Unequal Folks Save

Our forager ancestors developed a strong aversion to inequality, for good functional reasons. Norms against dominance were humanity’s first strong social norms. But our world is a very different place now, and other than our inherited dislike of inequality, it is not clear that inequality is on net good or bad. Since researchers are intuitively so averse to inequality, however, they are reluctant to publish on inequality’s advantages.  So it is worth paying attention when they do:

Using the Chinese Urban Household Survey data between 1997 and 2006, we find that income inequality has a negative (positive) effect on household consumption net of education expenditures (savings) even after we control for household income. We argue that people save to improve their social status when social status is associated with pecuniary and non-pecuniary benefits. Rising income inequality can strengthen the incentives of status-seeking savings by increasing the benefit of improving status, and by enlarging the wealth level required for status upgrading. We also find that the negative effect of income inequality on consumption is stronger for poorer and younger people and that income inequality stimulates more education investment, which are consistent with the status-seeking hypothesis. (more)

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  • Dog of Justice

    Chinese saving behavior is known to be different from that of Westerners, so I’d avoid concluding too much from this study until it’s replicated with a different population.

  • http://theviewfromhell.blogspot.com Sister Y

    Income inequality is a better predictor of homicide rates than absolute poverty:

    http://psych.mcmaster.ca/dalywilson/iiahr2001.pdf

    • Jeffrey Soreff

      The frustrating thing about the correlation is that it isn’t the robber barons getting whacked. If they were, then the Gini index would self-correct!

      • http://www.freedomofink.com Ray

        Um, the way you worded that you think it would be a positive thing if the rich folks were getting whacked.

        As opposed to simply wanting no one to get whacked.

      • JL

        In defence of Jeffrey: they amount to the same thing.

        If the system was self-correcting then at equilibrium there is no inequality and nobody gets whacked.

        I’d say that would be desirable, the occasional robber baron getting whacked when external forces cause disequilibrium would be a small price to pay, since such things would be very infrequent.

    • http://www.hopeanon.typepad.com Hopefully Anonymous

      This has the feel of push-epistemology, as in “hey look, here’s another bad thing I found about income inequality”.

      • Sister Y

        Inequality increases the intensity of competition in good ways – and in really, really bad ways. Sorry, I thought my point was obvious.

    • http://www.freedomofink.com Ray

      I only sped read a few pages at random to get a feel of that study, but everything I’ve read to date on this topic does not support the idea that inequality itself is the culprit.

      A close look at homes where the violent come from are fraught with all of the classic symptoms that have always produced anti-social and often criminal behavior.

      • http://www.freedomofink.com Ray

        Sister Y

        It is easy to attach increased violence to inequality in wealth because it feeds the emotional instincts of class warfare.

        But every other socially aberrant behavior is also attached to the same individuals, and the same groups in which we find the increase in crime.

        Yet no one seriously proposes that income inequality causes high rates of teenage pregnancies. Such social problems are treated separately, but violence alone it seems is attributed to such inequality.

      • Sister Y

        So I’m not sure you understood the thrust of the study from reading a few pages at random. It’s always been difficult to study whether income inequality or poverty causes violence and bad outcomes. This is because income inequality correlates so strongly with poverty. But the authors of the study were able to find data on a province with lots of poverty but great income equality (because of off-season fishing subsidies/welfare or something). And it turned out that income inequality itself was a better predictor of homicide rates than levels of poverty.

        Violence may be seen as the visible end of other socially negative processes. Homicide is an especially visible form of violence.

  • http:/juridicalcoherence.blogspot.com Stephen R. Diamond

    The last three decades in the U.S. is an experiment (of course, and uncontrolled one) in the effects of inequality, which seem decidedly unpleasant. Inequality provides incentives, but those effects are overshadowed by the concentration of power and with it the institutionalization of rent seeking.

