Category: Equitablog

Can This Capitalism Be Saved?

Posted on by Brad DeLong
Robert reich saving capitalism Google Search

Here is piece of mine left on the cutting room floor elsewhere. So I might as well throw it up here.

Reviewing: Robert Reich: Saving Capitalism: For the Many, Not the Few http://amzn.to/29Viz6w

Robert Reich’s Saving Capitalism: For the Many, Not the Few http://amzn.to/29Viz6w is an excellent book. It powerfully argues that America needs once again—as it truthfully reminds us that we did four times in the past—restructure its institutions to build both private and public countervailing power against the monopolists and their political servants in order to right the distribution of income and boost the pace of economic growth.

Reich wants to remind us Americans of our strong record of “expanding the circle of prosperity when capitalism gets off track.” We have in our past no fewer than four times built up countervailing power to curb the ability of those controlling last generation’s wealth and this generation’s politics to tune institutions, property rights, and policy to their station. This repeated, deliberate construction of countervailing power kept America a high-wage economy—the world’s highest-wage economy, in fact—for ordinary (white, male) guys.

Until now.

Thus Reich wants us here in America to fix our future by recalling our past.

The first piece of our past Reich wants us to remember is Andrew Jackson’s Age: the period starting in 1828 when America removed:

accrued unwarranted privileges… [keeping] average citizens… [from] gain[ing] ground…. The Jacksonians sought to abolish property requirements for voting and allow business firms to incorporate without specific acts of the legislature, and they opposed the Second Bank of the United States, which they believed would be controlled by financial elites. They did not reject capitalism; they rejected aristocracy. They sought a capitalism that would improve the lot of ordinary people rather than merely the elites…

In what may be the only favorable citation of Roger B. Taney I will see in this decade, Reich remembers not the Supreme Court Chief Justice of the late 1850s but the Attorney General of the early 1830s. He remembers the Taney of:

It is a fixed principle of our political institutions to guard against the unnecessary accumulation of power over persons and property in any hands. And no hands are less worthy to be trusted with it than those of a moneyed corporation…

Yes, Reich says, that Taney shared the same body with the Taney who wrote the opinion in Dred Scott vs. Sanford: Jacksonians believed that no laws that endowed the Cherokee or other native Americans with any property whatsoever should be enforced, and that no African American—slave or free—had any “rights which the white man was bound to respect” at all. But in Reich’s the Jacksonian Revolution prevented America’s drift toward a more English form of political-economic organization, in which restrictions on westward migration coupled with political grants of economic monopoly rights lead to a lower-wage economy.

Of course, that drift came after the Civil War, with the coming of the Gilded Age and then of the second piece of history that Reich wants us to remember: the 1901-1916 Progressive Era of Teddy Roosevelt and Woodrow Wilson as a response to Gilded Age inequality and political corruption of the system. The response to the Great Depression took the form of Franklin Delano Roosevelt’s 1933-1939 New Deal and the partial construction of the great arch of American social democracy, which was then extended with Lyndon Johnson’s 1964-1966 three-part legislative program of the 1964 Civil Rights Act, the 1965 Voting Rights Act, and the 1965 Medicare Act.

All of these, Reich argues, show that:

We need not be victims of impersonal “market forces” over which we have no control. The market is a human creation… based on rules that human beings devise. The central question is who shapes those rules and for what purpose…. The coming challenge is not to technology or to economics. It is a challenge to democracy. The critical debate for the future is not about the size of government; it is about whom government is for. The central choice is not between the “free market” and government; it is between a market organized for broadly based prosperity and one designed to deliver almost all the gains to a few at the top… how to design the rules of the market so that the economy generates what most people would consider a fair distribution on its own, without necessitating large redistributions after the fact…

The key for Reich is the proper construction of institutions that provide, in a phrase he borrows from John Kenneth Galbraith, countervailing power to that power over political-economic arrangements provided by the oligarchic inheritance of last generation’s wealth and the oligarchic building up of political influence.

We today see a much gloomier future–at least a much gloomier economic future than the one 2006 seemed to offer us. Lower asset returns and lower profit opportunities. Greater “headwinds”. Slowed technological progress. Slower growth in living standards. More income and wealth inequality. A political economy chained by ideological propaganda in which making good win-win policies has gone out the window.

Reich sees this context, and so he writes to remind us that we have successfully dealt with the problems of creating institutions to support equitable and inclusive growth before. But his book seems more cheerleading than sober assessment. It feels to me like an optimism of the will. But when I look around me, the reality I see seems to weigh heavily on the side of a pessimism of the intellect–in economic affairs, at least.

