On 7/15/05, Paul wrote: > Do you have a "back of the envelope" sense for how this breaks down? If > workers continued their previous marginal propensity to consume (say 1980), > what would be the reduction in aggregate demand and how does that compare > with the other components of demand?
it's really hard to say. One thing is that the MPC is very hard to estimate (since you have to posit a specific theory of the consumption function). And it's really hard to separate workers' consumption from total consumption. So here's a different calculation: If the average propensity to consume (consumption/personal disposable income) were to fall to its average 1980 value (0.875) and personal disposable income didn't fall, that would be a fall of about $713 billion, or 8% of current consumption spending. Of course, if C fell that way, it would cause a fall in personal disposable income. So maybe -- BIG MAYBE -- it would be a fall of 15% of US GDP. This is so back-of-the-envelope that the envelope has fallen apart. More revealing is looking at the average propensity to consume over time. People were consuming less and less of their income during the 1950s and 1960s. That is, they were being _more frugal_ in the Golden Era of the (limited) US welfare state. But the 1970s stagflation crisis and the 1980s-the present rise of neoliberalism has led to increasing ratios of consumption to income -- falling frugality. -- Jim Devine "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
