I put this post out for comments and discussion since this is an important question for which I don’t have an answer.
A 2005 Citigroup report – apparently cited in Michael Moore’s new movie, which I have not yet seen – arguesÂ that “plutonomy” – the extreme concentration of income and wealth in the hands of the very affluent – changes some fundamental capitalist economic dynamics.
The core of the argument is that countries which have shown an extreme concentration of income and wealth at the very top of the distribution – the US, Canada and the UK are the examples – also have, as a result, very low national savings rates.Â Evidence is cited to show that the very affluent in the US became net dis-saversÂ as they became much more affluent as the result of asset booms and the shift of resources in their favour towards the top of the the recent boom. The same pattern is held to be true of the UK and Canada, while more equal European countries had higher savings rates.
Alternatively put, the argument is that the very affluent increasingly and disproportionately drive up overall consumption – and they advise investors to buy stocks weighted towards companies producing the consumption items of the very rich since these are the most dynamic and fastest-growing markets.Â Â Indeed ,they argue pretty explicitly (andÂ offensively) that we shouldn’t worry about growing income and welath inequality since it increases rather than lowers consumption and demand.
This argument is at odds with the traditional Keynesian view that the very affluent have a lower propensity to consume and much higher savings rates than the middle class and the poor.Â An article in today’s Globe and Mail cites US figures (for 2007) which seem to show that this is still true.Â Goldman Sachs research is cited to show that the top 10% in the US account for 33% of pre tax income and 59% of household net worth, but just 22% of spending.Â By contrast,Â the bottom 40%Â – with 12.1% of income – account for 22.2% of spending. A reasonable implication might be that redistribution would be positive for consumption.
A problem with the Keynesian view would seem to be that it is at odds with the apparently strong correlation between increased concentration of income at the top, and declining national savings rates in the US, the UK and Canada. This is a major part of the evidence base of the Citigroup report.
So the question is – what are the implications of hyper income inequality for aggregate consumption and savings?