Question for Krugman: Can the Rich Provide All the Demand?

I’ve long been troubled by a Paul Krugman comment from 2008:

There’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class — $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do.

And I find in his concluding comment from his recent AEA session that he remains completely uncertain on the issue:

…we do not know how rising inequality interacts. There are more poor people who are liquidity constrained but they have less spending power, so we are not sure how it goes.

I’m kind of astounded by this thinking, and even more by his apparent lack of curiosity about the issue. It strikes me as being absolutely central to any discussion of public policy. (Viz: all the talk about a strong middle class vs. trickle-down.)

I’ve poked at this question a couple of times:

In my model here and here looking at how (re)distribution of wealth affects demand, hence production, and

In discussions of imaginary ultra-high-productivity worlds in which a single person could own an atomic fabrication machine that produces everything that everyone needs (and hence receive all the income from that production).

Paul has clearly been shifting his thinking to encompass the possibility of a post-Luddite-Fallacy world. I wonder if his thinking has also developed on the related issues of inequality and distribution, and their effect on demand.

Cross-posted at Angry Bear.

  1. psychohistorian
    January 12th, 2013 at 10:56 | #1

    Since Krugman refuses to talk about where money comes from I wonder if he could be convinced to talk about ongoing accumulative inheritance and its effects on the public commons.

    Thanks for the posting.

    Its seems imperative that folks keep pointing out that the myth of Macro economics never talks about the base class system with inheritance and accumulating private ownership of “property” as even externalities in their models. The agnotology/brainwashing about the rich deserving their place in our society continues.

  2. January 21st, 2013 at 02:57 | #2

    I think in his latest post on inequality [*] Krugman gave a good hint at what lies behind “his apparent lack of curiosity about the issue”: the permanent spending ***hypothesis***.

    He assumes that the statistical fact (which he doesn’t dispute, btw) that people on higher incomes spend less is an statistical artifact and does not reflect reality: whether one is rich or poor, one thinks “this is a good year to me, but next year could be bad, therefore, let’s save money now, so that I have savings next year”.

    Assume, instead, that people will try to spend about the same, if at all possible, and you reach a different conclusion: if this year was real bad, you may try to cut spending, of course, but there are limits (you still need to eat, pay your rent, use the bus, pay the phone, and such); if you have no savings, you’ll try to borrow to cover the difference. That explains that savings fell as inequality grew, which seems to puzzle Krugman.

    If you are on low incomes, the rare good year means basically you earned a few thousand bucks more: it doesn’t put you on the road to a savings account. At best, you pay your debts.

    At the other hand, if you are really, really, really wealthy, you don’t have many bad years, but if one were to come around, you don’t really feel the pinch as much: you’ll hardly have to go to the pawn shop, cap in hand, with the jewels of the British crown.

    Basically, you can still save, while leading a very good life.

    [*] Inequality and Recovery – Krugman – January 20, 2013
    http://krugman.blogs.nytimes.com/2013/01/20/inequality-and-recovery/

  3. January 24th, 2013 at 21:34 | #3

    Paul Krugman does apparently believe that.

    Steve Waldman takes that on here:

    http://www.interfluidity.com/v2/3830.html

    Quite frankly I don’t see what if anything remains of Krugman’s argument.

  1. April 4th, 2013 at 07:26 | #1
  2. April 5th, 2013 at 19:14 | #2