Plutonomy?
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 – argues that “plutonomy” – the extreme concentration of income and wealth in the hands of the very affluent – changes some fundamental capitalist economic dynamics.
http://www.scribd.com/doc/6674234/Citigroup-Oct-16-2005-Plutonomy-Report-Part-1
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. Evidence is cited to show that the very affluent in the US became net dis-savers 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.  Indeed ,they argue pretty explicitly (and 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. An article in today’s Globe and Mail cites US figures (for 2007) which seem to show that this is still true. 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. By contrast, the bottom 40% – 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?
Maybe the rich are hiding their incomes in large enough amounts that it’s dragging down the overall savings rate. Hiding them in overseas tax havens, writing it off through tax loopholes? Does the report address that possibility?
I have seen Moore’s movie, but you have provided a more complete summary of the Citigroup report.
You make two empirical observations: increasing wealth at the top end corresponded to lower national savings rates, but the rich save proportionally more than the poor. My hypothesis would be that the rise of the super-rich increased the consumption bar to which the rest of society aspires.
The issue was not that the super-rich were spending proportionally more of their incomes on consumption, but that their visibility was inducing those with less income to borrow to finance more consumption. Most or all of the consequent increase in consumption was for positional goods, which expand the economy but not total well-being.
Not sure if you knew this or not Andrew, but it is no longer considered a planet, and therefore any theory based on an iceball that is no longer classified as a planet most likely must go through a similar process!
Seriously though, I hate to be a suspicious person, but I do have a bit of a problem with data collection and quantification process of these aggregates.
With the recent action on rich hoarding in swiis banks and such, I do wonder just how much of the savings are actually included in these measures. I also know from personal experience trying to monitor incomes of the wealthy through various means from a public policy perspective is quite difficult. Unlike other respondents to a survey, say the census or such, asking how much an individual of the hyper rich might take a hundred or so accounts and I am sure the banks that produced this had a difficult time measuring such constructs.
My feeling is we will never get to the bottom of such a question because the facts are just too difficult to collect.
Just a point on methods.
Does investment by Canadians in, say, China or Indonesia count as “savings” in Canada?
Erin I think you have nailed to some degree. Anyone who hung out in the major metro-poles saw a lot of conspicuous consumption going on during the late nineties through to the present. Housing being the ultimate positional good. The sparsely (and poorly) decorated 4000 square-foot house comes to mind. But the SUVs and the designer sunglasses, designer rims on reading glasses, and oh yes the must have chicklette white teeth also spring to mind. Never mind the chalet owners with industrial grade chainsaws. As for me, my friends bought me a “proper” espresso machine: not only is the espresso soo good (1/4 inch of chrema every time) but I just do not know how I lived with out one all these years:).
Incidentally it is why I like living in Quebec city. The rich are not quite as showy and the income compression is greater so I feel less poor than I would if I lived in Toronto or Vancouver.
Studies have shown the income disparody in a society leads to worse health, even among the well off even though there is no obvious economic reason why that would be.
Perhaps the lack of savings a similar effect.
The Plutonomy report has disappeared from the web. Surprise Surprise.
Robert Frank wrote on it here.
http://blogs.wsj.com/wealth/2007/01/08/plutonomics/
Here it is:
http://jdeanicite.typepad.com/files/plutonomy-1.pdf