Thinking About “Premature Deindustrialization”: An Intellectual Toolkit I

Posted on by Brad DeLong
End of export led growth would not be good for post crisis Asia Asia Pathways

OK. Popping the distraction stack again. The very sharp Matthew Yglesias writes about:

Matthew Yglesias: Premature Deindustrialization: The New Threat to Global Economic Development:

In the popular imagination, the old industrial landscape has moved abroad to Mexico or to China, perhaps due to bad trade policies or simply the vicissitudes of changing circumstance… [and] the migration of factory work to much poorer countries has been a boon to those countries’ economic development…. [But] ‘premature deindustrialization,’ in which countries start to lose their manufacturing jobs without getting rich first…. [Dani Rodrik:] “Developing countries… have experienced falling manufacturing shares in both employment and real value added, especially since the 1980s.’…

Jana Remes… economy-wide productivity growth in Mexico has been dismal… [because] Mexican manufacturing sector has… remained quite small…. The dynamic manufacturing sector, in other words, simply isn’t big enough to employ many people. And it’s not really growing much…. [Future] manufacturing enterprises will increasingly look more like software companies–where designing, programming, maintaining, and debugging the machines will be more important than staffing them. A country like the United States with a very robust high-tech sector will be a strong contender for those technologically intensive manufacturing jobs, even if there aren’t very many of them. Countries that haven’t yet industrialized, meanwhile, may be left out in the cold…

And:

Let me back up and quickly sketch the argument that manufacturing matters, and manufacturing exports matter a lot for industrialization and economic development in the Global South. And let me make the argument in what I regard as the proper way–that is, dropping far back in time and running through the economic history…

I do not, all thing considered, think that, absent the luck and randomness that gave us the British Industrial Revolution, a permanent or semi-permanent “Gunpowder Empires” scenario was the third-millennium likely historical destiny of the Sociable Language-Using Tool-Making Big-Brained East African Plains Ape.

However, this does not mean that the historical destiny looking forward from 1750 or so in the Global South was bright. World population had quintupled in the 2000 years to 1750, carrying with it a notional five-fold shrinkage in average farm sizes, or at least in the amount of land supporting the typical family. The slow pace of technological progress from -250 to 1750 had made up for–indeed, had caused–this rise in population. And the biotechnologies of agriculture were indeed mighty: to 1750 we have the creation and diffusion of maize, of double-crop wet rice, of the combination of the iron axe and the moldboard plow that could turn northern temperate forests into farms, of domesticated cotton, of the merino sheep, and of the potato.

But a human population growing at 10% per generation required more such innovations, lest living standards fall in order to curb population growth via children so malnourished to have compromised immune systems, women who were too thin to ovulate, or increased female infanticide. People in 1750 were as well fed and clothed as they had been in -250. But what would have been the next agricultural miracles? You would have needed a number of them to attain continued total factor productivity growth at 0.02%/year to compensate for the further quartering of farm sizes that would have been inevitable for population growth to continue and human numbers topped 3 billion by 2050. And draft animals are not that much help in a densely populated near-subsistence society: they have large appetites, and the land their foodstuffs grow on is subtracted from that available for people. Only a relatively rich society can afford to replace human backs and thighs with those of horses and oxen.

However, these problems in the economic growth of the Global South ought to have been solved by Britain’s Augustan Age industrial breakthrough. Let’s rehearse the story briefly:

(1) The Protestant Wind that blew in 1688 and a century before in 1588 created in Great Britain an ideologically mobilized ruling class willing to commit previously unheard-of resources to first defensive and then imperialist war. (2) The resulting fiscal-military state coupled with the fact that Great Britain is an island created the first British Empire and funneled the maritime trade profits of the world into the island. (3) The resulting high wages coupled with the extremely low price of coal made the R&D to invent and deploy the first generation of technologies of the coal-steam-iron-cotton-machinery complex profitable. (4) The first generation of this complex of technologies are barely profitable even in the most favorable regions of Britain. (5) But the third-generation technologies are wildly profitable in Britain and profitable in selected other regions like New England and the lower Rhine valley. (6) And by the fifth generation–1850 or so–British-style industrial technologies would have been profitable anywhere in the world the resources could have been brought together, as long as there was large enough market demand to serve.

