Wednesday, January 23, 2008

 

Charity vs. Investment. Suppose people in Atlantis increase their charity to the poor by 1% of GDP but people in Lemuria increase their investment rate by 1%. In which country will the poor be better off? In the short run, it will be the Atlantians, of course. In the long run, though, Lemuria will grow faster and-- a tricky bit-- the poor will get richer.

Let's suppose the poor do no investment and consume all the charity they receive. two separate cases are (a) when the current non-poor might have poor descendants-- who will inherit some of their investment-- and (b) when they do not. We'll use assumption (b). Let's assume zero taxes, so taxes on investment income play no role. The social discount rate is very important, so let's assume it's zero, leaving it out of the picture. We'll just do some comparisons of the next 200 years. The benefit to the poor from investment might come from (a)increased information production/process innovation, (b) increased product innovation-- new goods, consumer surplus, or (c) an increased marginal product of labor due to the bigger capital stock, and hence higher wages.

I'll ask macro people about this.

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