Poor people spend basically all of their money, so the factor is almost 1 there. Food is low margin, effectively the supermarket will respend almost all of it replacing stock. I imagine that lets it end up a bit higher
There needs to be more to it than that though, otherwise buying and destroying food should work just as well. I really wonder if it actually does work just as well, or if the factors @dexterbelgium and others listed in the election thread and here are part or most of how it gets so high.
This is more or less the broken windows fallacy. When you burn the food, you are destroying something of value that could be put to use (by feeding someone), and destroying wealth pointlessly. People are still going to want to eat, and now you are just explicitly wasting some of the supply.
The choice should never be between burning food and food stamps, it should be between food stamps and spending on something else, since if you are simply trying to stimulate economic activity or funnel money to food producers there's no need to just destroy food.
The reason why food stamps are a good idea is because they both put good use to the food and they stimulate the economy.
There is a fundamental difference between the parables of breaking windows in order to stimulate the economic activity of pane makers and Keynes's parable of filling jars full of money and burying them in the ground so people can then go dig them up.
He's trying to understand how food stamps are good or something I think.
I mean, burning food, feeding people.
There's an inherent good in one of those things so I'm not sure of his point.
Maybe finding a reason to try to sway fiscal conservatives on the SNAP program? Is that where this started, @Spacekungfuman? I've been in and out all day so I'm at a loss for the impetus.
Yes. It started as a response to someone saying that food stamps can be justified on economics alone. I want to know if that is true (in which case, it is a great argument to use against conservatives) or if the economics are the same as any direct spending or transfer program.
My understanding of the numbers is that the effectiveness of direct spending or transfer programs depends on the particulars of the direct spending or transfer program and what they are being used on. You can't simply say they are somehow equivalent across the board due to the structure of "money being spent by the government to buy goods" or "money being handed out through tax credits."
Also, something important to keep in mind is that stimulus from different government programs can vary in how that effect takes place over time. From what I've read, food stamps tend to provide more up front right now stimulus, since people spend them quickly as they have got to use them to eat, while large scale infrastructure programs which tend to have their impact over a much longer timeframe. So that is something that policymakers should keep in mind (if so many of them weren't so stupid/crazy) in terms of what sort of economic issues they are trying to deal with.
The purpose of burning the food in my example is to continue to stimulate demand for food just like food stamps do. The question (which I have received a number of helpful answers to) is if giving the poor food has a greater revenue effect than buying food or other goods that the poor would have bought if they were not constrained by the need to spend all their money on food. I think the answer is yes for this program, but it may vary across programs.
Can you explain the difference between breaking windows to employ glass makers and burying jars if money to "employ" hole diggers? Neither are doing productive work.
If you want to provide a benefit for the domestic food makers in isolation then the most direct way is through subsidies (of which there are plenty of agricultural subsidies), or if you are feeling like being an ass, tariffs on foreign producers and imports. I should note that I don't look kindly on tariffs for the purposes of propping up local industries, as opposed to there being some other more complicated situations and for other purposes where they might be merited.
The difference between breaking windows and the jars is that with breaking windows you are actually causing a destruction of wealth. Existing windows have an economic value to their owners, and by breaking them to in order to drum up more business for the window pane makers you are unnecessarily making things worse. Better to pay the window pane maker for a public works project, or failing that, to pay him to sit around and do nothing after filling out his orders, if you want to support his business.
With the jars, you are creating work that is more or less pointless in terms of producing anything of value for the purpose of solely providing work and income to the workers, but the currency in the jars isn't economic wealth itself, just a claim on goods and services. So you aren't actually losing much of value by burying the jars other than potentially the opportunity cost of the labor used, but this sort of policy is only something that would only be mused about when you are talking about cases of significant underutilization of labor. It is just an extremely unconventional form of monetary or fiscal policy for the purposes of illustration. (We are assuming the jars and the paper the currency is printed on is of negligible value for the purposes of this analogy by the way, you aren't doing it to try to manipulate the prices of the container of the currency)
I also believe Keynes used this analogy because he also wanted to highlight what his thoughts about gold mines, because when on the gold standard there's a strong connection between digging up physical gold out of the ground and digging up currency. I think he wanted it to seem a bit silly because of that.