Thus as of 1850 the problem of finding the agricultural and industrial technologies needed to move the Global South to wealth and prosperity appeared solved. The technologies existed–in Britain. They could be easily transported–they were embodied in the capital goods made in the machine shops of Lancashire. Writing around 1850, Karl Marx saw 50 years as the time span for his bourgeois economic and political revolutions to spread as far as India–and thus set the stage for global socialist utopia.

Writing around 1850 and still writing so in the 1870s, John Stuart Mill saw the big economic problems as not ones of innovation and technological diffusion but rather of the demographic transition: The conscious human management of fertility was essential if technology was going to win its Malthusian race against population even in the Global North, and that required widespread cheap artificial birth control coupled with the dropping of the Victorian modesty that prevented public discussion of such “things”.

But Marx and Mill were wrong. The problems of the demographic transition turned out, in the long sweep of things, to be easy presuming successful development and income growth: They solved themselves within two generations after girls attained the leisure to learn how to read.

It was, rather, the problems of technological and institutional development and transfer that turned out to be the nastiest and most stubborn ones for the Global South. The U.S. was about twice as rich as China and India in 1800. It was 30 times as rich as they were at purchasing power parities come 1975. And, at least according to Hans Rosling and company, China and India were no richer in 1975 than they had been in 1800.

Why should this be the case in a world in which the technology was embodied in large hunks of metal shaped in the machine shops of Lancashire–hunks of metal that could be cheaply transported all over the world? Why did the 20th century see a world sharply divided between a Global North and a Global South, with productivity in the Global North growing at 2% per year while the Global South fell further and further behind?

What I believe to be the correct answer was given by W. Arthur Lewis (1977): The Evolution of the International Economic Order:

Lewis’s first step first step is to note nineteenth-century labor mobility. Between 1850 and 1914 more than 50 million people left Europe to settle elsewhere, and more than 50 million people left China and India to settle elsewhere. Racism and imperialism exclude Chinese and Indian migrants from settling in the temperate zone colonies and ex-colonies with agricultural profiles familiar to the relatively rich Europeans. Thus the need to pay wages high enough to attract migrants from Europe kept living standards in what Lewis calls the temperate zones of European settlement high, and kept the prices of the temperate-zone commodities that they alone could produce high as well.

Migrants from China and India went to the tropics. China and India were both then in the down-phase of the Malthusian cycle, with emigrants thus being willing to accept barely more than raw biological subsistence wages to move to the world’s Malaysias and East Africas. Their pressure pushed wages in tropical migrant-recipient economies down, and pushed the world market prices of the tropical-zone commodities that they made and sold down. That meant that even tropical economies that did not receive immigrants from China and India found their relative wage levels collapsing as well. Manaus, the capital of Amazonas in Brazil, looked to be getting rich providing services for the prosperous rubber tappers of the Amazon basin–until the British Empire brought Brazilian biologics and Chinese workers to the Malay Peninsula, and the world price of rubber collapsed.

Thus when Modern Economic Growth began in the last third of the nineteenth century, the world was then being rapidly divided by migration and the world labor market into a Global North producing high-price temperate and a Global South producing low-price tropical agricultural products. And it was in this world that first the fifth-generation technologies of the coal-steam-iron-cotton-machinery complex and then the knock-on Second Industrial Revolution technologies of modern metallurgy, internal combustion, electricity, and organic chemistry diffused.

And here something peculiar happened.

The overwhelming bulk of the labor required for Industrial Age factory-floor work is not high: “semi skilled” is the buzzword–which means a degree of familiarity with machine technology and the operations of the particular system, plus a willingness to accommodate your motions to those enforced by the system as a whole. It is the kind of thing but almost anyone can pick up any few months at most. No deep knowledge or understanding of the underlying processes and engineering mechanisms is required to be a productive assembly line worker. The high technology is embodied in the machines. And the machines can be cheaply shipped anywhere on earth. Yes, you do need a few engineers who understand the machines at a profound and comprehensive level. But, ever since the day in 1789 that the 21-year old [Samuel Slater][] sailed for America, finding qualified engineers willing to work as expatriates has not been an insurmountable problem.

You would imagine, therefore, that once the iron-hulled ocean-going screw-propellered steamship and the submarine telegraph cable had made their appearance, factory work worldwide would have rapidly gone to where labor was cheap. Yet from 1850-1980 that was not the case. Factory work by and large stayed where labor was expensive. And those economies that did manage to figure out how to utilize British Industrial Revolution and Second Industrial Revolution technologies at near-frontier levels of efficiency rapidly joined the club of rich economies that was the Global North.

