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A Great Depression for rich people
What does a Great Depression for the relatively wealthy look like? If you spend lots of your budget on "luxuries" -- especially durables -- it is easy to postpone their consumption. This might cause gdp to fall more rapidly than if people were poorer. If you are spending most of your money to eat and stay alive, and a negative shock comes, you have to work harder to make up the difference.
It's so, so easy to put off the purchase of a new car. And that makes for a steep ride down, most of all for the geographically distant producers of durable goods. Whether the steep economic plunge is worse in utility terms is debatable but maybe not because wealth buffers are better built up.
On the other hand, the presence of so many wonderful free goods allows for easy substitution into activities which do not generate much economic revenue or employment.
For these ideas I am indebted to a conversation with Arnold Kling and Seth Ditchik, just before we ate superb barbecue at Oklahoma Joe's, get the ribs and french fries.
Posted by Tyler Cowen on February 27, 2009 at 05:55 AM in Economics | Permalink
Comments
Free goods link just comes back to main marginal revolution page.
Posted by: John Bailey at Feb 27, 2009 8:15:29 AM
I don't think that's a mistake so much as its an example of a "wonderful free good."
Posted by: mhallex at Feb 27, 2009 8:32:10 AM
Clever, you dog. Well played.
Posted by: Chris at Feb 27, 2009 8:41:17 AM
exactly. the education and entertainment value i have received for basically free from the internet -- mostly blogs -- would have cost me quite a bit not 3 years ago. in fact it wouldn't have happened at all. this is clearly economic activity, so why is this not part of measured GDP? because there is no money changing hands? we need an electronic micropayment scheme.
Posted by: babar at Feb 27, 2009 9:10:11 AM
I thought the deal was that if we gave them massive tax cuts, they would create jobs for us. What happened?
Posted by: a at Feb 27, 2009 9:44:25 AM
Another thing that buffers recessions is the modernization of the family. Two earner families mean that losing a job does not zero out family income. Many families are budgeting against their two income margin, but even then many have more of the sort of budgetary fat that Tyler eludes to in the post. For these families, serious hardship can be avoided by dropping gym memberships, fancy cell phone packages, HBO, vacation at the Cape, 401k contributions & cet. Sure that stinks, but a lot less than dropping more necessary expenditures.
Posted by: liberalarts at Feb 27, 2009 9:46:20 AM
It is easy to hold-off on a car, but if cars sucked as bad as they did in the 70's, we'd never have kept one of ours for 15 years. As it is, we figure we have up to two years before replacing it.
Posted by: MH at Feb 27, 2009 9:56:28 AM
Don't forget the Winstead's burger! There's on on the Plaza. Get the vanilla shake, try the limeade, and make sure you ask for ONION on the burger!!!!
Oklahoma Joe's was a good second choice. Hope you still make Bryant's.
Posted by: Peter Russell at Feb 27, 2009 11:17:47 AM
In the face of a 4% increase in the federal tax burden, the rich will likely continue getting richer, only more slowly. They probably won't get poorer in any way that will seriously affect their lifestyle--one less Mercedes p'raps. And additional 4% of $250,000= $10k. Even adding to that his attempt to lower the itemized deduction limit from $3500 to $2800 for the upper tax bracket so that it equals that the current limit of the 28% bracket would keep the tax hit well below the cost of a Mercedes.
In a recent Times article the authors describe "a pronounced move to redistribute wealth by reimposing a larger share of the tax burden on corporations and the most affluent taxpayers."
NYT Online-2/25, Jackie Calmes and Robert Pear
This is the kind of statement I have to write down somewhere so I can always return to it when I need a smile.
Maybe my thinking isn't conservative enough, perhaps I use the language differently, perhaps conservatives are speaking a different language. But I'm confused as to how "reimposing" a larger tax share" does not imply (the prefix "re" is hard to miss) that at some point the original tax share was "X" and now it's "X-y" (Surely that's redistributing wealth upward, by decreasing the tax burden (X). . . isn't it?) So now we're going to redistribute wealth downward by increasing the tax burden(X+y). In this scenario, how does "redistribution of wealth" qualify as evil in one case and good in the other?
ANY taxation, state, local or national, is, is it not, a redistribution of wealth? Do not my taxes and yours provide funds to poorer (and even affluent) areas of the country for various reasons? Example: Tornadoes, earthquakes, floods,wildfires, you name it. Should we stop taxing, or take away the power to tax, and return to a pre-Constitution world--something closer to the Articles of Confederation--where the government could only request states to pay taxes, thus leaving the country vulnerable to foreign forces?
Posted by: songar at Feb 27, 2009 1:12:54 PM
The upper-upper-middle class who remain employed will benefit from a recession as prices drop while their salaries (which constitute the majority of their incomes) remain the same. Discounts on luxury hotels, car dealers more eager to push inventory will take lower offers, remodeling costs will be less, housing upgrades could be had cheaper, etc. Many people consider this group to be "wealthy".
Posted by: Jim P at Feb 27, 2009 2:47:56 PM
Very funny. Got me, too.
Posted by: Parke at Feb 27, 2009 2:48:13 PM
songar,
Clearly you are a socialist, if not an outright communist.
