I once wrote a short paper called The Savers-Spenders Theory of Fiscal Policy based on the premise that there are two types of people: Some save and intertemporally optimize their consumption plans, while others live paycheck to paycheck, spending their entire income as soon as it’s received.[...]
Apparently, the new Supreme Court nominee Sonia Sotomayor is an example of the latter. The Washington Post reports that the 54-year-old Sotomayer has a $179,500 yearly salary but
On her financial disclosure report for 2007, she said her only financial holdings were a Citibank checking and savings account, worth $50,000 to $115,000 combined. During the previous four years, the money in the accounts at some points was listed as low as $30,000.
My grandmother would have been shocked and appalled to see someone who makes so much save so little.
While admittedly, the She’s-just-Sonia-from-the-Bronx narrative has already grown a bit tiresome, Mankiw’s critique is a bizarre on several levels. For one thing, while a $179,000-per-year income is quite a lot wherever one lives, it doesn’t go as far in New York City as in almost any other place. State taxes in New York are pretty high for the upper income brackets, and New York City also charges a city tax of 3.648%. As a single filer, Sotomayor’s income tax burden, counting her federal nut, is probably something like $65,000.
In addition, New York City is an expensive place to live: particularly on the Island of Manhattan, and even more particularly in the West Village neighborhood where Sotomayor has her apartment. The average price of a two-bedroom rental apartment apartment in a doorman building in Greenwich Villiage is $5,396 per month, or about $65,000 per year. (Sotomayor, from what I can gather, in fact still rents her space). So considering her tax bill and the cost of her apartment, Sotomayor is down to “only” about $50,000 in disposable income per year. A single person can certainly live very well on that sort of income — even in Manhattan — but would probably not live what we’d ordinarily consider an extravagant lifestyle. It would be quite easy to spend a good chunk of that $50,000 on utilities, transport, groceries, and extra medical care (Sotomayor is diabetic); throw in a couple of nice meals out every month, tickets to a dozen Yankees games each year, and maybe a week’s worth of vacation, and you’re not going to have a whole heck of a lot left over. And of course, if one is generous with one’s friends, or gives money to one’s extended family or to charity, the money will go even faster. Sure, it’s a pretty full life. But it’s not likely that Sotomayor is downing bottles of Cristal and snorting coke in the bathroom every Friday at Hotel Gansevoort, or having four-martini lunches with the Sex and the City girls at Bryant Park.
What makes Mankiw’s argument even sillier, however, is that it reflects a lack of understanding of the very thing that he, as the World’s 23rd Best Economist*, ought to know very well: incentives. What are a person’s incentives to save, rather than spend, money? The four basic ones are usually these:
1. To protect against downside in one’s income, particularly the risk of being fired.
2. To save for retirement.
3. To save for one’s family and children.
4. To save for an expensive purchase, such as a home or a nice car.
Nos. 1-3 don’t really apply to Sotomayor. With the possible exception of being a tenured professor at Harvard, few positions offer more job and income security than that of a justice on the Federal Circuit Court; Sotomayor would have to be impeached by the House and found guilty by the Senate to lose her job, something which has happened only a handful of times in American History. Sotomayor’s federal pension is undoubtedly very generous, rendering #2 somewhat moot, particularly as she could also stand to make a significant “post-retirement” income in private practice or on the lecture circuit. And she does not have a children or a husband to support. It would be quite irrational if she had half a million dollars collecting dust and 0.01% interest in her Chase checking account.
Perhaps Mankiw’s grandmother would find her more virtuous if she were saving up for a Lexus or a summer home in the Hamptons, but that doesn’t seem to be her cup of tea. Her one real indulgence is the apartment she keeps in the West Village. Although virtually anywhere that would be a reasonable commute from her courtroom in Lower Manhattan would be relatively expensive, she could save a bit by living in the Financial District or perhaps in Brooklyn. But Mankiw, who lives in a zip code where the median price of a house is 1.65 million dollars, should not exactly be throwing stones from his undoubtedly very charming, New England Colonial home.
* Barry Julian Eichengreen, who recently surpassed him in the rankings, should not be expecting any Christmas Cards from the Mankiw family!