Friday, December 06, 2013

On savings versus consumption

In my previous post I showed date indicating that more income is going to the top 10 percent, and especially to the top one percent of all tax payers. The chart above suggests that the shift in shares of income means that more of the total income of the society is going into saving, and thus less into consumption.

Does economic growth come from increases in consumption or increases in investment? Trickle down theory -- that growth comes from increasing income for the already affluent -- is pretty much discredited in the modern world. The rapid increase in wealth and in income of the rich in the last few years does not seem to have resulted in robust economic growth, as shown in the following graph.

Perhaps if we focused on increasing demand, for example by increasing the minimum wage we might see more impact on employment and income. An increase in tax income, perhaps by reducing tax breaks for the rich or increasing tax rates on the highest income people, might help in paying for food stamps and extended unemployment benefits that would increase consumption by the poor.

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