But if we want to actually prop up the glass industry even though there is no productive work for window makers, we need to subsidize the whole supply chain, correct? Breaking the windows does that automatically, since the cost of replacing them will flow through the whole chain in a way that direct subsidies to the glass makers does not. This is why the food is bought at retail and burned in my example, since it requires all the same market interactions as people buying food with food stamps. Appropriate subsidies throughout the entire supply chain are preferable to breaking the windows, but we need to be sure that they don't result in the glass maker firing all his employees and keeping the full subsidy for himself (something he can't do if we break the windows, since he needs them to help him actuay fix the windows).
I am not advocating breaking the windows, for the record (I think we should use them for public works, and if there are no public works projects, then we should let them fail if they must, since we obviously don't need that many window makers anymore). This is just an exercise to evaluate where we should allocate our stimulus money.
I'm getting the impression you aren't really understanding what I'm trying to say, and I'm not sure how to get it across.
If you want to prop up the whole glass industry supply chain and increase demand for windows as the end product, then it is a lot better idea to have a public works project that uses a lot of windows than it is to go around and break people's windows so the glass workers can go replace them. Because breaking the windows, and I'll say this again, causes a completely unnecessary destruction of wealth.
You seem to be fixated on the idea that the purpose of these sorts of programs in general is to manipulate the supply and demand of an individual good on the micro level. Subsidies are aimed at manipulating a particular industry, yes, but for more pure stimulus programs you are more focused on what the aggregate effect on the economy is. Screwing around with the price of food in isolation from the price levels in the economy of the whole is not the point of food stamps, but instead to feed people with the add on boost aggregate demand when it is low and the economy is in a rut.
This stuff isn't really talked about on the public theater well enough, but whether you want to employ more pure stimulus programs is actually rather situational. When you are stuck in an economic slowdown with high unemployment and underutilization is when you want stimulus, because it increases growth and adds inflationary pressure that pushes you away from disinflation and deflation. This is especially the case for fiscal stimulus when you reach the limits of monetary policy when interest rates start bumping up against the zero lower bound. However, when your economy is booming and you have a bunch inflation already? No, don't bust out the stimulus programs then.
But there is more to evaluate public spending on than purely the stimulative effect. Infrastructure spending in particular is something where you get more returns out of it than simply a short term stimulative effect on the economy, as it can support more long term economic growth. So you need to keep in mind what the timeframe of your economic problems are when choosing what the money is spent on.
SKFM, please don't lose sight of the fact that economics is about stuff; how we make it and who gets it. Money is just a convenient way to measure and trade stuff, interest a way to trade stuff now for more stuff in the future.
So when you ask what the difference is between giving food stamps to poor people versus buying and burning the food in purely economic terms; then the answer is that in one scenario people get to eat, in the other we destroy a bunch of food. It should be breathtakingly obvious what the better economic policy is.
Likewise with the example of burying jars of money. Obviously it's a non-productive activity. The difference is that during full employment this would reduce how much stuff we have since it would take able labor away from other activities. (Rather like the zero-sum games we have so many smart financiers and lawyers play. Pure waste.) But during a recession this labor would have sat idle anyway so you're not losing anything by employing it. Moreover, by making them work for their free money, you're not destroying incentives to seek other gainful employment.
So the conclusion of that thought experiment is: if putting people to work in the most ridiculous and senseless activity imaginable does no harm to our economy's output and is an effective way to give them income support during a recession, then surely having them to anything even remotely smart (public works) would represent a huge boon to our economy. Tada! We're all Keynesians now.
Again, economics is not about money. It's about stuff. And having millions of our unemployed labor force do anything remotely sensible will always result in us having more stuff than if they sit around idle. Growing and burning food is not sensible. There are obviously better uses.
Utility matters because it's how we decide to gets stuff. The idea is to maximize our society's utility by making as much stuff as possible and giving it to the people who'd benefit most from it. Often there's a trade as taking stuff from people who have a lower marginal utility to those with higher marginal utility can reduce incentives that govern how much stuff is produced to begin with. So we want to be clever about structuring the system that governs all this.
Resale is very good for our economy as it results in us having more stuff, by keeping it around in a useful fashion for longer. By reselling it the item flow from someone who derives less utility from it to somehow who values it more.
The point of all this is most emphatically not to keep money flowing up the chain. Money is but an instrument. Economics is about physical things.
Look. enc0re, that's all well and good, and no one is arguing the societal good of feeding people, but if you completely decouple food stamps from reality, can you give me a number that shows how it's a better form of stimulus than launching cats to the moon?
