Peak Debt and Income
The big argument in the debate on the stimulus packages was between two groups. The demand-side folks wanted to make sure that the money got into the hands of the poor, because they'd spend the money, boosting the economy. The supply-side folks wanted to keep money in the hands of the well-off, because they'd invest it, providing increased productive capacity to boost the economy. (See also: 5 Creative Ways to Invest During a Weak Market)
If you're interested in looking into the issue a bit more deeply than the economic pundits in the mainstream media usually do, check out Peak Debt and Income (PDF), a new paper by Ronald M. Laszewski. (I linked to his previous paper in my Peak Debt article.)
There are two threads to Laszewski's argument.
Maximizing Household Assets
Laszewski creates a simple model of the economy as a tool for investigating the question of how to get household balance sheets back in order after suffering the problems diagnosed in the earlier Peak Debt paper:
At the time it appeared that a peak in consumer purchasing power had already been reached, and that it was likely that there would be a long period of economic decline to follow. Three ways in which the consequences of the large over-hang of debt might be ameliorated were examined: (1) a significant growth in real personal income, (2) a default on outstanding debt, and (3) a central bank induced hyper-inflation.
The earlier paper had gone on to demonstrate that options two and three would probably have little effect in boosting future economic activity. Option one, on the other hand, could be effective.
The result of Laszewski's further analysis is that growth in GDP is strongly dependent on how total income in the economy is divided up.
Consumption by Income Group
From the end of World War II until the early 1980s, the top 10% got about 34% of total income. In recent years the share taken by the top 10% has grown sharply; they now get almost 50%. If the income fraction received by the top 10% was returned to its historic value, the current incomes of the other 90% of households could be increased by 30%.
As the demand-side analysts have been pointing out, the rich spend much less of their income. The poorest folks spend almost 100% of their income, average folks spend about 90%, and the top 10% spend only a little more than 50% of their income.
Putting these facts together, Laszewski calculates the effect on the economy if the income distribution were returned to something like its post-war norms. If the richest 10% only got 34% of the national income (instead of the 50% they're currently receiving), the increased spending on consumption would boost GDP by 4.2%. Other assumptions about how the money might be redistributed could add as much as 10.5%.
The math in this paper isn't as complex as in the previous paper. So, if you're interested, take a look at Laszewski's Peak Debt and Income paper (PDF).
The supply-side folks are wrong. At this time, additional business investment will produce very little additional growth in GDP.
The demand-side folks are right. Getting extra money into the hands of the bottom 90% of the population would produce substantial growth in GDP.
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