In fact, up until the 1980s, with the important exception of the move of the textile industry from New England and Old England to the U.S. South and the European Mediterranean, outsourcing and offshoring were simply not things putting downward pressure in aggregate on the wages and prosperity levels of old industrial districts. For every job that left for, say, low-wage Korea or Taiwan putting downward pressure on wages, there was another job where rapidly rising wage levels in Japan or Italy putting upward pressure on Global Manufacturing wages. Before the 1980s it was rapidly increasing productivity in manufacturing coupled with a less than unit price elasticity of demand for staple manufactures that hollowed out the Global North’s old industrial disticts–not globalization.

So why was it that manufacturing stayed in the Global North for so long, given that the machines could be shipped anywhere, the skill required of the workers was not so high, and expatriate engineers (and managers) were cheap relative to the scale of operations?

Lewis (1977) provides his explanation:

In a closed economy, the size of the industrial sector is a function of agricultural productivity. Agriculture has to be capable of producing the surplus food and raw materials consumed in the industrial sector, and it is the affluent state of the farmers that enables them to be a market for industrial products…. If the smallness of the market was one constraint on industrialization, because of low agricultural productivity, the absence of an investment climate was another. Western Europe had been creating a capitalist environment for at least a century; thus a whole new set of people, ideas and institutions was established that did not exist in Asia or Africa, or even for the most part in Latin America, despite the closer cultural heritage. Power in these countries—as also in Central and Southern Europe—was still concentrated in the hands of landed classes, who benefited from cheap imports and saw no reason to support the emergence of a new industrial class. There was no industrial entrepreneurship.

Of course the agricultural countries were just as capable of sprouting an industrial complex of skills, institutions, and ideas, but this would take time. In the meantime it was relatively easy for them to respond to the other opportunity the industrial revolution now opened up, namely to export agricultural products, especially as transport costs came down…. And so the world divided…. It came to be an article of faith in Western Europe that the tropical countries had a comparative advantage in agriculture. In fact, as Indian textile production soon began to show, between the tropical and temperate countries, the differences in food production per head were much greater than in modern industrial production per head….

Trade offered the temperate settlements high income per head, from which would immediately ensue a large demand for manufactures, opportunities for import substitution, and rapid urbanization…. The factorial terms [of trade] available to them offered them the opportunity for full development in every sense of the word.

The factorial terms available to the tropics, on the other hand, offered the opportunity to stay poor-at any rate until such time as the labor reservoirs of India and China might be exhausted…

The key is that the technologies of the first British and the Second Industrial Revolution, as they developed, rapidly grew in productivity, scale, and capital intensity. You needed a large market in order to support an industrial complex at a scale capable of near-efficient production. And a poor economy with a poor middle class could not do the job from demand at home.

To recapitulate: If you were a rich, temperate zone economy with a high wage level, the market for your nascent manufacturing sector was all around you. As long as you could keep Britain (or later the United States) from sucking up all of the oxygen, your manufacturing sector could grow organically. And so you can gain the learning-by-doing expertise needed for successful industrialization, growth, and development to carry you to the world’s productivity and living standard frontier.

But if you were a poor, low-wage, tropical country, you could not. Your own citizens were too poor for your middle-class to be a source of mass demand for manufacturers. Thus successful economic development would require much more than import substitution.

It would require export promotion, and successful export promotion at that. You could not industrialize and develop by relying on your own home market. You had to borrow someone else’s. And as the twentieth century proceeded that turned out to be a tricky and a delicate task indeed.

TO BE CONTINUED

[Samuel Slater]: https://en.wikipedia.org/wiki/Samuel_Slater (Wikipedia: Samuel Slater

Must-Read: Jacob Vigdor et al.: Report on the Impact of Seattle’s Minimum Wage Ordinance

Posted on by Brad DeLong

Must-Read: Jacob Vigdor et al.: Report on the Impact of Seattle’s Minimum Wage Ordinance:

The typical worker earning under $11/hour in Seattle… earned $11.14 per hour by the end of 2015, an increase from $9.96/hour at the time of passage….

We estimate that the minimum wage itself is responsible for a $0.73/hour average increase…. The minimum wage appears to have slightly reduced the employment rate of low-wage workers by about one percentage point…. Hours worked among low-wage Seattle workers have lagged behind regional trends, by roughly four hours per quarter (nineteen minutes per week), on average…. Seattle’slow-wage workers did see larger-than-usual paychecks… but most… of that increase was due to a strong local economy…. At most, 25% of the observed earnings gains… can be attributed to the minimum wage….

