The Rich Are Better Stewards of Money Than the Poor

[emacknight]

@Stoneburg

Trickle down economy is retarded and doesn’t work. Trickle up economy is smart and does work.
I could put it in more complicated terms but why bother.

Okay, so take trickle up stimulus/tax cuts:

We’ve got $224 billion to spend. We could give it all to one guy that we deem the poorest person in American, or to the one guy we consider the richest person in America. What would result in a better stimulus?

Obviously that’s pretty stupid. But it’s an issue we need to address. Were along the income scale is the money best dished out?

I firmly believe that the small stimulus Bush dolled out was retarded, but the $8000 first time home buyer’s credit wasn’t.

So let’s say you’ll give that $224billion to a segment of the population, where do you choose and why?

[Really_Not_All_That_Bright]

@Bryan_Ekers

In practice, though, the cheaper boots were probably made in Asia anyway, so that has to be taken into account when measuring the impact on the local economy. Personally, I can imagine paying for a quality custom-fitted set of footwear (that and a few tailored suits are likely to be my only clothing extravangances) which for convenience I’ll have made and fitted locally.

In the specific case of boots, an expensive pair might well have been made here (wherever that is) by a local bootmaker, but in general, American-branded high-end goods are just as likely to have been made in China as cheap stuff.

For example, 99% of Coach manufacturing is now done in China.

[gonzomax]

@Anaamika

I really do not understand how spending it on smokes and booze does not also benefit the economy. Money should be circulated; shouldn’t it?

Actually they recklessly waste it on rent and food. Some like to denigrate the poor. It is easy to slam the poor while pretending the wealthy are just more reasonable in their decisions. The rich can invest. They also can and do squander. But the poor are limited in their choices. If they pay rent and eat, there is not much left.

[GHO57]

Umm…

I’m a millionaire… technically… well, a Dollar millionaire (as long as it doesn’t gain value too much against the Euro)… and assuming someone would be willing to buy me out of the company. But anyways, I’m not exactly short on cash is my point.

Give me a 1000 bucks, and I’ll just throw it in my loose change jar. Give a hundred homeless people 10 bucks each, and you’re going to see 1000 dollars spent at local businesses. Which is better for the economy?

Alternatively, I could throw it in a long term savings account… which means it’s a 1000 bucks that’s off circulation, doing pretty much nothing, except making me and the bank richer. Sure, there’s an extra grand to go to someone’s small business loan… but if that is what is wanted, it’d make sense to give the money to them directly.

But hey, if you’re handing out money… Go right ahead, I could use a solid gold bowling ball.

[Really_Not_All_That_Bright]

Imagine the boost to the local carpentry industry when all those bowling lanes your ball breaks need fixing!

[Wesley_Clark]

I don’t agree at all. Who says wealthy people invest their money in ways to increase economic productivity? They blow it on consumer goods too, just far more of them. Why is a $10 million dollar home a good investment if $1000 in smokes and booze is wasteful?

Secondly, the concept that investments that improve productivity is only going to happen when that results in more profits. As long as labor is cheap and abundant, you don’t need higher productivity.

In fact, that is one of the benefits of high wages for labor. High wages for laborers increase the incentives to invest in automation and robotics to increase productivity. As long as there are endless millions of people willing to work w/o safety regulations for $5/day, there is no incentive to invest hundreds of millions into robotics and automation.

So if anything giving more money and power to laborers is the way to increase productivity. A strong union movement will do more to achieve what Sam Stone wants (increased productivity) than supply side tax cuts, because a strong and wealthy labor movement will make mechanical alternatives to labor more appealing.

Plus supposedly 60% of the time a fortune is wasted by the time kids get through with it. It is gone 90% of the time by the time the grandkids get through with it. So the rich are not experts with money when the money is handed to them via family connections.

Plus we saw horrible job growth under Bush despite the income of the top 1% and corporate profits skyrocketing. Where were these great jobs or improved standards of living from 2000-2008? I didn’t get any. The top 1% saw their incomes double and corporate profits tripled under Bush. Where were the amazing jobs, increased standards of living, etc?

And corporations are currently sitting on about 1.9 trillion in cash reserves. Are they using it to create jobs or boost productivity? Nope. Supposedly they will use it for mergers and dividends, which will cost jobs.

In February corporations had 1.18 trillion in cash reserves. By July it was 1.8 trillion.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6kXsL1Q5FYc

http://blogs.ajc.com/jay-bookman-blog/2010/07/15/flush-with-1-8-trillion-corporate-america-sits-on-the-sidelines/?cxntfid=blogs_jay_bookman_blog

Has it been invested to increase standards of living or create jobs? Nope.

