I'm having a really tough time wrapping my mind around recent economic happenings, because I don't think I understand money circulation very well.
For example, the current economic scandal I'm hearing about is how the stimulus bill cost a lot of money for what didn't look like it amounted to much work. One person said that the government provided $30 million to build a highway near him.
Okay, well, the money had to go somewhere, right? Some money was given to employees, and naturally they spent it on their expenses, so the money flowed into the economy both through the highway building, and then personal expenses. Then the highway-building requires materials, so you have to pay a bunch of supply companies to give you supplies, spurring their economy, and through their employees, the overall economy too. I'm sure there are tons of other things that money was spent on in this process too, but it seems like it all just flows through companies, giving them business, and to employees, who stimulate the economy. And you have a new highway to boot. But I guess the point is, I don't see what the problem is whether they spent $10 million, $30 million, or $60 million on this endeavor, if it stimulated the economy. If the highway project CEO walked away with $15 million as a personal bonus and then just hid that money, I could see it as a big loss.
But here's where I know I have an error in my thinking: I don't see how the CEO would be hurting the economy if he
did take $15 million as a personal bonus (and it only cost $15 million to make the highway) and then invested the money into other projects. To me it seems like he injects that money right back into the economy, for the most part (I'm sure he keeps some).
I think I have some wrongful notion that as long as money is circulating, good stuff is happening, and I don't know enough to recognize the other factors at play that would make or break an economy. So:
1. Is there any relatively easy way to untangle my thoughts or will this require a whole book to read? I'm a grad student so time's a bit tight. Maybe a list of things I could wiki?
2. If "omg Obama spent $30 million on a highway" can be construed as bad, it stands to reason that "omg Obama spent $60 million on a highway" would be worse, but I can't figure out why, if all of the money goes to stimulating businesses and then directly back into the economy.
3. If the CEO took $15 million and then invested all of it, why would that be really bad? Even if he didn't invest all, and kept some for himself, if he used that money to buy a sports car, wouldn't he be stimulating sport-car business? Or hell, even if he kept it in a bank, wouldn't that stimulate the bank's business?
I put this here instead of D&D because I think I just have an error in thinking, rather than a topic worth debating, but if I'm mistaken, sorry and feel free to move or lock this thread.
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Economists call the measurement of how one kind of spending/tax cut is better than another (where "better" is defined to be "gives a bigger boost to GDP") the "multiplier effect." If every dollar of government spending (or every dollar of taxes cut) results in one dollar of increased GDP under a certain policy, the multiplier effect of that policy is 1. If you get two dollars of GDP boost for every dollar of spending, the multiplier effect is 2.
So what policies have the biggest multiplier effect? This has been studied, and it does indeed turn out that public works/infrastructure is better for GDP growth than tax cuts. Here are the figures: Note that for some tax cuts the multiplier effect is less than 1, meaning that a dollar of taxes cut will actually grow the GDP by less than a dollar. This is obviously not ideal.
This should get you started!
So then... why ever bother reducing the tax on the rich? Wouldn't it be ideal to keep it just below the line at which they'd go "screw it, I'm off to Somalia". After all, tax cuts don't seem to be good multipliers and they certainly don't build highways.
However, I'm still a bit confused. Why are things like food-stamps not... higher multipliers?
1$ in food stamps should become: $1 immediately into the store-owners cash register. Then of that $1, maybe $.05 becomes personal wages for the shop-keeper, but since he doesn't save his money (just like every other American), he's going to go spend it immediately. Meanwhile, the $.95 from the initial dollar will go to delivery companies, suppliers, fruit pickers, etc. And each of them will also likely spend all of that money again since no one but the rich save their money.
So even if we only follow this path a few steps, it seems like the multiplier should just keep growing higher and higher the more that money circulates, no? I'm guessing the answer must be no, because otherwise the only thing keeping the multiplier from being infinity in my head is that someone somewhere down the line is actually saving the money instead of spending it. But that'll change hands so many times before it occurs, right?
So I like your answer, it's very informative and thank you, but I seem to be confused by it now as well
Oh I bet you can figure this one out if you think real hard
Now I'm not an economist, and it's been a while since I studied any of this. But something else you should know is that the main effect of stimulus (whether it's increases in food stamp benefits, tax cuts, whatever) is not just spreading money around. Rather it's increasing the 'aggregate demand'--that is, how much demand there is for any kind of stuff at a given time. So some kinds of spending are better at creating aggregate demand than others, which is what the multiplier is all about.
