Noah Smith has a plan for closing the “wealth gap.” The solution? Thrift!
I had an entire post written out but decided that I was burying the main point, which is that Smith doesn’t get it, in a way that’s almost cruel.
“But there are reasons to believe that redistribution can’t fix all of the problem, or even most of it. If you do the math, you discover that in the long run, income levels and initial wealth (factors 1 and 2 from above) are not the main determinants of wealth. They are dwarfed by factors 3 and 4 — savings rates and rates of return.”
I wouldn’t quite say “dwarfed,” and as how much you can save and where you can risk investing it is largely driven by income, number 2 seems to far and away remain the most important one.
“In fact, being willing to save more is probably a big part of how the rich got rich in the first place. ‘Cheap'” is an insult, but being cheap is how you get rich.”
No evidence presented for this claim. This is a major part of his argument and he doesn’t even seek to demonstrate any of it. None. He just says it.
“Instead, the answer is to change America’s culture of (not) saving.”
Again, he presumes a culture of not saving rather than one of not having money (the culture we have, if anything, is one of corporate exploitation that’s not interested in helping workers to do better when ever their employers do).
And if Smith is talking about people who do have lots of money to save and invest, like those in the mid to upper class (which is actually a good ways above the median household), then, I mean, who cares? The wealth gap between the super rich and the would be rich is not the one anyone should be worried about.
“This means that more financial education in public schools is a must. I’m not talking about teaching kids the Capital Asset Pricing Model. I mean what Bob Shiller calls “basic Suze Orman stuff.” How to make a monthly budget. What “saving” and “borrowing” mean. How wealth builds over time. How to avoid borrowing lots of money at high interest rates (e.g. credit cards and payday loans).”
“In addition to “nudging” middle-class and poor Americans to save more, we can help them get a better return on their assets — the second thing that has a huge effect on wealth in the long run. This means helping middle-class people invest in stocks without paying high fees. The first part of this is teaching middle-class people to avoid making frequent changes in their stock portfolios.”
“The second way to get better returns is to avoid actively managed funds.”
Yes, the problem is people not understanding how budgeting works and that they don’t know stocks exist. It’s like that scene in Trading Places where two rich old white guys banksplain “commodities” to Eddie Murphy.
“This is not to say that middle-class people should put all their money in stocks. And many poor people can’t afford to take the risk of investing in stocks. But in the long run, “asset allocation” — i.e., how much of your savings you put in stocks and other high-return assets like corporate bonds — is a major determinant of whose wealth grows and whose stays the same.”
Hmmm, I wonder what would happen if everyone started saving as much income as they reasonably could? Where would the high yield investments be with so much capital sloshing around? How would the markets react when aggregate demand plummets even further?
You know there’s going to be trouble when you flip through Smith’s article and there’s not a single chart or graph to illustrate any of his points or validate any of his claims. Call me a hypocrite, but I really hope the Atlantic DIDN’T pay for this article.