Has anyone mentioned the fact that food is a non-taxable commodity? The government giving poor people foodstamps frees up the money that would have been spent on food to be spent on other items that can incur a taxable fee such as a sales tax.
Look. enc0re, that's all well and good, and no one is arguing the societal good of feeding people, but if you completely decouple food stamps from reality, can you give me a number that shows how it's a better form of stimulus than launching cats to the moon?
Sure, for any number of reasons. Maintenance and resale of the item. You avoid the costs of destruction. Someone actually gets utility out of the luxury good. Etc.
Isn't resale a drag on the economy? The whole point of this exercise is to keep money flowing up the whole chain, and resale sidesteps it entirely.
What? No, resale is good for an economy- even at the level of analysis you're requesting, it's an additional economic transaction. The person selling the object is getting money they would not otherwise get and can spend it again as well, perhaps on something that incurs a sales tax.
Why does the utility matter? We are talking pure economic growth here.
We only value economic growth in the abstract because of its utility in the first place. The utility of a given activity is therefore relevant. Especially with the argument for stimulative spending- while it is true the stimulative effect might be the primary objective and so paying people to dig ditches might work just fine for that goal, paying people to build something of greater value has the stimulative effect *and* the value of the thing constructed.
When stimulus is necessary it really only means that malinvestment is not a concern; we don't ultimately worry about whether or not we need those ditches, what we need is people digging them. But if we can have both (like, say, have those people dig a canal, or pave a road, etc) we get investment returns over the long term which can offset the cost of stimulus. As well as providing whatever other benefits of a given project.
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JuliusCaptain of Serenityon my shipRegistered Userregular
There is a very clear economic advantage to food stamps over burning: The people getting foodstamps were previously allocating at least some of their money to food, which will probably spill over into other local level economic activity.
A 'perfect economic growth government intervention' is impossible to calculate and almost certainly socially undesirable. One of the biggest reasons for governments to exist is to constrain the free market and alter the variables so that it has a more desirable outcome, not in an economic sense but in a wellbeing sense.
But the same number of dollars are spent either way. Either the poor buy food with cash and the government buys other goods it does not need to destroy or use, or the poor buy food with food stamps and other things with the money that would have gone to food. Why are these not identical? I think the answer is things like crime, emergency room services, and allowing people to enter the workforce. But those are all specific to the poor, and can be alleviates other ways (universal healthcare, subsidized public transportiaon and child care, etc.).
Yes, the same number of dollars is spent. However, in the situation where you're not burning food you are utilizing the products you buy. When you burn it, you end up with the same situation essentially (people fed) but there is twice as much money spent on it.
If we give poor people $100 for food, and they buy $100 worth of food, they now have $100 worth of food, the store has $100, and the poor people might be able to dedicate the $100 they would've spent on food on other things. The quality of their lives has improved through better nutrition, and they are more likely to be productive members of society. From a position of pure self interest, people who are not hungry or starving are less likely to commit crimes in order to rectify that problem, reducing the load on emergency services (police, hospitals, food banks, charities, etc, whom can now dedicate their resources to other areas, issues and people).
If we give a store $100 and tell them to burn $100 of food, all you've done is continued the (potentially artificially enhanced) scarcity of whatever products they chose to destroy. People who are hungry are still hungry, and whatever support structures are in place are strained a little further.
Desperate people do desperate things, which are often self destructive, counter productive and a tax (lol) on society, so society has a vested interest in providing a baseline level of support to those who need it. It isn't easy to attach a dollar value to the benefit of giving someone back a shred of their dignity in letting them make budgeting choices. It's impossible to know just how much less tangible good is done every time a mother or father receives their SNAP card/reload/however it is done and is able to feed their children for another week/month/however often it is done, or whatever tangible losses they might have personally suffered or negative impacts they might have had striving to survive.
The result is greater than the sum of its parts, the Return on Investment is excellent. Why is it better to spend $100 on roads than $100 on digging and filling in ditches? Because you now have repaired roads, which people use! The end product is of value, and the money put into the system (given to construction companies, which in turn pays its employees (and may need to hire more employees), who in turn buy products, which in turn generates demand for products, etc).
