Pay periods

[Harry Veeder <eo200@xxxxxxxxxxxxxxxxxxx>]

This is a partial reply to Paul Davidson's rejoinder.

>
> From: pdavidso <pdavidso@xxxxxxx>
> To: Harry Veeder <eo200@xxxxxx>
> Cc: pkt <pkt@xxxxxxxxxxxx>
> Subject: RE: saving and finance  and an answer to Basil Moore
>
>> ===== Original Message From Harry Veeder <eo200@xxxxxx> =====
>>>
>>>
>>>> Paul davidson wrote:
>>>>>>
>>>>>> No !. The decision of how much of one's income to consume is the first
>>>>>> decision. As long as the average propensity to consume is less than
>>>>>> unity--  this first decision will leave the household with a RESIDUAL
>>>>>> sum of funds  that is equal to nonconsumption.  THIS FIRST DECISION IS
>>>>>> WHAT CLASSICAL  ECONOMISTS CALL THE TIME PREFERENCE DECISION because it
>>>>>> involves the  household in deciding what proportion of income to spend
>>>>>> (to consume) on  the products of industry THIS PERIOD i.e., what
>>>>>> proportion of income the  household has a TIME PREFERENCE of consuming
>>>>>> in the current period.
>>>
>>> Harry's response:
>>>
>>>
>>>> Classical mush.
>>>> How long is the period in 'this period'???
>>>
>>>
>>> The period is the pay period!  If you get paid once a week, then the
>>> decision is how much to spend  (time preference) out of your pay this week
>>> (or bi-weekly or this month is the period..etc  depending how often you get
>>> paid) vis-a-vis how much not to spend out of incme this pay period.  If you
>>> decide to have any "not to spend" income during this pay period, the second
>>> (liquidity preference) decision is what time machine (liquid asset) will
>>> you buy this period  to carry your non-spent income into the next (future)
>>> pay period(s).
>>>
>>> AS my book  FINANCIAL MARKETS  MONEY AND THE REAL WORLD indicates this
>>> liquidity decision as to what time machine (or machines) to buy depends on
>>> (a) transactions costs of buying the time machine today and liquidating it
>>> sometime in the future, the money stream of income expected to be received
>>> while possessing this time machine minus the carrying costs of  holding the
>>> asset, and the capital gain or loss expected when the time machine will be
>>> liquidated (resold) .
>>>
>>> [If you decide to spend more than your income this pay period, (this is,
>>> your first time preference decision to spend more than you earn this
>>> period) then your second decision (liquidity preference) is what time
>>> machine(s) [liquid asset(s)] should you liquidate in order to finance your
>>> purchases in excess of income this period.
>>
> Harry's Response:
>
>> The problem with this analysis is that it assumes spending decisions are
>> rooted in certain knowledge of the pay period. It seems to me the
>> _macroeconomist_ cannot say if people are certain or even wish to be certain
>> of their pay periods.
>>
>
> Paul's rejoinder:
>
> Harry:
>
> If you read what I wrote above, it is not the macroeconomist who needs to have
> "certain knowledge" of what time duration the pay period is.  For each income
> recipient knows whether he/she gets paid weekly, biweekly, or monthly, etc.
> --certainly they know when they are employeed and on a payroll.

Let be more explicit. Certain knowledge of pay periods implies certain
knowledge about the future, which is inconsistent in a world of fundamental
uncertainty.

> If you are retired you know the pay period between pension checks and social
> security checks.

In such situations the pay period has been secured, but it is not certain
that is what will come to pass.

> If your income is mainly from dividend checks you know  the period between
> dividend declarations, etc.
>
> So dear Harry, IT IS THE INCOME RECIPIENT [ NOT THE MACROECONOMIST] THAT
> MAKES THE TIME PREFERENCE DECISION (spending vs. nonspending) -- AND THESE
> DECISION MAKERS KNOW THEIR RESPECTIVE PAY PERIODS.  [There is no requirement
> for the pay periods for different people to be the same.)

What income recipients 'know' is what they demand and what they demand is a
degree of income security. It also true that the degree of income security
demanded varies and it even varies among individuals of similar incomes. If
supply matches demand for income security over all degrees of income
security desired then everyone is happy.


> ALL OF THIS YOU WOULD HAVE KNOWN HAD YOU EVER READ ANYTHING I WROTE  where I
> SPECIFY that the  consumption decision (the time preference spending decision)
> is explicitly expressed as both a function of one's income and the payment
> period for the "consumer".


This implies that any two individuals who have identical assets, income
payment periods will make the same time preference spending decision.
i.e. that who we are as economic actors comes down to what we own
and our next paycheck.

Harry Veeder