FRANCO MODIGLIANI WON THE NOBEL PRIZE IN 1985 for “his pioneering analyses of saving and of financial markets”.
When the Italians come to Cambridge and stay with me, they used to visit with Franco Modigliani–when he was alive–& his wife Serena who lived in an apartment building overlooking the Charles River. Francesca and Renato described Modigliani as brilliant and also ‘cute.’ By then he was in his 80s and liked to drive a little car. His wife didn’t think he ought to because his eyesight and reflexes weren’t the best. During conversation, he repeatedly went back to the car topic, she would roll her eyes, and he would smile.
FRANCO & AMADEO
Before Francesca and Renato came into my life, I didn’t know about Modigliani the Economist. I knew the long-faced, stretched-out painting of Amadeo Modigliani. Were the two men related? No. They were both born into Jewish-Italian families. Amadeo in Livorno to a bohemian family; Franco in Rome, to a professional family. Their lives overlapped for two years, 1918-1920. (Amadeo 1884-1920; Franco1918 – 2003).
LIFE-CYCLE SPEND/SAVE THEORY
Franco Modigliani developed the life-cycle theory of spending. People borrow when they are young — typically to buy a house; they save in the middle of their lives, and they spend what they have saved after retirement. Simple, but never stated succinctly prior to Modigliani. The theory explained why the countries where population or productivity grows fast tend to have higher saving rates than those that are rich and do not grow as fast.
Saving money does not mean speculating in stocks. Many stocks are risky and rely on “money illusion.”
RETIREES CYCLE MONEY TO YOUTH
In the life-cycle theory the wealth of the nation gets passed around. The very young have little wealth, middle aged people have more, and peak wealth is reached just before people retire. In retirement, retirees sell off their assets to pay for food, housing and leisure activities. The money spent by the old in retirement are recycled into the economy and taken by the young who are still in the accumulation part of the cycle.
In a stable economy consumers maintain a consistent level of consumption throughout their lifetime. Modigliani did not recommend families save for their children, or work to build their children’s lives; children assume their own life-cycle economy.
THE WAY WE ARE RAISED
Most of us agree that saving money in younger years for use in later years is a smart way to live. That is what my parents taught me. My parents did not know Modigliani’s life-cycle theory; saving was just sensible.
The lifetime theory of sharing wealth between generations does not factor in extreme Wall Street greed, citizens buying way over-priced houses, banks creating debt on top of debt.
NOW THE YOUNG PEOPLE BECOME THE NEW WORKING CLASS
People who are starting out–the generation that has been coddled and protected–will be paying the debt of our nation rather than contributing to the wealth of our nation. Rather, they will be taking on both debt services. Whether they help out the retiree generation directly or indirectly, the young people will become America’s working class. No matter what job they have–doctor, lawyer, house cleaner, UPS driver, CEO, engineer, scientist–their earnings are unfairly tagged.