Now, I'm not an economist like our powerhouses here, but it seems quite self-evident why it's better to utilize funds towards a common good than to simply throw the money away; we're getting something out of it. People who aren't hungry, infrastructure that's no longer falling apart, whatever. Most people have to play a zero-sum game; they have $X available, and between food, rent, bills, clothes, entertainment, and whatnot that's all they get. If you increase their available funds for food through a support program, you also let that $X get spent on other things (and as noted above, you don't have to waste time, money and stress sending collection companies after them for a fraction of what you'd get if they had the funds to pay their bills, etc).
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
Poor people spend basically all of their money, so the factor is almost 1 there. Food is low margin, effectively the supermarket will respend almost all of it replacing stock. I imagine that lets it end up a bit higher
There needs to be more to it than that though, otherwise buying and destroying food should work just as well. I really wonder if it actually does work just as well, or if the factors @dexterbelgium and others listed in the election thread and here are part or most of how it gets so high.
This is more or less the broken windows fallacy. When you burn the food, you are destroying something of value that could be put to use (by feeding someone), and destroying wealth pointlessly. People are still going to want to eat, and now you are just explicitly wasting some of the supply.
The choice should never be between burning food and food stamps, it should be between food stamps and spending on something else, since if you are simply trying to stimulate economic activity or funnel money to food producers there's no need to just destroy food.
The reason why food stamps are a good idea is because they both put good use to the food and they stimulate the economy.
There is a fundamental difference between the parables of breaking windows in order to stimulate the economic activity of pane makers and Keynes's parable of filling jars full of money and burying them in the ground so people can then go dig them up.
He's trying to understand how food stamps are good or something I think.
I mean, burning food, feeding people.
There's an inherent good in one of those things so I'm not sure of his point.
Maybe finding a reason to try to sway fiscal conservatives on the SNAP program? Is that where this started, @Spacekungfuman? I've been in and out all day so I'm at a loss for the impetus.
Yes. It started as a response to someone saying that food stamps can be justified on economics alone. I want to know if that is true (in which case, it is a great argument to use against conservatives) or if the economics are the same as any direct spending or transfer program.
My understanding of the numbers is that the effectiveness of direct spending or transfer programs depends on the particulars of the direct spending or transfer program and what they are being used on. You can't simply say they are somehow equivalent across the board due to the structure of "money being spent by the government to buy goods" or "money being handed out through tax credits."
Also, something important to keep in mind is that stimulus from different government programs can vary in how that effect takes place over time. From what I've read, food stamps tend to provide more up front right now stimulus, since people spend them quickly as they have got to use them to eat, while large scale infrastructure programs which tend to have their impact over a much longer timeframe. So that is something that policymakers should keep in mind (if so many of them weren't so stupid/crazy) in terms of what sort of economic issues they are trying to deal with.
The purpose of burning the food in my example is to continue to stimulate demand for food just like food stamps do. The question (which I have received a number of helpful answers to) is if giving the poor food has a greater revenue effect than buying food or other goods that the poor would have bought if they were not constrained by the need to spend all their money on food. I think the answer is yes for this program, but it may vary across programs.
Can you explain the difference between breaking windows to employ glass makers and burying jars if money to "employ" hole diggers? Neither are doing productive work.
If you want to provide a benefit for the domestic food makers in isolation then the most direct way is through subsidies (of which there are plenty of agricultural subsidies), or if you are feeling like being an ass, tariffs on foreign producers and imports. I should note that I don't look kindly on tariffs for the purposes of propping up local industries, as opposed to there being some other more complicated situations and for other purposes where they might be merited.
The difference between breaking windows and the jars is that with breaking windows you are actually causing a destruction of wealth. Existing windows have an economic value to their owners, and by breaking them to in order to drum up more business for the window pane makers you are unnecessarily making things worse. Better to pay the window pane maker for a public works project, or failing that, to pay him to sit around and do nothing after filling out his orders, if you want to support his business.
With the jars, you are creating work that is more or less pointless in terms of producing anything of value for the purpose of solely providing work and income to the workers, but the currency in the jars isn't economic wealth itself, just a claim on goods and services. So you aren't actually losing much of value by burying the jars other than potentially the opportunity cost of the labor used, but this sort of policy is only something that would only be mused about when you are talking about cases of significant underutilization of labor. It is just an extremely unconventional form of monetary or fiscal policy for the purposes of illustration. (We are assuming the jars and the paper the currency is printed on is of negligible value for the purposes of this analogy by the way, you aren't doing it to try to manipulate the prices of the container of the currency)
I also believe Keynes used this analogy because he also wanted to highlight what his thoughts about gold mines, because when on the gold standard there's a strong connection between digging up physical gold out of the ground and digging up currency. I think he wanted it to seem a bit silly because of that.
