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Update on Mankiw’s Grandmother

Responding to emailers who had similar questions on his reasoning that Nate and I had, Greg Mankiw writes:

Economic theory alone does not prescribe what the right level of saving should be: Optimal saving is a function of the subjective rate of time preference, and economists have no basis to say that some intertemporal preferences are better than others. In my savers-spenders model, both savers and spenders may be acting optimally given their own preferences. I am sure, however, that none of these arguments would have convinced my grandmother.

I don’t quite follow the “intertemporal preferences” thing. Yes, I understand the meaning of the phrase, I just don’t see how it really applies here. If Sotomayor has enough money now, and she’ll be getting enough money in the future, then what does intertemporal preference have to do with anything? Is the argument that, if she has a long time horizon, she’ll save more now so she can “buy a jet ski made out of diamonds” (in the words of commenter Drew Miller) in a few years? That doesn’t make a lot of sense to me. I don’t see intertemporal preference as the appropriate analytical concept here.

But Mankiw’s last sentence makes me think he’s agreeing with my P.S. here. I think he’s saying that his grandmother had such a depression mentality that, even though Sotomayor has a well-paying job for life and money in the bank, it wouldn’t be enough. Thus, Mankiw was ultimately making more of a claim about his grandmother’s attitudes (and, more generally, those of people of her generation) than about Sotomayor’s financial choices.

OK, enough about this now. And I promise not to analyze the arguments of Alan Dershowitz, John Yoo, and the rest. Back to data analysis.