    Here’s the difference between the U.S. and China : China is a Communist country (if you haven’t noticed). Power is centralized in the Communist Party and its apparatus. Although the economic elite and the politically powerful overlap, that fact is something of an open secret; Communists aren’t supposed to seek personal economic advantages. Of course they do, but the rise of inequality doesn’t increase concentration of power, at least not nearly as much. Perhaps it even decreases it by creating a counter-elite.

    • http://www.freedomofink.com Ray

      The last three decades? So how does the bottom 20% of American economic society stack up against the median today, as compared to forty years ago?

      • http:/juridicalcoherence.blogspot.com Stephen R. Diamond

        If your question is rhetorical, it’s misguided. The wages of American workers have stagnated for decades. I don’t have stats on the bottom 20%, but they surely have not gotten any richer. Probably considerably poorer after the Clinton welfare “reforms.”

  • nw3

    Hmm, I think we are looking at this from the wrong direction. If there are real benefits to wealth, people borrow more, increasing the cost of money aka the interest rate, making saving more attractive.

    It’s funny I don’t think banks lend savings, but the Federal Reserve distorts things.

  • bigbadjohn

    well lets see. the poor dont save because they are too busy trying to keep a roof over their head and food in their bellys. not much left to put in the stock market after everything is said and done.

    • vaniver

      This assumes that sustaining oneself / one’s family is binary. It really, really isn’t. There’s always some comfort that can be traded away to save more.

      Actually, thinking about this suggests a possible explanation for why the poor in China save but the poor in America don’t (besides obvious ethnic or cultural differences). It could be that inequality (in absolute terms) is high enough in China that low-wealth people are motivated to give up *a lot* of comfort to become moderate wealth, whereas in America it is so high that no amount of sacrificed comfort could make someone moderate wealth. I don’t find that very convincing, though, since it’s not that hard to accumulate a million dollars in America over the course of 30 years, which is enough to have moderate wealth.

      • http://www.hopeanon.typepad.com Hopefully Anonymous

        “it’s not that hard to accumulate a million dollars in America over the course of 30 years”

        This statement has an empty feel to it, to me.

  • Doug

    Robin,

    On an unrelated note the “Why Not Censor” post from Jan 2 has (ironically) seemed to have disappeared from the site.

  • JL

    There was another study, I read it in Freakanomics iirc.

    A lot of spending is done to signal social status.

    When income is equal people try to outspend each other and they race to an equilibrium where nobody saves anything. The study compared poor inner city youths who spent a lot on shoes and wall street bankers who spent a lot on luxury cars.

    But when a rich guy lives next to a poor guy, the poor guy knows he can’t outspend the rich guy and the rich guy only needs to spend a minimal amount to assert his status relative to the poor guy.

  • http://entitledtoanopinion.wordpress.com TGGP

    Are you referring to the Spirit Level, which Nicholas Kristof recently cited in the NYT?

  • http://www.freedomofink.com Ray

    Stephen Diamond:

    My question as to the last 30 years is not rhetorical at all.

    If you are looking for single stat metrics i.e. wages, to judge these things you’ll end up with an impossibly narrow view that will be little more than anecdote despite what statistics you might find.

    Look for overall standards of living. You’ll find that the bottom 20% are doing quite well in terms of what they enjoy in their material lives. Owning their own automobiles is common, air-conditioning, cable TV, cell phones, internet connections, and so on.

    For your speculation on the last three decades of increasing inequality you would have to show that fewer and fewer people are able to afford such things. Good luck with that research.

    But if you can’t force yourself to go on such a fruitless quest, try this simple thought experiment. The ghost of economics past comes to visit you tonight, and condemns you to be poor the rest of your life, but you get to choose when and where you get to live this life out.

    I am genuinely interested in what your answer is to this. If it’s any time but right now in America, that should be accompanied by an interesting explanation.

    • http://www.hopeanon.typepad.com Hopefully Anonymous

      My sense it that there are better places geographically to be poor than “right now in America”.

      I’d guess it’s better to be poor in Sweden and Canada, at least.

      • http://www.freedomofink.com Ray

        How so?

        You would have to weigh more generous government benefits more than the overwhelming abundance of the American shopping experience.