But if we want to actually prop up the glass industry even though there is no productive work for window makers, we need to subsidize the whole supply chain, correct? Breaking the windows does that automatically, since the cost of replacing them will flow through the whole chain in a way that direct subsidies to the glass makers does not. This is why the food is bought at retail and burned in my example, since it requires all the same market interactions as people buying food with food stamps. Appropriate subsidies throughout the entire supply chain are preferable to breaking the windows, but we need to be sure that they don't result in the glass maker firing all his employees and keeping the full subsidy for himself (something he can't do if we break the windows, since he needs them to help him actuay fix the windows).
I am not advocating breaking the windows, for the record (I think we should use them for public works, and if there are no public works projects, then we should let them fail if they must, since we obviously don't need that many window makers anymore). This is just an exercise to evaluate where we should allocate our stimulus money.
I'm getting the impression you aren't really understanding what I'm trying to say, and I'm not sure how to get it across.
If you want to prop up the whole glass industry supply chain and increase demand for windows as the end product, then it is a lot better idea to have a public works project that uses a lot of windows than it is to go around and break people's windows so the glass workers can go replace them. Because breaking the windows, and I'll say this again, causes a completely unnecessary destruction of wealth.
You seem to be fixated on the idea that the purpose of these sorts of programs in general is to manipulate the supply and demand of an individual good on the micro level. Subsidies are aimed at manipulating a particular industry, yes, but for more pure stimulus programs you are more focused on what the aggregate effect on the economy is. Screwing around with the price of food in isolation from the price levels in the economy of the whole is not the point of food stamps, but instead to feed people with the add on boost aggregate demand when it is low and the economy is in a rut.
This stuff isn't really talked about on the public theater well enough, but whether you want to employ more pure stimulus programs is actually rather situational. When you are stuck in an economic slowdown with high unemployment and underutilization is when you want stimulus, because it increases growth and adds inflationary pressure that pushes you away from disinflation and deflation. This is especially the case for fiscal stimulus when you reach the limits of monetary policy when interest rates start bumping up against the zero lower bound. However, when your economy is booming and you have a bunch inflation already? No, don't bust out the stimulus programs then.
But there is more to evaluate public spending on than purely the stimulative effect. Infrastructure spending in particular is something where you get more returns out of it than simply a short term stimulative effect on the economy, as it can support more long term economic growth. So you need to keep in mind what the timeframe of your economic problems are when choosing what the money is spent on.
No, I get and agree with that. My question was more about what we do when there is no productive use for the window makers. We can have specifically tailored subsidies, but need to be very careful in how we craft them to avoid the problems I described above, we can create more demand for windows, or we can let the window makers go out of business. Breaking the windows takes something of value out of the world, which is bad, but we have people immediately replacing them, so the windows stay in equilibrium. but we maintain our capacity to build new windows when the time comes, because our window makers are still in business and still honing their skills.
I agree that infrastructure is fantastic, and want to see a lot more of it. In fact, this all started because I said I thought the pure economic case for infrastructure was stronger than food stamps (at the very least, the origin of the multiplier is easier to understand) and some people pointed out that the administration has tagged food stamps with a higher multiplier than infrastructure. That is the origin of this mental exercise to determine the pure economic benefits of food stamps, in a world where we don't care about feeding people as an end.
Utility matters because it's how we decide to gets stuff. The idea is to maximize our society's utility by making as much stuff as possible and giving it to the people who'd benefit most from it. Often there's a trade as taking stuff from people who have a lower marginal utility to those with higher marginal utility can reduce incentives that govern how much stuff is produced to begin with. So we want to be clever about structuring the system that governs all this.
Resale is very good for our economy as it results in us having more stuff, by keeping it around in a useful fashion for longer. By reselling it the item flow from someone who derives less utility from it to somehow who values it more.
The point of all this is most emphatically not to keep money flowing up the chain. Money is but an instrument. Economics is about physical things.
But doesn't utility maximization point towards massive redistribute, given the diminishing marginal utility of money?
I don't understand the resale point, since resale seems by definition to mean just moving money from one pocket to another, without creating new wealth.
Sure, for any number of reasons. Maintenance and resale of the item. You avoid the costs of destruction. Someone actually gets utility out of the luxury good. Etc.
