Supplying New Arguments for Supply Side Economics

Economist Tyler Cowen picks a fight with this claim: "Left-wingers should be the real supply-siders."

The core of his argument:

The left often stresses how wealthy people have superior opportunities in life. They can save more, avoid debt, buy better educations, they have a better chance to start a company, and so on. Furthermore this is seen as unfair. Right?

To put the point in simple quantitative terms, equity yields an average of about seven percent, while holding debt claims yields a bit over one percent. Most poor people don't hold much equity, or for that matter they tend to take out debt rather than hold it. Smart rich people stock their portfolios with equity quite heavily. So on average rich people get richer. That is even more unfair. Right?

OK, to oversimplifiy the numbers just a bit, rich people earn -- at least -- six to seven times more on their money than do poor people. Many of the poor earn negative rates of return.

The contemporary left often seeks to remedy this unfairness, but in the meantime it is true true true. Right?

So for each extra dollar we leave with rich people, the economy earns six or seven times more in net terms -- at least -- than if that dollar had been given to the poor.

He concludes:

The real supply side story is about how different social classes use resources in different ways and to achieve different rates of return. Right?

Read the whole thing.

Comments

[MikeP]

"The rich people's economy" doubles in size about every ten years or so. "The poor people's economy" doubles in size about every sixty years or so, at best. After sixty years have passed, "the rich people's economy" has done at least six times better, relative to its original starting point.

After sixty years have passed, "the rich people's economy" has done at least thirty-two times better, relative to its original starting point.

[de stijl]

MikeP,

Poor people suck at math. It's one of the main reasons why they're poor.

[Taktix?]

He's already full of shit right here:

To put the point in simple quantitative terms, equity yields an average of about seven percent, while holding debt claims yields a bit over one percent.

How many of those holding equity were, at one time, in debt as a means to aquire said equity, such as buying a car, getting a degree, etc.

It's already assuming that there are only two types of people in the world, those that DEBT have equity, and those that ONLY have debt.

Collectivist asshole...

[Taktix?]

...those that ONLY have equity, and...

[joe]

"So for each extra dollar we leave with rich people, the economy earns six or seven times more in net terms -- at least -- than if that dollar had been given to the poor."

No, you twit. If that money was given to the poor, they would't be barely keeping their savings account in the black and going deeper into debt. They'd be spending and investing like rich people.

Poor people don't engage in less-profitable financial activity because they want to. They put what money they have into savings accounts and credit card bills because they don't have enough of it to do anything else.

Sheesh.

[joe]

...not to mention, if poor people had more money, they would spend most of it on stuff they need, like groceries, car repairs, and furniture.

The comparison Cowen should be making is between the return on equity investment to the economy vs. the mulitplier effect of that money being spent on goods and services.

[VM]

can we pick a fight with the term "supply side economics", too?

[NoStar]

C'mon joe,

You know they'd blow a lot of it on Malt Liquor and crack cocaine.

[MikeP]

joe, I was about to make a comment fully supporting your point. But then you go and bring up the multiplier effect...

Anyway, I'll still support your earlier point...

There is massive selection effect going on between the people who have the disposable wealth to put toward high yeild investments and those who don't. Over a lifetime most people go from debtors to debt holders to equity holders. Implying that the wealthy's wealth trickles down at a rate faster than the 20-something's wealth builds up is not born out by this argument.

And the liberal's response to Cowen's argument is not so likely to be, "Wow, trickle down is more economically efficient than redistribution," but rather, "We can fix this by having the government guarantee poor people's equity investments."

[MikeP]

yeild

'i' before 'e' except after 'c' and sometimes 'y'.

[crimethink]

Poor people don't engage in less-profitable financial activity because they want to. They put what money they have into savings accounts and credit card bills because they don't have enough of it to do anything else.

Call me an elitist, but ha, ha, and ha some more.

For instance, which socioeconomic stratus invests in the lions share of lottery tickets, which earn a whopping -99.999999% rate of return?

[Pluton\'s Advocate]

Not to mention the question of why they have high credit card bills in the first place.