        There are numerous studies available showing the difference in American and European buying power. Long story short, our poor people live like the European middle class. Our poor people rival the Euro middle class in the homes they live in, the cars they drive, the TVs, game systems, and so on.

      • http://www.hopeanon.typepad.com Hopefully Anonymous

        Ray,
        Are you being lawyerly here or are you coincidentally an American who thinks American poor are the best off poor in 180+ countries?

        Weighing costs and benefits of being poor in America, it seems to me that American poor fare better than a lot of but not all of the world (I think a better case can be made that American poor were the best off poor in the world in the 1950’s and maybe 1960s).

        However, this is an unscientific and unthorough assessment on my part.

  • http://www.freedomofink.com Ray

    I’m in between things right now, but I’ll look up one of the reports available that compare the overall buying power of Americans versus their foreign counterparts, and link it later tonight.

    The larger point though is that certain European countries have very generous government benefits for the lower classes, but that there is just more material wealth available in America for everyone, and this is fairly easy to quantify.

    Don’t know about the lawyerly thing, and I’m by no means claiming America to be a model of free market prosperity, but I’ve been shopping in foreign, developed countries, and they just don’t compare to the staggering amount of stuff that we have available (and that 99% of Americans take for granted).

    • http://www.hopeanon.typepad.com Hopefully Anonymous

      Ray,
      Does it feel on the inside like you’re a guy from America looking for x?

      x= whatever trait about America that can be used to claim that it’s the best of all the sovereign nations.

      • http://www.freedomofink.com Ray

        You’re avoiding the subject.

        I only had time to search for homeownership rates in the US and EU, but didn’t find much in the way that broke it down by quintiles.

        I’ll pick the search back up later tonight, but you could also look up figures on car ownership, the cost of fuel, cell phone usage and if possible, smart phones versus other phones, how many homes have televisions, cable, internet access in the home, etc.

        These seem like trivial things, but they’re typically taken for granted as constituent parts of our daily lives. So people wind up making an argument for living in the EU because of national health care or some other long term benefit, but they don’t realize that the Super Walmart, and Safeway aren’t stocked the same, and the prices are often not even comparable. (Every week I see this billboard for Cricket – the low rent cell phone carrier – and they have the Android now. I wonder what the availability is for smart phones among the lowest quintile in France for instance. That could be a project for you to show how biased I am.)

      • http://kazart.blogspot.com Mike Wengler

        Check this out: http://mjperry.blogspot.com/2010/01/eu-vs-usa-part-iii.html It shows that if European countries were states, they would not be rich states.

        We tend to “normalize” our opinions of the economies of Europe and the U.S. But in $ to $ or Euro to Euro terms, the US is wealthier.

  • http://www.freedomofink.com Ray

    Most of what I’m finding on various statistics are based off of the 2000 census. Those have been fairly hashed over, and America’s poor have done well for themselves considering what most people think of when hear the word “poor.”

    I downloaded a free pdf on the EUs census data, but that’s a lot to slog through, but I’ll keep reading.

    One interesting note on the penetration of smartphone usage by country is that the richest countries were not the leaders. Italy and Spain had far more smartphone usage than America, UK or Germany. There did seem to be a slight negative correlation between internet penetration and smartphone usage so the countries that have lower internet penetration had higher smartphone usage. Implication being that smartphones are making up for their lack of internet access.

    Not a lot of luck finding comparable data between bottom quintiles between nations though. Broad indices should be avoided though since government benefits are typically weighed heavily in such reports.

    And that’s the thing that needs to be clarified. When people start talking about income inequality it’s a knee-jerk emotional reaction to say that income inequality is “bad” but overall purchasing power and purchasing power between income groups has to be considered. Living in a relatively wealthy country is better than living in a relatively poor country even though the income inequality is worse in the wealthier countries. So one can argue which is better, national health care or access to more material comfort across the board, but income inequality in and of itself is not the hobgoblin the redistributionists try to make it out to be.