I was at a party recently when the talk turned to Piketty. I brought up the point made by several commentators that if the rich consume rather than reinvest their wealth, inequality won't grow as fast as Piketty claims. After I laid out the argument, it struck me that this point was entirely correct and entirely misleading. That's because the whole debate is about the wrong question and it's easy to get lost.
The focus on inequality makes it seem like it's a good thing if rich people consume rather than save their wealth because that would reduce inequality. But focus on poverty and you reach the opposite conclusion. If the rich save more, there will be more capital in the future, which leads to higher wages (because labor becomes scarce relative to capital), which leads to higher incomes for the poor and the middle class (because wages constitute most of their incomes). In other words, if the rich save more and accumulate more capital, the poor and the middle classes will be better off because of it. That it will also increase wealth inequality seems quite beside the point.
Ask the wrong question (how can we reduce inequality?) and you get the wrong answer (encourage the rich to save less and consume more).
Ask the right question (how can we reduce poverty?) and you get the right answer (encourage the rich to consume less and save more).
UPDATE 6/2/2014: Andrew Biggs made the same point here earlier.
The focus on inequality makes it seem like it's a good thing if rich people consume rather than save their wealth because that would reduce inequality. But focus on poverty and you reach the opposite conclusion. If the rich save more, there will be more capital in the future, which leads to higher wages (because labor becomes scarce relative to capital), which leads to higher incomes for the poor and the middle class (because wages constitute most of their incomes). In other words, if the rich save more and accumulate more capital, the poor and the middle classes will be better off because of it. That it will also increase wealth inequality seems quite beside the point.
Ask the wrong question (how can we reduce inequality?) and you get the wrong answer (encourage the rich to save less and consume more).
Ask the right question (how can we reduce poverty?) and you get the right answer (encourage the rich to consume less and save more).
UPDATE 6/2/2014: Andrew Biggs made the same point here earlier.
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