Supply side tax cuts also means less revenue for infrastructure, which will lower productivity. A less educated workforce with worse transportation, more expensive energy, poor communications, etc. is not going to compete as well with a better educated nation with good infrastructure. So if you give the wealthy $400 billion in tax cuts, that is $400 billion that could go to investments in energy R&D, building high speed rail, funding for college, etc.

[Bryan_Ekers]

@Really_Not_All_That_Bright

Imagine the boost to the local carpentry industry when all those bowling lanes your ball breaks need fixing!

Well, plus the local chiropractors who benefit from treating the spinal injuries resulting from trying to lift a solid-gold bowling ball.

[Whack-a-Mole]

It would seem demand-side economics work better than the supply-side. That is, there are not a lot of rich people (relatively) than there are everyone else. Buying a Rolls Royce is economic activity but for every one $250,000 car sold there are likely thousands of more mundane cars sold which has a much greater impact on the overall economy.

If the masses are poor what are the rich going to invest in? What are they going to build (or build more efficiently) if no one is buying because they have no money?

Income inequality is not rectified by giving more money to the rich who will somehow presumably generate new jobs for everyone else. This simply is not our experience to-date. “Jobless” recoveries are becoming the norm.

The rich are not putting the country back to work so therefore the rich are not being better stewards of our money. They are good stewards at keeping themselves rich only.

Note that when income inequality was shrinking the rich actually made a little more money than when the inequality was growing (bolding mine):

It is well known that income inequality in the United States has been on the rise for about 30 years now — an unsettling development that has finally touched the public consciousness. But Professor Bartels unearths a stunning statistical regularity: Over the entire 60-year period, income inequality trended substantially upward under Republican presidents but slightly downward under Democrats, thus accounting for the widening income gaps over all. And the bad news for America’s poor is that Republicans have won five of the seven elections going back to 1980.

<snip>

The table also shows that families at the 95th percentile fared almost as well under Republican presidents as under Democrats (1.90 percent growth per year, versus 2.12 percent), giving them little stake, economically, in election outcomes. But the stakes were enormous for the less well-to-do. Families at the 20th percentile fared much worse under Republicans than under Democrats (0.43 percent versus 2.64 percent). Eight years of growth at an annual rate of 0.43 percent increases a family’s income by just 3.5 percent, while eight years of growth at 2.64 percent raises it by 23.2 percent.

SOURCE: http://www.nytimes.com/2008/08/31/business/31view.html

[Rhythmdvl]

@emacknight

So let’s say you’ll give that $224billion to a segment of the population, where do you choose and why?

Me me me me me me!!! Pick me! Pick me! PICK ME!!!

Arguments for trickle-down economics are very close to the rationale for state control of the market–except instead of bureaucrats you pretty much have the landed gentry controlling things. Yes, there is a lot of economic mobility and freedom in our society, but inherited wealth, position, and general socioeconomic status dwarf that mobility.

There is divergence, in that a bureaucracy’s ostensible focus in the betterment of all citizens, whereas the private individual’s motive is much more limited (which arguably incentiveizes marginally better choices), but overall you have a general repudiation of capitalism and one of its fundamental underpinnings: that consumer demand and freedom inexorably drive towards market optimization.

Clearly it’s a mixed bag; for example, you do need a capital market and those within are acting to supply and demand capital, labor, etc. But the general arguments for trickle-down economics take as a premise that a select (albeit open) aristocracy just “knows” what’s best.

[GHO57]

@Bryan_Ekers

Well, plus the local chiropractors who benefit from treating the spinal injuries resulting from trying to lift a solid-gold bowling ball.

Obviously I wouldn’t BOWL with it… it’s an investment; you know, just doing my part in creating jobs and all that.

[Bryan_Ekers]

Jacques: Now throw… throw, damn you!

[Sam_Stone]

This thread is full of economic fallacies. Keynesianism run amok and taken to an absurd degree that even Keynes would roll his eyes over.

First, consumption consumes things. You do not get wealthier by consuming your stuff. I would think that this would be obvious to just about everyone.

The only reason we’re talking about stimulating consumption to help the economy right now is because we’re in a recession that has caused demand to fall, leading to an oversupply of production. If we don’t stimulate demand, the production shuts down, and then when the economy picks up again we’ll have an under-supply. So the current demand-side stimulus is meant to protect production.

If we weren’t in a recession, demand-side stimulus would be an insane way to grow a healthy economy. It’s completely backwards. In a healthy economy, you need savings to finance production. Savings are deferred consumption. In a normal economy, productivity increases come from building new factories, inventing new gadgets, drugs, and processes, improving infrastructure, increasing education, etc. All of these things take capital. You can’t just spend your way to riches - you first have to get rich, then you can spend some of your money.

