makes — and dismisses — here.
In brief: poorer people spend a larger share of their income/wealth than richer people. So if poorer people have more income/wealth — if the distribution is more equal — there will be higher money velocity/more spending/more production/higher GDP.
(Search for “marginal propensity” and follow Related Links to see my stabs at this.)
But Kevin — who certainly has the political inclination to make this argument — says:
This sounds pretty plausible, doesn’t it? Higher inequality should generate less consumption, which in turn produces a weaker economy. Unfortunately, the data says something else. “I wish I could sign on to this thesis,” says Paul Krugman, “and I’d be politically very comfortable if I could. But I can’t see how this works.”
Me neither. I spent a couple of months trying to write a magazine piece based on this thesis, and I finally gave up. By the time I was done, I just didn’t believe it. So I gave up and spiked the idea.
I’ve tweeted him and posted a comment, but haven’t heard: what made him give up on this? What convinced him otherwise?
And in response to a recent post where I ground this axe, Scott Sumner responded:
But you really need to give up on that MPC stuff, it was discredited decades ago. Monetary offset rulz.
This in keeping with his seeming assertion that nothing matters except monetary policy, because monetary policy will (or at least should) always offset it.
But still: Sumner, Drum, and Krugman all seem to think that the distribution/MPC/velocity argument has no legs. They’re quite categorical about this.
SRW took a stab at the subject recently, telling a story that I find quite convincing. But didn’t really explain to me why so many feel so certain that it’s not true.
Can folks (especially those who don’t believe this argument) point me to what might be considered definitive takedowns? I have notions about what they might say, but want to see the best argument(s) out there.
These takedowns should, just for instance, convincingly debunk this paper (sorry, gated), which suggests that rising income inequality ’67-’86 resulted in 12% lower consumption spending in ’86 than would have occurred if inequality had remained the same.
Cross-posted at Angry Bear.