As to whether the money ever stops being spent, sure it does. Some people are going to save (really!), some are going to use it to pay down debt, some are going to put it into million-year CDs where it isn't going to affect the economy at all, whatever. The idea is that you can measure how much certain kinds of spending is going to ping-pong through the economy and create aggregate demand before it comes to rest.
What that means is that macroeconomics at some level is describing how things have previously worked in operations with the fed, other countries, etc. even as it claims theoretical insight. Oftentimes, the result you get is going to depend on variables, etc. which weren't knowable beforehand, but can be fit into existing theories. So economics as a discipline can have very poor predictive power - it will, depending on how you jigger a model, come out with every possible outcome.
For example, those multi effects are describing spending habits and sectoral effects of expenditure - presumably one reason public works projects have a high multiplier is that all of the second-level infrastructure expenditures - labor, cement, equipment are produced and bought in the united states. whereas consumers will be importing foreign goods. So public works projects have a better effect for an explicable reason, and if that underlying reason changes then your results are going to change, too.
So here, one underlying dynamic is going to be different than the historical modelling that derived those multiplier numbers, which is going to reduce the effect and also explains why inflation doesn't yet seem to be crazy - institutions and individuals will take money they have now and either use it to pay off existing debt or save more of it as insurance against future unemployment or recession. The multiplier is partially a reflection of people's willingness to spend. People and firms aren't very willing to spend right now.
In the same way that money spent multiplies out, the cost of money taxed multiplies out. The taxation cost multiplier corresponds to the spending that would have happened but did not. Whenever the government taxes money in order to fund another project, these taxes destroy an entire set of purchases by artificially sucking money out of the economy and spending it elsewhere.
This is why spending multiplier analysis seems to create money out of thin air; it is a distorted way to make programs look great by multiplying benefits without appropriately multiplying costs.
Like if food stamps have a multiplier of 1.71, they might've been higher except ohno, the feds got like $.34 in taxes out of it along the way between sales, distribution, deliveries, etc.
Well... then that's even awesomer, right? Now it means I managed to increase the GDP by 1.71 for only .66 cents, not a whole dollar! No?
But it seems a silly way to look at things, because spending $1000 on a bridge doesn't cost any more than cutting taxes by $1000, so the tax cost multiplier would change things across the board. In other words, the net GDP benefit of raising taxes to spend $1000 on one of the items in scrivener's chart would be ($1000 * {item's multiplier effect} - 1000 * {taxation cost multiplier} ). The taxation cost multiplier is constant across the board (since the cost of money taxed multiplies out the same regardless of what you are spending it on), so the net effect of Cutting Corporate taxes when the taxation cost multiplier is .45 would be $300 - $450 = $-150, while the net effect of Increasing Infrastructure would be $1590-$450 = $1040.
Basically the taxation cost multiplier doesn't have any effect on the validity of scrivener's chart. The best way to spend a thousand dollars doesn't need to take into account where the money's coming from, because the money's coming from the same place no matter how you spend it.
You are a politician. The rich are holding a pair of bolt cutters. Guess what they've got in them?
It should be noted that our current political atmosphere is rather unusual from the norm of human civilization over the length of history. Historically, the rulers have BEEN the rich and powerful, and the taxes were not levied ON THEM but rather BY THEM. Today in America, power is wielded by people who are not rich (at least not by the standards of what we consider to be "rich" these days), but whom are manipulated BY the rich.
Also, infrastructure spending without a plan doesn't necessarily accomplish much either. The biggest payoff for government spending was achieved during Eisenhower's time with the interstate system and that occurred because the government had a consistent plan that actually accomplished something ("build huge fucking roads everywhere and bulldoze anything in our way"). Building Palin's bridge in Alaska would have definitely been infrastructure spending but I don't think it would accomplish much economically.
This too. There was an economist (probably Keynes. It's always Keynes) who talked about how you could stimulate the economy by paying people to dig holes and then paying other people to fill the holes back up, you wouldn't get anything useful out of it but at least people are working!
