Any successful consumption theory must accommodate three basic patterns: the rich save at higher rates than the poor; national savings rates remain roughly constant as income grows; and national consumption is more stable than national income over short periods.
The first two patterns appear contradictory: If the rich save at higher rates, savings rates should rise over time as everyone becomes richer. Yet this does not happen.
Mr. Duesenberry’s explanation of the discrepancy is that poverty is relative. The poor save at lower rates, he argued, because the higher spending of others kindles aspirations they find difficult to meet. This difficulty persists no matter how much national income grows, and hence the failure of national savings rates to rise over time…..
By ROBERT H. FRANK
Published: June 9, 2005
Read more at The Mysterious Disappearance of James Duesenberry – New York Times.