Life in the fast lane. Photo credit: Getty Images
The rich, said F. Scott Fitzgerald, are very different
from you and me. Yes, retorted Ernest Hemingway – they’re richer.
How do Americans consume in comparison to
Kazakhstanis? The typical American is 150% richer than the typical Kazakhstani
(65,000 versus 26,000, in 2017 international dollars for 2022).
I estimated the amount spent by Americans out of an
additional dollar of annual income over the period from 1990 through 2022. Consumption
is final consumption expenditure (that is, the amount that consumers spend on goods
and services in the final stage – the burger after MacDonald’s cooks it);
Income is gross domestic product (the value of production in the US). I
express both variables in 2015 international dollars, so they adjust for inflation
and for changes in the exchange rate. Time
indexes the number of years that have passed since 1990. For 1990, Time
= 1. For 1991, Time = 2, etc. All
data are from the World Bank.
Table 1: The marginal propensity to consume in the
long run in the US
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Regression
results |
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R square |
.997 |
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Standard error |
1.56E+11 |
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Observations |
32 |
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ANOVA |
Df |
SS |
MS |
F |
Signif. F |
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Regression |
1 |
2.19E+26 |
2.19E+26 |
9001.45 |
0.000 |
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Residual |
30 |
7.3E+23 |
2.43E+22 |
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Total |
31 |
2.2E+26 |
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Coefficients |
T-stat |
P-value |
Lower
95% |
Upper
95% |
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Intercept |
2.89E+10 |
0.216 |
0.830 |
-2.4E+11 |
3.02E+11 |
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GDP |
0.823 |
94.88 |
0.000 |
0.805 |
0.841 |
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Table 1 shows that over the long run, Americans spend
82 cents of each additional dollar, a much higher rate than in Kazakhstan (65
cents).
The intercept is statistically insignificant. That is,
consumption when Americans have zero income may well be zero even outside of
the sample. This suggests that Americans should they have zero income would not
consume by borrowing from future income. Of course, the case is not realistic,
because the US has lots of income every year. But although the case is a
logical extreme, it sheds light on the debate over whether Americans spend too
much. These results suggest that over the past three decades, Americans have
not consumed catastrophically.
The model explains virtually all variation in consumption
over the years; R-square is over .99. It’s all about income. There is not much room for additional explanatory
variables.
Table 2: The marginal propensity to consume in the US
in the short run
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R
Square |
0.997 |
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Standard
Error |
1.59E+11 |
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Observations |
32 |
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ANOVA |
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Df |
SS |
MS |
F |
Signif.F |
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Regression |
2 |
2.19E+26 |
1.09E+26 |
4352.819 |
0.000 |
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Residual |
29 |
7.29E+23 |
2.52E+22 |
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Total |
31 |
2.2E+26 |
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Coefficients |
T-stat |
P-val |
Lower
95% |
Upper
95% |
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Intercept |
1.11E+11 |
0.157 |
0.876 |
-1.3E+12 |
1.55E+12 |
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GDP |
0.814 |
10.968 |
0.000 |
0.663 |
0.966 |
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Time |
3.03E+09 |
0.119 |
0.906 |
-4.9E+10 |
5.53E+10 |
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Table 1 gives the Income coefficient that is
the average over the 33-year period. This coefficient is thus for the long run.
In contrast, Table 2 controls for the Time trend; that is, it controls
for the long run. So its Income coefficient is the marginal propensity
to consume in the short run.
The short-run marginal propensity to consume (.814) is
remarkably close to the long-run propensity (.823). This suggests that at the
margin, Americans save the same way in the short run as in the long: The marginal
propensity to save in both periods is about the same. Maybe Americans obtain financial
information quickly and see no reason to update it later. Here, we interpret saving broadly: It includes the forced saving of tax payments as well as private saving.
But in Kazakhstan, the marginal propensity to consume
is much higher in the short run than in the long: .946 versus .645.
Kazakhstanis may need time to gather financial information and adjust their
savings (and thus consumption). This may speak to the inefficiency of financial
markets in developing economies.
The Time coefficient in Table 2 is statistically
insignificant. US consumption has no time trend. Once again, it’s all about
income. In contrast, Kazakhstani consumption falls over time, controlling for
income, again perhaps because financial information improves over time, lifting
savings and reducing consumption. – Leon Taylor, Baltimore tayloralmaty@gmail.com
Notes
For helpful comments, I thank but do not implicate Annabel
Benson.
Reference
World Bank. World Development Indicators. www.worldbank.org
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