After all, don't you remember the terrible recession we
suffered through when the wealthy previously suffered under
such onerous taxe rates back in the mid-to-late 1990s? Get
thee to an IRS office!
Posted by: Barkley Rosser at Feb 27, 2009 5:24:17 PM
The Great Depression for wealthy people? Check out those old MGM musicals! Singing! Dancing!
Posted by: ZBicyclist at Feb 27, 2009 10:15:45 PM
In a poor society, there is little room for savings. In a rich one, a significant fraction of the population can choose whether to spend or save. In a time of deleveraging, saving is that choice. A return of confidence is critical to reversing that disposition.
Posted by: Larry at Feb 27, 2009 11:02:58 PM
Barkley: Thanks for the heads-up. Now I've got the label I've always wanted! And I appreciate the correction. It's silly of me to even consider the 1987 recession and the following years of high unemployment, high deficits, and low GDP. Reagan's tax cuts didn't seem to prevent those. Isn't it worth noting that he took the top rate down to 50% and the the recently proposed changes will "return" it to 39% (That is 11% 'lower', right?). And I can't forget the economic growth that seemed to accompany the Clinton tax increases. But most of all, I'm struck by the obvious failure of Bush tax cuts to avert the recession (or worse).And the fact that while those tax cuts were in effect the deficit reached $400+B.
Please diabuse me of my misconceptions on all (not just one or two) of the above, because I sincerely want to be the moderate liberal that I think I am, though I know some people predictably equate liberals and socialists, just as others equate conservatives with fascists.
Posted by: songar at Feb 27, 2009 11:12:37 PM
songar,
But you must not forget the disaster the US economy was between 1940 and 1964 when the top marginal income tax rate was in excess of 90%, without question far worse than any time before or since.
Posted by: Barkley Rosser at Feb 28, 2009 1:05:06 PM
Ah, yes. . .I recall my personal financial woes during those years. Full pockets, growing 401(k)'s. Why, every time I hark back to those times, I think of the "onerous taxe rates back in the mid-to-late 1990s" that you mentioned. And I weep. I grew up in the 50's and 60's-- a financially calm time in my household, with no financial worries to speak of, despite my father's low-paying job.
Tangentially: Here's something I go back to occasionally for a good laugh.
http://www.miseryindex.us/urbymonth.asp
Scroll down quickly and note the point where the graph suddenly looks like supermodel who's just developed a major set of mammary glands.
http://www.slideshare.net/cmulbrandon/income-distribution-in-the-united-states
I've got "so" many questions about the 22 charts and graphs in the link above, and no one to answer them. . . It seems to me that someone could synthesize all this info, though I doubt that it's yet been done within a NON-ideological framework. So many ways to fudge and so little time.
And you, you devil you, instead of dealing with my previous request, you just added to the list. :)
Posted by: songar at Feb 28, 2009 3:56:06 PM
Just wanted to respond about the BBQ! While Bryant's is quintessential KC BBQ, Oklahoma Joe's is my favorite, so glad you could try it out... though I'd go back for the Z Man... best sandwich on the planet. I will also second the comment by Peter Russell about Winstead's. It'll knock your socks off.
Posted by: Brad at Mar 1, 2009 1:52:15 PM
songar,
Well, measured happiness in the US peaked out in 1956. Of course, Kahnemann has established that
having "intimate relations" is what makes women the happiest, and I note that 1957 was the year
of absolutely all time maximum births in US history, heh heh...
Posted by: Barkley Rosser at Mar 1, 2009 1:57:12 PM
I guess if a 90% tax rate "greases the wheels" in bed, it is, as Martha Stewart would say (between her eponymous sheets?), "a good thing". But for a true and useful perspective, don't we need to be able to compare birth rates between those couples earning under $4k--the ones paying 20%--and those earning over $400k (the 90 per centers). The 20%'ers--even as they do today-- made up a much larger portion of the population and they might. . .just might. . .have made up for any "sexual slippage" that may have occurred among those poor, tax-stressed 90%'ers.
I wonder if the 90 per centers were 90 per centers in the sack. . . .? They say wealth is an aphrodisiac. Q: Does money increase (decrease) fertility and/or horniness?
Until we have those answers, we're left with a niggling muddle only further confused by facts such as the following: Most of the countries with the highest birth rates are in Africa . #1 Niger has a 45% income tax rate and a 35% corporate rate. #2 Mali has a 40% income tax rate and a 35% corporate rate. Just googlin' on a lazy Sunday.
Anyone up for authoring paper: "Top Marginal Income Tax Rates and the Biological Imperative"?
Posted by: songar at Mar 1, 2009 6:34:12 PM
I totally agree with a lot of the previous comments. I do believe that the rich will see something happening but, they won't feel a damn thing. It's the blue collard worker that will really feel the stretch of a dollar. However in the past couple of months we have seen a slight break in our nations economy but, this recession is far from over.
Our banks are hurting but, not more than our "average joes". For the banks to have money, we must make sure that "joe" has money. A phrase from a very comical movie comes to mind; "The word of the day is J O B" give us our jobs back.
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