Of course, raising and lowering taxes is extremely politically sensitive. For the past decades the USA has gone with deficit spending instead. Which leads to other bad effects, but are outside the scope of the question.
A thing not mentioned on the multiplier discussion: The multiplier would also stop counting when the money leaves the country to an overseas supplier.
During the 1990s, they kind of did this in Japan. They had a whole bunch of unemployed construction workers, and a whole bunch of extra construction supplies, so they just found some empty space and built a bunch of concrete poles sticking out of the ground for no reason. I'm trying to find a picture, but my Google-fu is weak. That's a example of spending which does employ people and put money into the economy, but isn't as helpful as, say, roads.
People are talking about the cost of taxation relative to the spending, but it should be noted that much of the US government budget is borrowed, and the benefit of the spending should be compared to the interest rate the government borrowed at. If you borrow at 5% and invest that in infrastructure, etc that yields 10% back, you've made a good call - you made 10-5=5%. You can see the cost for the US government to borrow money here. If you check out the historical data, you will see that usually in a recession, the borrowing rates go down. This means it is an even better idea to invest in infrastructure, etc, in a recession, since you can borrow the money for less than you would if it were in a boom. In a recession, the government should intentionally be running a deficit to take advantage of low borrowing rates and invest back into the economy.
Yes, the money usually comes from the same place regardless of what you spend it on, but this just means that you should not spend money on a program unless the spending multiplier exceeds the marginal tax cost multiplier.
If you do not attempt to analyze the damage caused by taxation, you are willfully ignorant to the true cost of any new programs; it becomes easy to enact programs that hurt the economy more than they help.
The tax cost multiplier tells you the GDP lost when you introduce a new tax; the tax cut multipliers on that chart represent the GDP created by removing specific existing taxes. They are not the same thing and you cannot substitute one for the other.
I am not claiming that the government programs are always bad, or even usually bad; I'm just saying that spending multiplier analysis is often presented in a misleading, inaccurate way.
Find me an economist who isn't just a stooge who ignores deadweight loss in his calculations.
Yeah I'm pretty sure this happened in New Zealand during the great depression, too.
I'm in the same group as the OP, economics is a lot like quantum mechanics for me. It makes absolutely no sense and is often completely counter-intuitive, but it ends up actually happening like the theory predicts in real life.
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I find that quite a number of people here don't like rich people. In your OP you said something about giving money to a rich person who hides it (I understand you don't really mean it that way). Rich people don't have mattresses full of money at their houses. They put their money in the stock market and other investments like normal people and banks do.
Or public works. Let's rewind even further. Back to the Depression. What do you find? The WPA; put people to work building schools and drainage canals and flood control dams on every major tributary of the Mississippi. Of course, in the depression the economy was utterly and totally tanked so even that wasn't enough and the only thing that could jumpstart America was a no-holds-barred, us-or-them total war (which we got, thankfully).
Spending works best when the government acts as a "regional planner and developer", spending money in a way that focuses on accomplishing some goal that serves to improve transportation, deliver information or energy, improve the workforce, or prevent flooding. This is how the government repays its investment... by building something that makes the country more productive.
I mean... this is simple stuff. You could model Keynesian economics in EVE.
I think you're smart enough to know that this is not a sentiment unique to this group of people.
The proletariat always despises those who have that which they do not. Am I rich? No. Am I wealthier then many people? Sure. But I work hard and save a lot and when I see someone who has more then me whom I feel does not deserve what they have, I don't like them. I think most people feel that way.
Something important to bring up about the spending multipliers, these charts, if I remember correctly, are the effects on GDP after a certain, at least somewhat lengthy, period of time. They are not immediate returns, you don't spend a dollar today and in two weeks you get back 1.76 in GDP improvement. Different kinds of stimulus spending effect the economy in a quicker or slower manner. Tax cuts generally do not provide a significant increase in the future GDP, the investment return tends to be lower than actual spending. However, tax cuts, for the lower and middle class in any case, tend to have a more immediate effect than stimulus spending. People, when they receive their tax cuts, are likely to go and spend it immediately, rather than hold onto it. So you have a direct effect on the economy in a more immediate manner, rather than a delayed one like building infrastructure or such things.
