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economics, economy, politics, Uncategorized

Income inequality and diminishing marginal utility

Calvin is referring to economic law of diminishing marginal utility.  In general, it states that consumption of preceding goods or services won’t deliver the same level of satisfaction relative to the first (or in Calvin’s case, the second).  As Calvin illustrates, his third or fourth bowl of chocolate frosted sugar bombs will make him sick.  The same is true with almost anything that we can purchase.  You may be satisfied with a lamp you bought to light up your room, but you wouldn’t you buy another to light up that same room.  You might buy a second to light up a different room but you eventually stop buying the lamp because its utility drops.  A second and third car, bedroom set, or dinner won’t make you as happy when you bought them the first time.

What does this have to do with income inequality?

Think about the amount of money you need to purchase the things you want.  Obviously, the wealthy have enough to purchase everything that they want four, five, or ten times over.  Much of the time, however, they don’t and this has to do with diminishing marginal utility.  Sure, there are many top income earners who buy several cars and houses, but spending habits of a small consumer elite can’t sustain a healthy economy.  The automobile and housing industry would prosper with a large consumers base, not a small one.

In truth, the wealthy spend their money differently than the rest of Americans.  A middle class family will likely spend a tax cut on groceries, clothes, or medical bills, etc.  A tax cut for top income earners, however, will most likely be invested.  Below is the distribution of financial investment ownership.

The top 1% of Americans own half the distribution of stocks, bonds, and mutual funds while the bottom 50% own less than 1% of that distribution.  In other words, you can’t expect the top 1% to maintain necessary levels of consumption; the law of diminishing marginal utitilty makes the wealthy consume less and invest more.

Investment is obviously important.  However, our economy suffers from a lack of demand because ordinary Americans don’t have the purchasing power to consume the things they need.

Income equality is not just a moral concern, it’s good economics.

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