For businesses that rely heavily on low-wage labor, our estimates of the impact… are small and sensitive to modeling choices…. Moreover, if there has been any increase in business closings caused by the Minimum Wage Ordinance, it has been more than offset by an increase in business openings.

Must-Reads: July 28, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: John Fernald (2014): Productivity and Potential Output Before, During, and After the Great Recession

Posted on by Brad DeLong

Must-Read: John Fernald (2014): Productivity and Potential Output Before, During, and After the Great Recession:

U.S. labor and total-factor productivity growth slowed prior to the Great Recession.

The timing rules out explanations that focus on disruptions during or since the recession, and industry and state data rule out ‘bubble economy’ stories related to housing or finance. The slowdown is located in industries that produce information technology (IT) or that use IT intensively, consistent with a return to normal productivity growth after nearly a decade of exceptional IT-fueled gains. A calibrated growth model suggests trend productivity growth has returned close to its 1973-1995 pace. Slower underlying productivity growth implies less economic slack than recently estimated by the Congressional Budget Office. As of 2013, about ¾ of the shortfall of actual output from (overly optimistic) pre-recession trends reflects a reduction in the level of potential.

Does a higher U.S. minimum wage hurt employment? A look abroad for answers

Posted on by Bridget Ansel

With a growing number of state and local governments in the United States raising their minimum wage, policymakers in Washington are once again examining the possible consequences of raising the federal minimum wage. While experiences of states and cities around the country will undoubtedly inform the debate, it is also helpful to look at other affluent countries where the federal minimum wage is much higher in order to better understand the effects on individual well-being and the economy on a national level.

A new issue brief by David Howell, a professor of Urban Policy at the New School, does just this. Drawing from recent his working paper (with co-authors Stephanie Luce of The Graduate Center, CUNY and Kea Fiedler of the New School) on the subject, Howell compares the U.S. minimum wage (which currently sits at $7.25 an hour) to those of other affluent, Western nations, using a variety of metrics before comparing these countries’ employment levels.

In his analysis, Howell first looks at the minimum-to-median wage ratio, which economists use to assess the strength of the minimum wage. A minimum wage that is substantially lower the the median wage means that the bottom of the wage distribution is falling further behind the typical worker in the middle of the wage distribution. While the United States is not alone in seeing a decline in this ratio, it does have the distinction of having the lowest minimum-to-median wage rate among the five countries Howell examines: The minimum wage in the U.S. is worth only 37 percent of what the median worker earns per hour. (See Figure 1.)

Figure 1

Howell also looks at the purchasing power of the minimum wage by comparing the starting wages at McDonald’s restaurants (whose starting pay tends to closely align with the minimum wage), calculating the number of Big Macs a worker can buy with an hour’s pay. He finds that starting pay is not only comparatively low in McDonalds in the United States, but the price of a Big Mac is also high. This means a U.S. worker can buy only 1.7 Big Macs an hour compared to 2.5 in France in 3.8 in Australia, for example. (See Figure 2.)

 Figure 2

On top of that, the United States lacks the kind of robust social supports that other countries provide for working families, meaning that one’s income plays a larger role in a family’s well-being in the United States compared to its affluent, Western counterparts. Minimum wage workers in the United States, therefore, have to work extraordinarily long hours—59 per week—to keep a two-child family out of poverty (if they are part of a single-earner couple). This long workweek is significantly higher than many other affluent nations (See Figure 3.)

Figure 3

But what does a low minimum wage mean for the overall economy? Howell points out that the “conventional wisdom” states that “there are big wage-employment tradeoffs associated with a high minimum wage.” Those who adhere to this kind of thinking believe that employers may compensate for the extra labor costs by hiring fewer people. That means that some low-wage workers, particularly those who are young and less-educated, are shut out of a job and overall employment levels are lower. Yet Howell’s international comparison finds scant evidence for such a tradeoff. (See Figure 4.)

Figure 4

 

And even when he looks specifically at the youth unemployment rate, Howell finds that there is no notable difference between the United States and other nations with much higher minimum wages. Discussing France and Australia, he notes that the two countries have “legislated a high minimum wage by international standards, yet, by both indicators, youth unemployment fell sharply between the early 1990s and the global 2008-2010 economic crisis—to levels below the United States.”