Isn't resale a drag on the economy? The whole point of this exercise is to keep money flowing up the whole chain, and resale sidesteps it entirely.
What? No, resale is good for an economy- even at the level of analysis you're requesting, it's an additional economic transaction. The person selling the object is getting money they would not otherwise get and can spend it again as well, perhaps on something that incurs a sales tax.
Why does the utility matter? We are talking pure economic growth here.
We only value economic growth in the abstract because of its utility in the first place. The utility of a given activity is therefore relevant. Especially with the argument for stimulative spending- while it is true the stimulative effect might be the primary objective and so paying people to dig ditches might work just fine for that goal, paying people to build something of greater value has the stimulative effect *and* the value of the thing constructed.
When stimulus is necessary it really only means that malinvestment is not a concern; we don't ultimately worry about whether or not we need those ditches, what we need is people digging them. But if we can have both (like, say, have those people dig a canal, or pave a road, etc) we get investment returns over the long term which can offset the cost of stimulus. As well as providing whatever other benefits of a given project.
All understood. The question was really if there is more stimulative value in food stamps vs buying food to burn it. Please see my first response in this post.
There is a very clear economic advantage to food stamps over burning: The people getting foodstamps were previously allocating at least some of their money to food, which will probably spill over into other local level economic activity.
A 'perfect economic growth government intervention' is impossible to calculate and almost certainly socially undesirable. One of the biggest reasons for governments to exist is to constrain the free market and alter the variables so that it has a more desirable outcome, not in an economic sense but in a wellbeing sense.
But the same number of dollars are spent either way. Either the poor buy food with cash and the government buys other goods it does not need to destroy or use, or the poor buy food with food stamps and other things with the money that would have gone to food. Why are these not identical? I think the answer is things like crime, emergency room services, and allowing people to enter the workforce. But those are all specific to the poor, and can be alleviates other ways (universal healthcare, subsidized public transportiaon and child care, etc.).
Yes, the same number of dollars is spent. However, in the situation where you're not burning food you are utilizing the products you buy. When you burn it, you end up with the same situation essentially (people fed) but there is twice as much money spent on it.
Well, the question is what are we buying. If we value feeding people, I agree we are just paying 2x as much to feed the same number of people. But if we value retail sales and the flow of revenue of the chain from those sales, and ignore feeding people entirely, the difference seems to drop out, doesn't it? This is why we need examples of the economic benefits of feeding people (and a number have been set out here).
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
If we give poor people $100 for food, and they buy $100 worth of food, they now have $100 worth of food, the store has $100, and the poor people might be able to dedicate the $100 they would've spent on food on other things. The quality of their lives has improved through better nutrition, and they are more likely to be productive members of society. From a position of pure self interest, people who are not hungry or starving are less likely to commit crimes in order to rectify that problem, reducing the load on emergency services (police, hospitals, food banks, charities, etc, whom can now dedicate their resources to other areas, issues and people).
If we give a store $100 and tell them to burn $100 of food, all you've done is continued the (potentially artificially enhanced) scarcity of whatever products they chose to destroy. People who are hungry are still hungry, and whatever support structures are in place are strained a little further.
Desperate people do desperate things, which are often self destructive, counter productive and a tax (lol) on society, so society has a vested interest in providing a baseline level of support to those who need it. It isn't easy to attach a dollar value to the benefit of giving someone back a shred of their dignity in letting them make budgeting choices. It's impossible to know just how much less tangible good is done every time a mother or father receives their SNAP card/reload/however it is done and is able to feed their children for another week/month/however often it is done, or whatever tangible losses they might have personally suffered or negative impacts they might have had striving to survive.
The result is greater than the sum of its parts, the Return on Investment is excellent. Why is it better to spend $100 on roads than $100 on digging and filling in ditches? Because you now have repaired roads, which people use! The end product is of value, and the money put into the system (given to construction companies, which in turn pays its employees (and may need to hire more employees), who in turn buy products, which in turn generates demand for products, etc).
Now, I'm not an economist like our powerhouses here, but it seems quite self-evident why it's better to utilize funds towards a common good than to simply throw the money away; we're getting something out of it. People who aren't hungry, infrastructure that's no longer falling apart, whatever. Most people have to play a zero-sum game; they have $X available, and between food, rent, bills, clothes, entertainment, and whatnot that's all they get. If you increase their available funds for food through a support program, you also let that $X get spent on other things (and as noted above, you don't have to waste time, money and stress sending collection companies after them for a fraction of what you'd get if they had the funds to pay their bills, etc).
