Thread by @Noahpinion

1/Who will put $600 to better use -- Scrooge, or Tiny Tim?

A Christmas economics explainer.

noahpinion.substack.com/p/should-you-g…

2/A few people claim that Scrooge would put $600 to better use, because he'd save the money, which would increase investment, which would make society richer, instead of consuming in the present.

https://twitter.com/HonourableHappy/status/1341328673547411458

3/And there are still some people who fixate on the idea of rich people's personal thrift as the key to building up productive capital.

wsj.com/articles/in-de…

4/But these folks are barking up the wrong tree. And in this post, I explain why.

noahpinion.substack.com/p/should-you-g…

5/First of all, we don't necessarily know that Scrooge will save the money and Bob Cratchit (Tiny Tim's struggling, working-class father) will spend it.

Sure, the rich save more, but that's how much of their *regular income* they save, not a *windfall*.

6/People treat windfalls differently than they treat their regular income.

It's possible that Scrooge is *less* likely to save his $600 check!

en.wikipedia.org/wiki/Permanent…

7/In fact, there do appear to be some rich people who are so obsessed with earning high returns that they keep all their savings in long-term illiquid assets, and consume hand-to-mouth! This sounds a lot like Scrooge, who eats gruel to save money!

nber.org/papers/w20073

8/But OK, forget about that, and just focus on the question: Will increasing national savings by $600 actually make the country richer?

Maybe not. It might just push down rates of return while leaving real business investment largely unchanged.

9/Suppose that real business investment -- purchases of capital equipment and software, training of workers, and so on -- doesn't depend much on the cost of capital, and mostly depends on how many actual business opportunities there are...

10/In that world, if you TRY to pump up savings -- for example, by handing $600 to someone you think is very likely to save the money -- you won't actually end up increasing total savings or investment. You'll just push down the rate of return (by pushing up asset prices).

11/And in fact, over the past 40 years we've tried very hard to incentivize rich people to save more, with cuts to capital gains and dividend taxes.

But actual business investment has held pretty much constant, while the cost of capital has gone down.

12/So it looks like we're in a world right now where the demand for business investment isn't very sensitive to the supply of savings.

The constraint on business expansion is mostly not the availability of financing; it's lack of real opportunities.

13/So even if Scrooge WOULD save the $600, giving it to him is not going to make the country much richer, if at all.

Now, weigh that against the fact that $600 would make Tiny Tim a lot happier and healthier!

It's really no contest.

14/Americans are going hungry, and you're telling me that we need that $600 to make the cost of capital EVEN CHEAPER?

Git outta town!!

washingtonpost.com/graphics/2020/…

15/Anyway, business investment is important, but we've basically reached the end of our ability to increase business investment and accumulate real capital by giving more tax breaks to the wealthy.

It's time to try other approaches.

And meanwhile, Tiny Tim needs to eat!!

16/Anyway, this has been your Christmas economic explainer. Sign up for my newsletter's free email list in order to get more stuff like this delivered to your inbox! :-)

And Merry Belated Christmas.

(end)

noahpinion.substack.com/p/should-you-g…