[joe]

NoStar,

As opposed to Single Malt and powder cocaine?

crimethink,

Congratulations! You just discovered and EVEN WORSE investment that available to poor people, that rich people ignore because they have better options! Way to bear out my point...

[joe]

"Not to mention the question of why they have high credit card bills in the first place."

When you bring home $300/week, $850 is a high credit card balance.

Those keep-the-1991-Mazda-running slackers!

[jf]

Actually, there are plenty of decent investment opportunities for "poor" people, it just that they probably don't know about them.

A PayPal money-market account yields around 5.15% annually right now, last I checked.

T Rowe Price has an automatic investment plan that requires a $50 automatic monthly investment, with I believe no minimum upfront deposit.

I think there are also a number of companies that allow people to buy stock directly in very small amounts.

When it comes to investment opportunities, I think the problem is asymmetrical access to information, which is why the rich invest in equities and the poor invest in lottery tickets.

[The Great Ape]

Poor people cannot afford much volatility in their investments because they have higher liquidity needs relative to their assets.

[Rex Rhino]

Well, I don't know if I am properly understanding the guys point in terms of public policy, as he doesn't really mention any public policy.

But essentially, isn't he just re-stating the Laffer Curve?

[MikeP]

Both sides are giving a number of reasons why poor people can't or won't invest in higher earning investments. But the point of Cowen's article is not why there is a difference. Rather Cowen's point is that -- regardless of the reasons for the difference -- leaving the money in the hands of the wealthy makes the economy, and those it trickles down to, more wealthy than taking it out of their hands and redistributing it to the less wealthy.

But I would contend that, regardless of the accuracy of his argument, this tactic is unlikely to convince the left-wingers he is goading with it.

Plain and simply, economic growth -- and the greater wealth and opportunity it yields to all in the economy over time -- is utterly uninteresting to most liberals.

It is not an overstatement that most on the left would rather have equality with lower total wealth than inequality with higher total wealth. Real wealth and exponential growth simply don't enter into the mindset.

So Cowen's feisty argument is unlikely to convince anyone.

[andy]

Crack was invented by the CIA to hold the black man down.

[Paul]

Those keep-the-1991-Mazda-running slackers

We're keeping an '88 corolla running...barely. Am I poor?

[Paul]

When it comes to investment opportunities, I think the problem is asymmetrical access to information, which is why the rich invest in equities and the poor invest in lottery tickets.

Hmm. I'm thinking asymmetrical information usage? Look, this argument is just an exercise in speculation. Show of hands for everyone who knows someone or has a family member that's poor? Ok, now, what kind of investments would said poor people make if they suddenly had enough disposable cash to make investments?

My guess is your answers are going to be all over the place. Some will buy more lottery tickets, some more crack or liquor, some a house, some rims for their car, some would go into a savings account, etc.

[DannyK]

Supply-side economics is pseudo-economics, pure and simple. The only reason anyone talks about it is because it's a nifty justification for cutting taxes without touching government spending, as in Reaganomics and Bushonomics.

It's the economic equivalent of the "eat all the ice cream you want and lose weight" diet. It's not very plausible, but the fat man, the ice cream maker, and the diet doctor can all have fun for a while pretending it's true.

[Rational Ignorance]

the problem is asymmetrical access to information

Knowledge of higher-yield investments than a forty of malt liquor and five lottery tickets is of no value to a man with ten dollars.

[Max]

I always thought that "trickle down economics" was a silly straw man. But here it is.

The most benign rich person is the miser who never spends his money. That is, the best case is when the money NEVER "trickles down"!

[jf]

Knowledge of higher-yield investments than a forty of malt liquor and five lottery tickets is of no value to a man with ten dollars.

Knowledge that you can save that ten dollars each week for a few months and use it to seed an investment plan is far more valuable that only thinking that your best option is the forty and some lottery tickets.