Again, I think the case for infrastructure is more obvious, since everyone but Mitt Romney relies on infrastructure to build their businesses. The examples for the economic value of feeding people you set out are similar to those mentioned by other posters, and I think they make sense, but I think it is also pretty clear that there is simply a difference between the durable goods which increase efficiencies that infrastructure spending produces and the less tangible benefits of providing a consumable good to the people to allow them to make less constrained choices.
Also, no one has argued in favor of throwing money away. The point of buying food to burn is to infuse money into the entire food industry, including requiring clerks to ring up the food that is bought and burned, truckers to transport it, and farmers to produce it. If you just give the money to people instead of actually consuming (even with flames) the item, you have not necessarily stimulated the entire chain in the same way as food stamps. The question is fundamentally if there is enhanced value, in terms of additional economic growth, in starting below the retail level, by handing money to consumers.
Again, I think the case for infrastructure is more obvious, since everyone but Mitt Romney relies on infrastructure to build their businesses. The examples for the economic value of feeding people you set out are similar to those mentioned by other posters, and I think they make sense, but I think it is also pretty clear that there is simply a difference between the durable goods which increase efficiencies that infrastructure spending produces and the less tangible benefits of providing a consumable good to the people to allow them to make less constrained choices.
Also, no one has argued in favor of throwing money away. The point of buying food to burn is to infuse money into the entire food industry, including requiring clerks to ring up the food that is bought and burned, truckers to transport it, and farmers to produce it. If you just give the money to people instead of actually consuming (even with flames) the item, you have not necessarily stimulated the entire chain in the same way as food stamps. The question is fundamentally if there is enhanced value, in terms of additional economic growth, in starting below the retail level, by handing money to consumers.
Um. In that case, we're just paying people to do nothing. If the food is going to be burned, then you might as well not produce and transport and sell the food at all. It's fundamentally inefficient, from an economic point of view. If you can't get over that, then I don't think the question you have is an economics question but rather a question you have of economics.
Well, if we don't worry about supplying a basic minimum level of support to those in need, we increase job demand for police and fire departments, riot-gear manufacture, urban combat training, civil defense programs, urban pacification weapons, techniques and technologies... y'know, there could be something to this.
Let things get bad enough and the 'problem' will sort itself out.
If we decided to go full sociopath as a society.
The point of buying food to burn is to infuse money into the entire food industry, including requiring clerks to ring up the food that is bought and burned, truckers to transport it, and farmers to produce it. If you just give the money to people instead of actually consuming (even with flames) the item, you have not necessarily stimulated the entire chain in the same way as food stamps. The question is fundamentally if there is enhanced value, in terms of additional economic growth, in starting below the retail level, by handing money to consumers.
And it's a bad point. It continues to ignore the benefits of putting that material to use rather than simply cutting a loop of the chain out and assuming it'd be more efficient. Those people still need to eat.
The people who own grocery stores, the people who work in them, the people who own farms and transportation lines are generally not the ones also on the verge of starving (granted there are probably some staff who are on support of one kind or another). This thought experiment continues to ignore the key point of supporting to those in need; that feeding people has greater benefits than simply them meeting their ~2,000 calories per day nutritional requirements. It increases their productivity, reduces their susceptibility to illness, and simply being less stressed and perhaps even happier all provide tangible societal benefits.
"Burning" food *is* throwing money away. It's ignoring the need of the many while playing a macabre piece of performance art so that the grocery stores and farmers and everyone in between continues to see the same X00 tons of CROP A B and C sent out and the same $Y,000,000 in weekly profits in return, as though people becoming increasingly ill and desperate is a side note.
First they came for the Muslims, and we said NOT TODAY, MOTHERFUCKER!
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
Again, I think the case for infrastructure is more obvious, since everyone but Mitt Romney relies on infrastructure to build their businesses. The examples for the economic value of feeding people you set out are similar to those mentioned by other posters, and I think they make sense, but I think it is also pretty clear that there is simply a difference between the durable goods which increase efficiencies that infrastructure spending produces and the less tangible benefits of providing a consumable good to the people to allow them to make less constrained choices.
