Posted on by ColinTwiggs

Redistribution boosts consumption, not output | Richmond Fed

Abstract from a February 28, 2014 paper by Kartik Athreya, Andrew Owens, and Felipe Schwartzman:

The aftermath of the recent recession has seen numerous calls to use transfers to poorer households as a means to enhance aggregate activity. We show that the key to understanding the direction and size of such interventions lies in labor supply decisions. We study the aggregate impact of short-term redistributive economic policy in a standard incomplete-markets model. We characterize analytically conditions under which redistribution leads to an increase or decrease in effective hours worked, and hence, output. We then show that under the parameterization that matches the wealth distribution in the U.S. economy (Castaneda et al., 2003),wealth redistribution leads to a boom in consumption, but not in output.

Read more at Does Redistribution Increase Output? The Centrality of Labor Supply | The Big Picture.

7 Replies to “Redistribution boosts consumption, not output | Richmond Fed”

  1. I am not an economist, but it seems to me that there is some flaw in
    the above theory. As an analogy, if I increase my consumption of Cheerios,
    would not the manufacturer have to increase their production? It seems that
    theories are being postulated, based on ones political agenda.

    1. If you consume more (not just just Cherios), you either save less or run up your credit card. If society saves less or borrows more to fund consumption, that is likely to impact on capital investment and therefore growth.

  2. I don’t beieve that capital investment will expand without the demand side
    increasing. Why expand production if there is no increase in consumtion?

    1. We have capital investment even when consumption has not increased. One possible explanation would be the creative-destructive nature of capitalism: innovation requires investment in new technology to replace aging, inefficient capital equipment.

      1. You appear to be pointing to an increase in efficiency, not production.
        Happy St. Patrick’s day

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