Now, the one key aspect your ignored when talking about the rich is the fact that they became rich in the first place. Leaving aside inherited wealth for a minute, if you have risen from the ranks of the middle class or lower and have become rich, you have demonstrated an ability to be productive with your money, on average. Sure, some people win the lottery. But most people who become rich do so because they are smart investors or because they have shown a willingness to defer personal pleasure for long-term gain, such as getting an advanced degree.

In addition, because the rich aren’t living from paycheck to paycheck, money held by the rich is more likely to wind up funding future production and innovation rather than current consumption. And again, consumption is not the path to riches.

And the normal disclaimer applies: I was speaking in terms of averages. Of course there are lazy rich people who blow all their inherited money. Of course there are careful poor people who invest what they can and spend their money wisely. On balance, you’ll just find more investment and intelligent money management among the ranks of the rich. I’d think this isn’t a particularly controversial insight.

[Bryan_Ekers]

If the money’s going to go to poor or middle-class people, I’d like to see a requirement being to present some kind of consumer-credit balance, with the money to go directly to the lender to retire the loan and cancel the card or close the account or whatever. Perhaps homeowners can get one or more mortgage payments covered. I’m overall a bit doubtful of giving people money to spend, but retiring debt sounds okay.

Of course, at least half of those who benefit, I expect, will be right back where they started a year from now.

[Really_Not_All_That_Bright]

@Sam_Stone

Now, the one key aspect your ignored when talking about the rich is the fact that they became rich in the first place. Leaving aside inherited wealth for a minute, if you have risen from the ranks of the middle class or lower and have become rich, you have demonstrated an ability to be productive with your money, on average. Sure, some people win the lottery. But most people who become rich do so because they are smart investors or because they have shown a willingness to defer personal pleasure for long-term gain, such as getting an advanced degree.

Most people who become rich do so because they are smart investors if you leave aside inherited wealth, but otherwise that is not true.

The question now becomes, why on earth should we leave aside inherited wealth? It’s not like it somehow doesn’t exist anymore, and Republican efforts to repeal the estate tax will ensure that it continues to do so, inexplicably.

[Fear_Itself]

@shiftless

If you hand some people $1000 the money will be gone in a week with nothing to show for it.

The flaw in your view of economics is assuming that when the poor spend their money, for, say, booze and cigarettes, it has vanished without doing any good, which is false. People have jobs making cigarettes. People have jobs making booze. They take home paychecks, which pay for gasoline, and groceries, and cars and appliances. When the poor spend their money, it goes straight into the economy and is multiplied several times over. When the rich invest their money, it goes into the stock market casino, where investment banks may or may not lend it out, so it takes longer to have an effect on the street.

The notion that investing on Wall Street creates jobs in a recession is laughable. Companies add jobs when demand increases, not when capital increases. Why would they expand productivity when there isn’t enough demand to justify the capacity they already have? The reason they laid people off in the first place was falling demand, not insufficieant capital; most of these corporations are flush with cash, but are hesistant to spend it on expansion because they are unsure of the future demand. Handing them more capital through investment is not going to create jobs or growth. Getting people to spend more, on booze and cigarettes for example, is what creates jobs and growth.

[mazinger_z]

Being a better “steward of the economy” is a misnomer. “Steward” implies a sense of trust and duty. While I don’t agree with the statement in its entirety, I think a better phrase would be that the rich are better at making money than the poor.

The key to improving the economy (at least at this point in history) is to increase demand, preferably including a multiplier effect. Giving a bunch of people (rich or poor) $1000 (or whatever amount) would be nice to those receiving it, but if they’re just paying down debt, then, most likely (all things being equal), that money is going to end up in a bank. If the banks aren’t lending and/or people aren’t borrowing, then circulation of that $1000 is going to be short lived. The same can be said of buying cigarettes and booze. Cigarettes and booze production is limited to a small number of players, and the cost of production for their materials is cheap as its labor. Very little additional wealth is generated, except for profits for the owners.

The ideal situation is to stimulate demand that leads to innovation, growth, and value. The problem is that too much subsidization or government interference causes market confusion, crowds out investment, and possibly leads to bubble formation. The problem that government face is that their efforts are very heavy-handed (as opposed to being precise) and they don’t have or ignore market data, as politics are often involved in the decision making (and they’re not a business). So, as a responsible government bureaucrat, putting re-election issues and other politics aside, what is the better course of action? Personal experience tells us that some people are not good with money, and business are out there to make money.

[Voyager]

@Sam_Stone

In addition, because the rich aren’t living from paycheck to paycheck, money held by the rich is more likely to wind up funding future production and innovation rather than current consumption. And again, consumption is not the path to riches.

And the normal disclaimer applies: I was speaking in terms of averages. Of course there are lazy rich people who blow all their inherited money. Of course there are careful poor people who invest what they can and spend their money wisely. On balance, you’ll just find more investment and intelligent money management among the ranks of the rich. I’d think this isn’t a particularly controversial insight.

