Redistributing Income1 min read

Here’s an interesting article from this week’s The Economist.

Outlaw economics

In H2 Macroeconomics, you may recall that we often assume that the poor may have a larger marginal propensity to consume (MPC) than the rich. This implies that, if we redistribute income from the rich to the poor, more money will be spent in the economy. This can act as a fiscal stimulus for the economy.

Recent research supports this line of thinking but suggests a more nuanced definition of rich and poor is required. The main finding as described in the article is as follows:

  • Those with lots of liquid wealth spend 13% of an unexpected windfall.
  • The poorest in the population — those living hand-to-mouth — on average spend 20% of an unexpected windfall.
  • Those wealthy but cash-strapped spend 30% of an unexpected windfall. They own illiquid assets like residential property.

In light of these findings, it seems that the most effective short-term fiscal policy involving redistribution is to take money from the rich (i.e. those with lots of liquid wealth) and give to those who are wealthy but cash-strapped. These are the people who live from payslip to payslip but have sizeable illiquid wealth. In America, they make up around 20% of the population.

I hope this short post gave you some fresh ideas for macro policy essays. For more details, read the article. Till next time, dream economics.

Please follow and like us:

Leave a Reply

Your email address will not be published. Required fields are marked *