The only difference Howell finds is that, intuitively, the United States has a higher share of low-wage workers relative to the overall working populations. These results suggest that a country’s employment levels are more affected by other non-minimum wage related factors. As U.S. policymakers weigh the consequences of a higher minimum wage at the national level, a look at the experiences of other nations demonstrates that the minimum wage is one of many elements that affect a nation’s employment levels.

Must-Read: Alisdair McKay and Ricardo Reis: Optimal Automatic Stabilizers

Posted on by Brad DeLong

Must-Read: Alisdair McKay and Ricardo Reis: Optimal Automatic Stabilizers:

Should the generosity of unemployment benefits and the progressivity of income taxes depend on the presence of business cycles?… We derive an augmented Baily-Chetty formula showing that the optimal generosity and progressivity depend on a macroeconomic stabilization term. Using a series of analytical examples, we show that this term typically pushes for an increase in generosity and progressivity as long as slack is more responsive to social programs in recessions. A calibration to the U.S. economy shows that taking concerns for macroeconomic stabilization into account raises the optimal unemployment benefits replacement rate by 13 percentage points but has a negligible impact on the optimal progressivity of the income tax…

Must-Read: Giles Wilkes: How I learnt to love the economic blogosphere

Posted on by Brad DeLong

Must-Read: Giles Wilkes: How I learnt to love the economic blogosphere:

Let me introduce you to Interfluidity, the blog of Steve Randy Waldman, a computer programmer now based, I believe, in San Francisco. Waldman epitomises the meritocracy of the medium; without the boost others get from being a professor or an already known personality, his blog has grown from obscurity to significance, purely on its merits. As is often the case, notice by more popular blogs will have helped (notably Cowen and DeLong) but his is a prominence earned entirely on merits. (I also like how he holds back from publishing dozens of posts a day.) Waldman’s posts are long but among the very few I think should be printed out and savoured.

A Brief History of (In)equality: Now Live at Project Syndicate

Posted on by Brad DeLong
Digesting Income Inequality Mind the Post

Over at Project Syndicate: A Brief History of (In)equality: BERKELEY – The Berkeley economist Barry Eichengreen recently gave a talk in Lisbon about inequality that demonstrated one of the virtues of being a scholar of economic history. Eichengreen, like me, glories in the complexities of every situation, avoiding oversimplification in the pursuit of conceptual clarity. This disposition stays the impulse to try to explain more about the world than we can possibly know with one simple model. For his part, with respect to inequality, Eichengreen has identified six first-order processes at work over the past 250 years.

READ MOAR of A Brief History of (In)equality at Project Syndicate

The permanent income hypothesis, wealth inequality, and anti-recessionary stimulus

Posted on by Bridget Ansel
If someone handed you $10 right now, what would you do with it?

I asked before, “If someone handed you $10 right now, what would you do with it? Would you decide to spend it right away? Or would you stash it away? Or some combination of the two?” How you answer that hypothetical would reveal your marginal propensity to consume. But why do people have different marginal propensities to consume? The way economists have long thought about this concept is through the perspective of the “permanent income hypothesis,” an idea advanced by famed University of Chicago economist Milton Friedman. The hypothesis states that an individual’s consumption depends less on their income today (their transitory income) and more on their lifetime income (their permanent income).

Yet as economics columnist Noah Smith writes, some empirical work shows some big flaws in the hypothesis. So it’s worth thinking through the hypothesis and how inequality, specifically wealth inequality, influences consumption.

The permanent income hypothesis posits that if you’re handed $10 right now, whether you spend it today depends less on how much income you took in today (perhaps only $10) and more on how much you’re going to make over the course of your life. Hopefully, $10 is a drop in the bucket compared to your lifetime earnings so you’re unlikely to spend much of that extra money. But as Smith points out, there’s a good amount of research that shows people will spend a decent amount of surprise money when they receive it. So what’s going on here?

The answer lies in who is most likely to spend that additional money. There are well-known variations in the marginal propensities to consume. People with lower net worth tend to have higher marginal propensities to consume, while these propensities decline as a person’s net worth increases. More specifically, research points to the importance of liquid wealth, or wealth that a person can readily access. The research shows that people who consume a decent chunk of new income are likely to be less wealthy.

Perhaps these less wealthy people have less access to credit and can’t borrow funds to finance their consumption. Regardless of the reason, if people with few liquid assets are quick to spend cash they receive, then this has important implications for fiscal policy. If policymakers want to make sure that the money they appropriate to fight a recession gets spent quickly, then they want to get it to the people with few or no liquid assets. These are the ones who will actually spend it, boosting consumption and helping to restart economic growth.