[Shelby]

Supply-side economics is not pseudo-economics at all. However, many of its' advocates' claims are risible. When you lower taxes on a productive activity, you get more production. To oversimplify, a 10% tax reduction might yield a 2% increase in taxable activity, partially offsetting the "expense" of the tax from the taxer's standpoint. A 10% tax cut does NOT produce a 10% or higher increase, which is the extreme claim that some proponents make and all the critics attack.

The other major issue regarding the how-the-poor-would-invest-if-they-had-money question is, a substantial minority of the poor are that way BECAUSE they aren't good at money management.

[Cracker\'s Boy]

"The other major issue regarding the how-the-poor-would-invest-if-they-had-money question is, a substantial minority of the poor are that way BECAUSE they aren't good at money management."

Not to worry, Shelby... "someone" will tell them how to manage their money.

CB

[Ken Shultz]

"Economist Tyler Cowen picks a fight with this claim: "Left-wingers should be the real supply-siders."

I think this may get to the heart of the "liberal elite" label. ...ever notice that there are few among the poor who think of themselves as being on the left?

When I was poor and I habitually ran out of food before payday, I wanted deep cuts in marginal tax rates. Returns on investment were beside the point--it was all about opportunities to get ahead.

[thedifferentphil]

This is a late comment on this thread, but Cowen's reasoning is not correct. people investing in debt that yields lower interest rates helps increase the return to equity by allowing corporations to borrow at lower costs. Thus, if all savings were done in equity form, corporations would no longer be able to float bonds for expansion, and would instead have to dilute their equity base with new stock offerings. Meanwhile, with higher levels of equity investments, the marginal return to equity would fall. Thus, his partial analysis does not take into effect the income loss that current equity holders would suffer if there was widespead converstion of bonds to stock.

[Guy Montag]

Well, as one who used to follow the Leftist model and now follows the Free Market model (to the extant that is possible in USian society) I say the Free Market approach is much better. Added bonus: I am not pissed off at "society" any more for my own failings!

Ken Shultz, I was thinking wrong when young and poor, you were thinking right.

[bob mologna]

"Those keep-the-1991-Mazda-running slackers"

"We're keeping an '88 corolla running...barely. Am I poor?"

Naw, you're both elitists. I'm trying to keep a 1973 Ford pickup roadworthy. Mind you, that's only because I'm a cheap bastard who prefers to invest in real estate than piss away money on a new car (or lottery tickets for that matter... though a fine bottle of wine never goes amiss).

[brotherben]

And then there's the 538 people in my town who are getting retrained at the expense of taxpayers because the rich fella what owns the van heusen plant invested his money in a plant in Honduras. They dont have a pot to piss in right now. But the rich fella has increased his bottom line.
What about the man who has worked for the company for years and gets hurt at work. The insurance company getting paid by his boss to take care of injured workers denies the claim and some rich quack doctor backs them up. The poor man (me) is now on soc. sec. disability for life and all the rich folks are out nothing. Where do I invest the extra 15$ a month I have after I pay my bills. Oh yeah, I'll buy 4 cases of ramen noodles and 20 pounds of spuds.
I dont know what the economic answer is but please understand that not all us poor folks are this way because of sloth or addictions or unwillingness to do better. Some are here because a lot of wealthy people only care about aquiring more wealth. No matter the cost to their fellow man.

[Paul]

Naw, you're both elitists. I'm trying to keep a 1973 Ford pickup roadworthy. Mind you, that's only because I'm a cheap bastard who prefers to invest in real estate than piss away money on a new

Your elitism brings a smile to my face. No, really it does. 😉

[Max]

When I was poor and I habitually ran out of food before payday, I wanted deep cuts in marginal tax rates.

Your marginal rate, or somebody elses?

(I wonder what the maximum theoretical marginal rate is. It is certainly higher than the top tax bracket, due to various tax deductions, phase-outs/phase-ins, etc).

[kevrob]

Anybody who thinks that a $1.00 lottery ticket comes out of a poor family's investment budget is not thinking straight. A lotto number is entertainment. The middle-class or wealthy person's equivalent would be the money they blow at the tables in Vegas or AC, or what they "waste" on sports betting. I've been known to take a flyer or two on a Powerball jackpot, spending as much as $2.00 a week on my vice. This all the while I was sending X% of each paycheck into a 401k plan.

