I’ve long been troubled by a Paul Krugman comment from 2008:
There’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class — $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do.
And I find in his concluding comment from his recent AEA session that he remains completely uncertain on the issue:
…we do not know how rising inequality interacts. There are more poor people who are liquidity constrained but they have less spending power, so we are not sure how it goes.
I’m kind of astounded by this thinking, and even more by his apparent lack of curiosity about the issue. It strikes me as being absolutely central to any discussion of public policy. (Viz: all the talk about a strong middle class vs. trickle-down.)
I’ve poked at this question a couple of times:
In my model here and here looking at how (re)distribution of wealth affects demand, hence production, and
In discussions of imaginary ultra-high-productivity worlds in which a single person could own an atomic fabrication machine that produces everything that everyone needs (and hence receives all the income from that production).
Paul has clearly been shifting his thinking to encompass the possibility of a post-Luddite-Fallacy world. I wonder if his thinking has also developed on the related issues of inequality and distribution, and their effect on demand.
Cross-posted at Asymptosis.