Well, I’m glad you’ve finally come around to admitting the stimulus package was a good idea. And I certainly agree that in times of low investment (the early '80s) a supply side solution works much better than a demand side one. The problem is that many on the right only have one solution - supply side - for all problems.

In evaluating who is a better money manager, you need to look at the inherent earnings potential of a person. One making just over minimum wage is shepherding his money just fine if his family is fed, housed and clothed. Someone with a reasonable job who blows his money isn’t.
It is fairly easy for a wealthier person to be better at managing money. We have a good buffer for emergencies, and can invest the rest. I can afford to pay someone to give me investment advice, which has paid off for me nicely. People with more money can get into higher returning investments also.
On the other hand, look at how many of the rich invested with Madoff. Look how many sunk money into pet food startups and other places with no sane business plans. A poor person playing the numbers is making a better investment than that.

People who started poor and became rich are very likely excellent money stewards. People who started rich and became poor are not. I don’t think you can generalize about the rest.

[Chronos]

Okay, so take trickle up stimulus/tax cuts:

We’ve got $224 billion to spend. We could give it all to one guy that we deem the poorest person in American, or to the one guy we consider the richest person in America. What would result in a better stimulus?

The reason that giving money to the have-nots works better (and the historical evidence is overwhelming that it does work better) is that there are a lot more have-nots than haves. It’s not a question of giving the money to the one richest person or to the one poorest person; it’s a question of giving it to the one richest person or split between the ten thousand poorest people.

Now, granted, some folks really are poor because they’re genuinely bad at managing money. A lot of those poor folks you help out are just going to piss it away wastefully. But there are also some poor folk who are great at managing money, and who just haven’t ever had any money to manage. And with that many people benefiting, the percentage of people like that doesn’t have to be very high at all to get a decent number of brand-new entrepreneurs, the folks who actually do grow the economy, and maybe even become part of the wealthy segment of society.

[XT]

@Sam Stone

This thread is full of economic fallacies. Keynesianism run amok and taken to an absurd degree that even Keynes would roll his eyes over.

Well there’s a shocker!

The Rich Are Better Stewards of Money Than the Poor

Of course they are…that’s why they are rich, after all.

When discussing economic stimulus, or lowering taxes, we could split them into three possibilities: large tax cut/stimulus for the rich, small tax cut/stimulus for everyone, large tax cut/stimulus for the poor.

There isn’t a magic formula or silver bullet. It’s going to depend on exactly what the situation is as to what is the best course…or, the best of a series of poor choices in some cases.

We could give everyone in America $700.

So…what would you do with the money if you got it? Probably the same thing I would do. Pay bills. Go out and buy a new TV. Whatever. What we probably won’t do with it is invest it. So, what you’ll end up with is a short term artificial stimulation that won’t really have any kind of long term impact because it’s a construct. Companies selling TV’s will see a short term gain, but they will know that it’s not a trend but instead an artificial stimulation, which means they are unlikely to expand production.

As Sam says, such a stimulus is designed merely as a place holder to protect production in the short term.

The thing that people on this board don’t seem to get is that rich people who want to stay rich actually invest their money as well as just spend it on new cars or a pair of gold plated sun glasses. Generally they invest MORE than they spend on consumer goods. And it’s that investment that drives our economy, allows our businesses to expand and grow. But these kinds of threads only focus on the consumption end, as if consumption is the be all and end all of an economy. I mean, that’s what’s really being said here…if you are giving out hand outs from the government, better to give it to the poor and middle class because there are more of them, and therefore they will spend it more on those TV’s and bills and such.

Any thoughts on what would produce the most economic gain?

It would depend on the economic situation. During the recent recession for reasons I admit are unclear to me, I’m told that a large tax cut for the rich wouldn’t have been a good idea or had any sort of large positive impact. However, that’s not always the case, so it’s going to be heavily dependent on what the ‘problem’ is (i.e. WHY are we having a recession) and where the economy is going.

-XT

[Really_Not_All_That_Bright]

@xtisme

So…what would you do with the money if you got it? Probably the same thing I would do. Pay bills. Go out and buy a new TV. Whatever. What we probably won’t do with it is invest it. So, what you’ll end up with is a short term artificial stimulation that won’t really have any kind of long term impact because it’s a construct. Companies selling TV’s will see a short term gain, but they will know that it’s not a trend but instead an artificial stimulation, which means they are unlikely to expand production.

Actually, we learned from the Bush rebates that everyone does more or less the same thing with it - it gets saved or used to pay down existing debt.

Giving money back to the people unequivocally fails as a short-term economic shot in the arm, although it’s certainly beneficial in the long run. This holds equally true for the rich and the poor.

If you want to give the economy a shot in the arm, the government has to spend the money itself.