That $100 or $200 a year spent on legal gambling is much less than well-to-do households pay each year on restaurant meals or their cable hookup. If it wasn't spent on tickets, it might go for video rentals, a night at the ballpark or an upgrade from Duff to Henry J. Duff. I doubt that it would go into the passbook account.

Now, if somebody is spending a significant chunk of their takehome on gambling of any type, they may not be too wise, and a poor person may be behaving in a riskier manner than a higher earner spending the same percentage, but it is a truism that the wealthier can safely devote a larger slice of their income to luxuries than the poorer sorts. Better to spend the occasional $1.00 on a lotto than to blow your home equity credit line on craps or poker.

Kevin

[_______]

Equities?

Why would a smart poor person invest in those?
Do any research on equity investments and the first thing you find is "past performance is no guaranty of future results". Makes the near negative interest rate (after the higher tax rate and inflation) on an FDIC insured account look pretty good.

[Mo]

Bravo to the Great Ape for recognizing risk-return.

Equities are a smart, long-term investment, dumb if you need money soon. Debt is a smart short term investment when your risk tolerance is lower. That is why as you get closer to retirement/death, portfolios become less equity weighted and more debt weighted. The poor that put their money in debt investments are acting rationally for their risk tolerance and liquidity requirements.

[Rex Rhino]

The insurance company getting paid by his boss to take care of injured workers denies the claim and some rich quack doctor backs them up. The poor man (me) is now on soc. sec. disability for life and all the rich folks are out nothing.

Well, the trouble is, you are NOT on social security disability for life. You are on social security disability until the system collapses, which is pretty damn soon. You will either need to find a job, find family to take care of you, or you will end up homeless or starving. If you are not preparing now, it will probably be the last option. Your survival depends on you figuring out what you are going to do when social security doesn't exist.

See, you are under the impression that the government is somehow immune from fraud, failure, and greed. You are under the impression that Social Security is somehow more trustworthy than a private insurance company.

Social Security is a pyramid scheme - every cent of social security contribution is spent (and then some). The Social Security system can't begin to hope to pay out social security when the baby boomers retire. It is not economicly feasable. If any private insurance system was designed like social security, they would go to prison for fraud.

The social security system is like a private insurance company, except that it is a monopoly and can commit criminal fraud without penalty.

In the comming few years, when millions of people find they have no income, no home, no medical care, no nothing, because the government spent all the Social Security money on farm subsidies and "spreading freedom", you are going to regret the faith you put into your messianic god-like government idol. All those politicians you oh-so-faithfully trusted to protect you from "evil big buisness" are screwing you, and will not be brought to justice when the collapse comes.

[clone12]

If "Left-wingers should be the real supply-siders", does that mean Tyler Cowan should also have his Libertarian parking privilege revoked for asking why consumers aren't merely satisfied with porn made in 1991 but demand new films be made every year, just out of principle?

[Max]

Equities are a smart, long-term investment, dumb if you need money soon. Debt is a smart short term investment when your risk tolerance is lower. That is why as you get closer to retirement/death, portfolios become less equity weighted and more debt weighted.

It's not so much a short-term/long-term issue, but rather the fact that your true economic "portfolio" includes your ability to earn labor income (i.e. human capital). As you deplete your human capital, you have to shift your savings to less risky assets to maintain a *constant* level of economic risk.

[Genghis Kahn]

Your survival depends on you figuring out what you are going to do when social security doesn't exist.

Yeah. And the Trilateral Commission and the Illuminati are out to get us, to. Oh, and don't forget the CRF!

The politicians will tax our economy to literal death before they'll let the SS ponzi scheme collapse. Because,

Plain and simply, economic growth -- and the greater wealth and opportunity it yields to all in the economy over time -- is utterly uninteresting to most liberals.

this is true, which is why this whole article is a laughable farce.

The whole political center has moved closer to socialism in recent decades, to the point that it makes little of no difference what "the Right" and "the Left" are saying. Remember when Bush was going to do something about S.S.?

