Tuesday, May 26, 2009

SCOTUS nominee is a spender

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. Sometimes readers of the paper think of the two groups as rich and poor, but that interpretation is wrong. Some people with low incomes manage to scrimp and save (I always think of my grandmother), and some people with high incomes spend most everything they earn.

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.

Update: Several readers have emailed me to suggest that Judge Sotomayer does not need to save much because federal judges have generous retirement benefits. Maybe so. And, in any event, 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.

Update 2: A couple other readers have pointed out a possible problem with the Washington Post story I cited above. To quote from one email, "Under the Ethics in Government Act of 1978, federal judges are not required to report publicly amounts they have saved in their Thrift Savings Plan (5 U.S.C. app. sec. 102(i)(1)(A)). The Thrift Savings Plan ("TSP") is the federal employee's version of a 401(k) plan. Of course, Judge Sotomayor may not have saved much in her TSP. On the other hand, she may have saved several hundred thousand dollars that way. The point is that the TSP need not be disclosed under the law, so there is no way the Washington Post could have reported on it."

Update 3: Ten days later, based on new documents filed by the nominee, the NY Times reports: "So how is it that Judge Sonia Sotomayor...reported a net worth of just $740,000 this week, with no stocks or bonds and a savings account of $31,985, just marginally more than she owes her dentist and credit card companies?...Besides living in an expensive area of the country, Judge Sotomayor has a taste for nice things and is an avid traveler. Her destinations have ranged from the Caribbean to the Galápagos Islands, and she has been known to stop in at a casino on vacation....Judge Sotomayor has been described in interviews as an interior decorating buff who loves to shop. And she is a frequent patron of Manhattan restaurants, sometimes picking up the tab for dinner with clerks in SoHo or at Chinatown places like Joe’s Shanghai."