Also, something else important to note, almost all kinds of spending or tax cuttings have diminishing returns, as you spend more on it you're going to begin getting less out of it. You can't just build non-stop roads, like people were saying, they have to actually be beneficial in some manner. Bridge-to-Nowhere is not beneficial. In the same strain, if you cut excessive amounts of taxes for people, they're not going to be able to spend all of the money immediately (most likely <_<;;;), they're liable to hold onto some of it, perhaps for an extended period of time. Therefore the return on the GDP multiplier is smaller than it would normally be.
So yeah, stimulus spending can't be spent in all the same places, and certain types are more effective than others. Hence why its hypothetically not beneficial to spend $60 million on that highway instead of $30 million.
That's a terrible way to feel, and is pretty much why the human world is a shitty place.
You see a guy with a girl you like? Doesn't deserve her, kill em.
A little kid with youth? Doesn't deserve it, beat his ass.
Some people settled down in a nice place before you did? Don't deserve it, kick em the fuck out.
After re-reading the chapter, it sounds like the economic theory behind the effects governmental spending works, but problems arise due to politics.
One problem is due to lag. First, it takes some time for the government to recognize that there's a problem that needs fixing. Then, it takes more time for the government to decide what to do about it. Finally, it takes even more time for the course of action (tax cuts, public works, etc.) to take effect. The argument is that by the time the government actually gets around to fixing the problem, the problem might have already fixed itself.
The next problem has to do with the politicians themselves. Especially in re-election years, they might try to push through a lot of tax cuts or public works projects (even if they're not needed) to get votes. The spending projects or tax cuts might be targeted at certain groups or regions in an effort to court voters to their cause.
And, even though it's not a political factor, you have the people who save their money, and/or use it to pay down debt. It's hard to predict how many people actually do this.
Anyway, if you want more info, try googling "discretionary fiscal policy".
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Thing is, people might take their tax cut and pay down their credit card, or make mortgage payment. Or maybe it is a tax cut that won't have an effect until next April 15th, when people have to write a smaller check than they expected. Cool, but if you really want to get money into the economy fast, the best two are extend unemployment and increase food stamps. Food stamps since you know that is guaranteed to be spent on food, and unemployment since somebody on unemployment is probably running a grim-looking budget, and needs to cover the basic expenses of life before they worry about saving or paying down debt. So those are the best for immediate kickback.
At this point, this is probably more of a D&D thread.
See but those are all fringe cases. I'm talking about wealth.
1. Dating and relationships are mutual undertakings. I find your objectification of people in this regard disturbing.
2. Everyone had an equal quantity youth. Some just had a better youth then others.
3. Having the opportunity to obtain something before me does not say anything about whether or not they deserve it.
To put 3 another way... lines are fair. They are absolutely fair. First in, first served. Let's say I'm in line to register for an anime convention. If they close registration after the person in front of me, the fact that the person in front of me was in front of me merely says that the person in front of me deserved the opportunity to register before me because of being in front of me.
Now let's say that person registered using drug money. Then I would say that person doesn't DESERVE the badge they bought, because they got the money that bought it through a way I look down on. But they did deserve the opportunity to buy a badge before me, by virtue of standing in front of me in line.
Samoris, you're talking about consumption smoothing that consumers will attempt to make current consumption = future consumption discounted by interest. This relies heavily on lenient or virtually non existent borrowing restraints, which for the most part isn't true today.
Totally furthering the D&D thread progression, I just have to add that when you're talking about tax cuts you have to take into account income and substitution effects on the labor market. That is, is the tax cut permanent or temporary? If it's temporary, labor supply goes up but if it's permanent increased wealth means less labor which will actually result in a contraction of the economy. Labor supply goes down with increased unemployment benefits (look at the European unemployment rate vs. American unemployment rate), future consumption is guaranteed at a greater period and workers are less incited to work today in order to provide for tomorrow. You also have to take into account Ricardian Equivalence (current consumption + future consumption discounted by interest = current income + assets + future income discounted by interest - current government spending + future government spending discounted by interest), although proven to not hold in general it does have a slight effect in reducing consumption and by extension consumption. Tax cuts directed at the poor are more likely to fuel increase in consumption on the macro level. But going back to the original question government purchases are taken into account by GDP (Y = C + G + I - NX), so any stimulant spending by definition raises GDP by that amount.
That is a tautology.