What we're doing, and will continue to do, is become more European in this country. We'll stagnate our economy, and even kill it, before we'll do anything rational with the welfare state. Because fixing the welfare state is going to hurt, and I mean that in more than a political sense.

You can bitch because a factory moved to Honduras and 500 people are now out of jobs (and I feel for you, btw). But 500 jobless people in a small town is nothing compared to what it would take to get of our welfare addiction. Which is why we'll never kick the habit.

The welfare state is worse for you than smoking. But they'll keep you from smoking so they can tax you.

The only concievable way we are going to survive the welfare state in the future, is the same way we've survived it in the past: serious economic growth.

Will new innovations make the necessary growth rates possible? Or have we reached the point where Uncle Sam sucks it away faster than American Ingenuity can create it?

Who knows.

[dagny]

Those keep-the-1991-Mazda-running slackers!

I keep an 89 Acclaim running. So far.

It helps that it was owned by an old person who rarely went much of anywhere. So it only has like 100,000 miles, not much for nearing the 20 year mark.

I would comment on the article, but all I got out of the quoted part was "rich people have more money than poor people"

[Pro Libertate]

1995 Accord--tied for the oldest car in reserved parking at work. The other car? Another 1995 Accord.

[Art Laffer\'s Voice]

SUPPLY CURVE!

[Lost_In_Translation]

This is all a moot point. The whole point of income redistribution is not so that everyone will be better off, its about giving enough money to those who don't have it so they will be pacified enough not to take up arms and wreak havoc. As long as they think someone actually cares about them living, they'll sit back, be relatively productive citizens and be only slightly miserable. Its bribery for stability. Its what its always been and always will be. We don't expect them to invest it wisely and become rich, otherwise there would actually be more market incentives to get the money (which would negate government doles).

Now, for the argument of rich investing vs. poor investing, which is beside the income redistribution point, as I've just explained. How many rich people (with investments in the $1 million +) actually control all of their investments. How many run their own stock portfolio, manage all their properties personally and decide which companies to put their money in on a daily basis? I don't know, but from personal experience, not many. They hire professionals who specialize in the areas of good investing and management and the rich person specializes in his area of expertise (company managing, atheleticism, technical expertise, etc). Its this specialization which yields a much better return. Equity is thus better managed by multiple specialists.

Now take a poor person. He might have a specialist, the bank, earning him interest on savings, but the bank is only one and can't optimize his investment, nor has much personal interest in maximizing the return on small amounts of money. Thus, even a frugal poor person, if he does not specialize in the right areas of income return, will not yield as much money as the rich. However, this assumes both an intelligent rich and poor person.

Take the case of a idiotic rich person. He may spend his money on flashy cars and big houses. But if he has enough money, other people dependent on that income from managing his wealth will shield him from the effects by adjusting to his prodigality and convincing him to get cars that might appreciate in value or houses in a rising market. They have a vested interest in keeping him rich for their own salary. Now, an idiotic poor person or middle class person does not have people smarter than them to shield them from their wastefulness and thus will lose everything because they won't make their money work for them. At that point, they threaten the government with disgruntlement if they are not given money to stay alive and thus we get back into a bribery situation aforementioned.

When the government starts admitting that most social programs are glorified bribery, we'll be on the right track to finding a better solution.

[thoreau]

Exactly, LIT. Even leaving aside the people who are where they are because of dumb choices, there are plenty of people who simply make sub-optimal choices because they lack the knowledge to pick the very best strategy.

It's like this: Do any of you have a friend who's a car geek? Or a travel geek? Or a home remodeling geek? You know the sort I'm talking about: No matter what sort of decision you make, this person always says "Oh, you could have done X and saved a bunch of money." Of course, unless this person is part of your close circle, you probably didn't wind up having this discussion until after you made your decision.

And if you try to have this dicussion before making your decision, you discover that your friend mostly confronts you with a dizzying array of alternatives that will require a lot of research and some really careful timing.

