Income Inequality and Low Savings Rate

Yves Smith discusses some research from Ajay Kapur, Niall Macleod, and Narendra Singh that seems primarily designed to justify extreme income inequality, but also contains the interesting hypothesis that inequality leads to low savings rates. Here’s Smith

Despite a good deal of romanticization standing in for analysis, the report does have one intriguing, and well documented finding: that the plutonomies have low savings rates. Consider an fictional pep rally chant:


We’re from GreenwichWe’re invincibleLiving off our incomeNever touch the principal

Think about that. If you are rich, you can afford to spend all your income. You don’t need to save, because your existing wealth provides you with a more than sufficient cushion.

A “plutonomies” is basically a coinage to describe the high-inequality Anglophone countries. A chart:

During World War II the government combined rationing of consumer goods, price controls, and a strong “war bonds” propaganda campaign to push the savings rate up. In other respects the variables seem to track. I will caution, however, that a lot of different phenomena in the United States have this basic historical trajectory so picking any two variables out can be a dangerous business.