Demand Macroeconomics 'It's an Ill Research Proposal

  • Length: 7 pages
  • Sources: 7
  • Subject: Economics
  • Type: Research Proposal
  • Paper: #2744581

Excerpt from Research Proposal :

Thus it was confidence ebbed that had ebbed actual income. The Hiscox Wealth Review of 2009 found: "The recession has left its mark on the psyche of the Working Wealthy with a lack of confidence impacting their perceptions of wealth and appetite for risk. Whilst two in five (41%) say the recession has not had an impact on the amount of money they have to spend, almost an equal number (44%) say they are fearful of the future" (PRN Newswire, 2009). But, observed Vanity Fair reporter tartly: "Most 60-year-old ex-Lehman Brothers bankers likely squirreled away enough to at least scrape by on a couple of million a year" (Shnayerson 2009, p.3). If they did cut back, it was in relatively minor ways: "Why should I pay $250,000 for a private plane," said one man to the magazine "when I can pay $20,000 to fly commercial first class" (Shnayerson 2009, p.1).

Some industries are even helped by recessionary periods -- some service industries such as tailors and cobblers are doing a booming business, as people are repairing items they once used to carelessly discard. Discount retailers, are doing well as consumers shift their purchasing patterns from traditional stores to lower-end venues. Consumers that used to buy at Macy's, are now buying at Wal-Mart, while consumers who bought at Barney's and Manolo Blahnik's stores are still able to buy at such establishments, if only slightly fewer purchases. But even the middle class do not discard all luxuries during recessions. Sadly, another industry that prospers during a recession is that of the 'sin' industries. "In bad times, the bad do well. Although it seems a little counterintuitive, people patronize the sin industry more during a recession. In good times, these same people might have bought new shoes, a new stereo or other, bigger-ticket items. In bad times, however, the desire for comforts doesn't leave, it simply scales down. People will pass on the stereo, but a nightly glass of wine, a pack of cigarettes or a chocolate bar are small expenditures that help hold back the general malaise that comes with being tight on cash" (Beattie 2009).

During a recession, affordable luxuries become more popular. While not exactly sinful, other small luxuries such as baked goods such as cupcakes have exhibited an increase in demand. Instead of going out to eat, consumers may buy a moderately-priced bottle of wine or a fancy breakfast pastry. "The most prosperous businesses…are the purveyors of small pleasures that can be bought at a gas station or convenience store" amongst purveyors of non-necessary goods and services (Beattie 2009). Interestingly, despite the temptation to suggest that consumers are 'drowning' their economic sorrows in alcohol, sugar and cigarettes, "not all sin businesses prosper in a recession. Gambling…becomes an extravagance and generally declines during recessions," especially as people travel less (Beattie 2009). Even addicted gamblers may be more apt to gamble online, as decreased revenues in the gaming industry over the course of this recession indicates. And the rich continue to 'gamble' in more conservative investment ventures than before the crisis, as things seem to 'feel' less lucky in the culture overall.

Thus, the middle-class may cut back and this demand shift causes some industries to boom while others go 'bust.' The high-luxuries of the middle class, such as gambling, mid-priced vacation destinations, and home improvements suffer the most while foreclosure-related industries, like building inspectors and bankruptcy attorneys are enjoying greater prosperity. So why should we care that the rich are continuing to buy again and remain insulated from the recession, perhaps more than any other demographic group? This has several policy implications. First, it goes against the idea that tax cuts for the wealthy will stimulate a rapid spike in demand, as demand already appears to be recovering even in the absence of such tax cuts. Increases in income and consumption amongst the rich are less directly linked than amongst other income groups. Secondly, it is also a sad indication of the seismic gap between rich and poor which has grown in the nation over the past thirty years, given the level of wealth the rich are able to exercise in making such purchases and their relative insulation from the business cycle (Besharov & Call 2009). This insulation encourages speculation, almost by definition, as the wealthy have so little, relatively speaking, to lose from risky behavior on Wall Street, and so much to gain.

References

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Besharov, D., & Call, D. (2009). Income transfers alone won't eradicate poverty.

Policy Studies Journal, 37(4), 599-631. Retrieved December 10, 2009, from ABI/INFORM Global. (Document ID: 1905094061).

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http://www.nytimes.com/2009/12/07/technology/internet/07private.html?_r=1&ref=fashion

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2009 at http://www.vanityfair.com/magazine/2009/01/wall_street200901

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