I'm not here to whine about the fact that saving money can require a lot of research and timing. I'm just here to observe that a lot of economic decisions require some specialization if you want to get the best possible deal. The internet has helped some, by disseminating more information and hence bringing more competitive pressure to bear on prices. But even there, the best deals still require some knowledge and timing. And inevitably, if you talk to your friend the geek it gets really confusing because it isn't an area that you have a strong interest in and deep knowledge of.

I'm a few years out of grad school. I know that if I had played my cards right I could have tucked some small amounts away during grad school and earned a return. I also know that during grad school there was a big tumble of stock prices. And most importantly, I know that I'm in a field where the interview process takes months and most hiring is done during certain seasons. So rather than trying to get the best return I'm focusing on building up several months' salary in the bank, and paying off my car loan ASAP so I have equity in something. I don't claim to be poor, but I'm certainly not following a strategy that will maximize my expected return. Instead, I'm following a strategy that will give me the necessary security to take risks in a few years, and earn the returns that come with risk.

I guess my point is that following a strategy that doesn't maximize expected returns (while minimizing your expenses) is not necessarily a sign of stupidity. It can just be a sign that you are focusing on what you know best, and focusing on putting yourself in a secure position.

Sorry if that was kind of rambling.

[joe]

Wow, did this thread get off track quickly.

Damn, Hondas run a long time. You want a good long term investment? Five speed Civic.

[Pro Libertate]

Hondas rule. I've owned two Accords and nothing else in the last twenty years.

I wonder if there isn't a business opportunity akin to credit counseling where lower-income people could get help in making financial decisions. I've seen some things like that on the charitable/government assistance front, but could it be a profitable enterprise? With pooled funds, safer investments with decent returns are available.

[dhex]

"I've seen some things like that on the charitable/government assistance front, but could it be a profitable enterprise?"

i've never seen anything organized above the credit union level myself. it's an interesting idea. "microinvesting" ?

[joe]

Pro Libertate,

Let's take jf's example of saving $10 bucks a week to put into an investment. After an entire year, he will have a whopping $520.

When he's up to that level, he starts an account at Fidelity (yeah, right). At the 6% return Cowen attributes to equity holdings, after another year, that $520 is up to just over $550. If he had put it into a 1% savings account, He would have just over $525.

Twenty five bucks.

How can somebody who doesn't know the meaning of "it takes money to make money" be so arrogant as to sneer at anyone else's knowledge of economics?

[thoreau]

Now compound that interest, joe. And add another $520 next year. Do that for 40 years until retirement.

[thoreau]

To be clear, saving $10 a week won't add up to a huge amount even over 40 years, but there will be a big difference between equity and the savings account.

[joe]

thoreau,

The point is, the difference between the equity and the savings account won't actually amount to squat in terms of providing for a retirement, at the amounts that poor people could realistically put aside. The puny differrence in no way makes up for the loss of liquidity, given that their entire annual investment amounts to a low-to-medium cost car repair.

People who don't have much money aren't selecting savings accounts as their investment; they're just putting whatever extra money they have aside until the (fuel pump, hot water heater, etc.) goes. Rich people don't make a great deal of money off their cash-on-hand, either.

[Pro Libertate]

joe,

Obviously, the more money you have, the better you'll do. A small, regular investment over time can net you some pretty nice returns, though. Half the trick for any non-rich investor is to take whatever you can afford out of your hands and invest it. On top of that, you can contribute any windfalls to your investment(s) and set your account up so that any dividends are automatically reinvested. Low-cost investments are probably best--like index-pegged mutual funds.

Probably the biggest problem for someone who is low income is to be in a position where an investment makes more sense than paying down high-interest debt or being able to leave the investment alone when a financial need arises. Maybe even worse is the fact that most people--with or without good incomes--are ignorant about the time-value of money, the true costs of debt, and the need to make wise choices about spending.

Back when I dealt with lending, I heard quite frequently that the subprime borrower was payment sensitive--i.e., he didn't care about the term, the fees, or the rate; he just cared about whether he could handle the payment. That's understandable, but it is also a dangerous attitude. Financial education is a big gap in K-12 education right now, that's for sure, and parents are passing on their poor understanding of finance to their kids.

