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Posts Tagged ‘Upper Income Spending’

Risk Adjusted GDP growth and taxing the rich

May 13, 2011 6 comments

Matt Y tackles a tough problem. Many economists believe that lower taxes on the rich increase economic growth by a few tenths of a percent.  We do not have much solid empirical evidence for this, but they still believe it.  So of course, these people agitate for lower taxes on the rich – its a no brainer because it makes everyone better off.

But the most cursory investigation makes it obvious they care far more about low taxes than economic growth.

First, Nearly all the benefit from this .2% comes after the current generation is dead.  The extra benefit is barely visible after 40 years.

Economic Growth after 40 years

3.5%   296%

3.7%  328%

The overall economy is 30% better off after 40 years. Thats great, but not exactly earthshaking extra growth.

Next, This is the total economic growth. It doesn’t account for distributional effects.  If the entire economy is 328% better off, but the middle class is only 200% better off, the deal is much better for the middle class to go with taxing the rich.

Over the last 40 years, the middle class is closer to 0% better off than 200% better off. No wonder why the middle class wants to tax the rich more.  They don’t get any growth otherwise.

Then, This thinking doesn’t account for increased economic volatility that results from wealth concentration.  I pound the table about this – we need to think about risk adjusted returns when looking at economic growth.

Downside volatility is horrible for long term growth, because digging out of the hole takes a long time.  Some people are waking up to the idea, but we need more focus on the risk and not just the return when thinking about long term GDP growth.

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The U.S. recovery accelerates

December 20, 2010 Comments off

The U.S. consumer is beginning to feel as though they will not lose their job next week, and that the cuts are done.

As a result, spending is probably up this month.  I am actually seeing long lines in stores when I shop – very long lines.

Economists expect consumer spending to be good for November -and I do too.  I no longer think the Gallup polls are good indications of spending.  My expectation is that due to society wide changes, frugality is “in” and appearing to spend less is part of the new normal.   I would tell people I am spending less this year, when by any objective assessment I am clearly spending more.

Even the Gallup polls show parity with last year – but as far as I can tell the Gallup information is equal weighted, not spending weighted.   Upper income spending drives most of the U.S. Economy.  My expectation is that high-income spending is up dramatically over last year for the Holiday Season.

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