Obviously, there are virtually no investment "magic bullets" for someone who is making little to begin with, has lots of expenses, and is saddled with debt. That's why I was wondering whether some sort of adviser that focused on low-income situations might not be useful.

[thoreau]

Washington Mutual now offers a CD with a 5% APR. Admittedly, you can only get it if you use online banking, and the minimum balance is $1000. Still, if you can scrape together $6k over several years, you could prepare for emergencies while getting a good return by buying 6 of them with maturity dates staggered at 1 month intervals.

[joe]

thoreau,

Do you think that people bringing home $327 per week are failing to scrape together a grand a year for long-term investments because they don't realize that 5% is higher than 1%?

I suspect that poor who put that money into their bills, or even a single takeout meal for two per week, are not being irrational.

[Pro Libertate]

joe,

Ah, but who are the typical low-income people? Some people are completely overwhelmed and have no hope of investing or even of meeting their expenses. Are they entirely typical? My experience in doing charity work in poor communities is that for plenty of low-income people, the problem isn't just low income, it's also poor choices. Keeping up the with Joneses is an issue at that level, too, which means getting cable is a greater priority than making an investment, for instance. And the idea that people who are relatively uneducated understand finance is silly--most well-educated people are financially challenged.

[Lost_In_Translation]

Joe,

The point is income distribution doesn't create more wealthy people or make people more secure in their finances, it just bribes a few not so lucky citizens to stay quiet and pass along peaceably. True economic improvement requires degrees of education to provide the market with a useful, valued skill followed by taking advantage of other people with useful, valued skills to create more wealth. Social Security is a decaying crutch which nets no real value added benefits to society. It needs to die and the faster, the better.

[MikeP]

People who don't have much money aren't selecting savings accounts as their investment

I know that people are discussing the practical here, but it is worth noting that the government is stealing 12% of the poor person's income before he ever sees it.

To repeat the elevator pitch against Social Security...

A person who works from age 18 to age 65 and puts 12% of his earnings into accounts yielding a mere 4% real return can draw down his savings over a 30-year retirement to earn a pension equal to 108% of his net paycheck.

[Son of a!]

Washington Mutual now offers a CD with a 5% APR.

I'd never buy that CD as long as Emigrant Direct is offering 5.05% on their plain old savings accounts. No minimum, no fees, no penalty for early withdrawal. The only drawback is it's an Internet bank, so you have to wait the 3 business days or whatever for ACH transfers to and from a traditional checking account.

[joe]

I'm not disagreeing with Pro Lib and L_I_T about poor knowledge of finance being a real problem among low income people.

Alls I'm sayin is, that isn't a sufficient explaination for why they don't invest in higher-yield vehicles.

[sonicfrog]

"The other major issue regarding the how-the-poor-would-invest-if-they-had-money question is, a substantial minority of the poor are that way BECAUSE they aren't good at money management."

Uhm, isn't the major issue regarding the how-the-poor-would-invest-if-they-had-money question, is that, unlike the theoretical construct we are playing with, in the real world the poor HAVE NO MONEY to invest? But some probably would be bad investors, if for no other reason than they didn't have the benefit of growing up in an environment where having disposable income was a part of the daily fabric of life. We learn so much by the example set by our family environment as we grow into adulthood. Children who grow up in a cash starved construct will know how to survive, a skill in itself, but may not know much about, or be distrustful of the basic concepts of growth economics. Example: I'm a guy raised in the A/C cooled, shop-for-food lifestyle of the typical American middle class. Throw me into the heart of Australia, a barren desert, and my chances of survival would be thin. Yet there are populations of aborigines who have lived their for thousands of years and survived because they were taught how from birth.

Hope this makes sense. I just woke up and haven't had my coffee yet.

PS. Subaru's rule. They go anywhere you want: desert, snow, beach... I rebuild them. Soooo easy to work on. Haven't made a car payment in my life.