Also, no one has argued in favor of throwing money away. The point of buying food to burn is to infuse money into the entire food industry, including requiring clerks to ring up the food that is bought and burned, truckers to transport it, and farmers to produce it. If you just give the money to people instead of actually consuming (even with flames) the item, you have not necessarily stimulated the entire chain in the same way as food stamps. The question is fundamentally if there is enhanced value, in terms of additional economic growth, in starting below the retail level, by handing money to consumers.
Um. In that case, we're just paying people to do nothing. If the food is going to be burned, then you might as well not produce and transport and sell the food at all. It's fundamentally inefficient, from an economic point of view. If you can't get over that, then I don't think the question you have is an economics question but rather a question you have of economics.
Like I said earlier, we could design efficient subsidies instead. But I think we have stretched this experiment out further than we should have, so I'm happy to stop, and go back to talking about other economic issues.
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JuliusCaptain of Serenityon my shipRegistered Userregular
There is a very clear economic advantage to food stamps over burning: The people getting foodstamps were previously allocating at least some of their money to food, which will probably spill over into other local level economic activity.
A 'perfect economic growth government intervention' is impossible to calculate and almost certainly socially undesirable. One of the biggest reasons for governments to exist is to constrain the free market and alter the variables so that it has a more desirable outcome, not in an economic sense but in a wellbeing sense.
But the same number of dollars are spent either way. Either the poor buy food with cash and the government buys other goods it does not need to destroy or use, or the poor buy food with food stamps and other things with the money that would have gone to food. Why are these not identical? I think the answer is things like crime, emergency room services, and allowing people to enter the workforce. But those are all specific to the poor, and can be alleviates other ways (universal healthcare, subsidized public transportiaon and child care, etc.).
Yes, the same number of dollars is spent. However, in the situation where you're not burning food you are utilizing the products you buy. When you burn it, you end up with the same situation essentially (people fed) but there is twice as much money spent on it.
Well, the question is what are we buying. If we value feeding people, I agree we are just paying 2x as much to feed the same number of people. But if we value retail sales and the flow of revenue of the chain from those sales, and ignore feeding people entirely, the difference seems to drop out, doesn't it? This is why we need examples of the economic benefits of feeding people (and a number have been set out here).
No we don't have to value feeding people, we have to not waste the value of the products we buy. Why do you think food even costs money?
Again, I think the case for infrastructure is more obvious, since everyone but Mitt Romney relies on infrastructure to build their businesses. The examples for the economic value of feeding people you set out are similar to those mentioned by other posters, and I think they make sense, but I think it is also pretty clear that there is simply a difference between the durable goods which increase efficiencies that infrastructure spending produces and the less tangible benefits of providing a consumable good to the people to allow them to make less constrained choices.
Also, no one has argued in favor of throwing money away. The point of buying food to burn is to infuse money into the entire food industry, including requiring clerks to ring up the food that is bought and burned, truckers to transport it, and farmers to produce it. If you just give the money to people instead of actually consuming (even with flames) the item, you have not necessarily stimulated the entire chain in the same way as food stamps. The question is fundamentally if there is enhanced value, in terms of additional economic growth, in starting below the retail level, by handing money to consumers.
Um. In that case, we're just paying people to do nothing. If the food is going to be burned, then you might as well not produce and transport and sell the food at all. It's fundamentally inefficient, from an economic point of view. If you can't get over that, then I don't think the question you have is an economics question but rather a question you have of economics.
Like I said earlier, we could design efficient subsidies instead. But I think we have stretched this experiment out further than we should have, so I'm happy to stop, and go back to talking about other economic issues.
What? No. Subsidies don't ... they're not relevant to the conversation at hand. Fundamentally, currency is a tool that facilitates the bartering process. At the most basic level, an economy is the exchange of something people have (labour) for something people need (food, shelter, etc,). If you're buying stuff just to destroy it, you're exchanging something for nothing. This is not economically efficient. If you provide a subsidy for people to produce undesirable goods, you're also exchanging something for nothing. Either way, societally speaking, we've committed resources, in terms of labour, raw materials, time, technology, etc, into something that we do not desire as a society.
The hardcore economists in the thread can describe it better than I can, but there are, I believe, specific scenarios in which subsidies are desirable, economically speaking. These include ameliorating start-up costs, buffering against economic downturns, correcting economic distortions, etc, but I do not believe putting people to work producing unwanted goods and services count. Such subsidies are strictly worse than welfare, because while with welfare the state pays individuals despite their not providing the state labour, these subsidies would entail the state paying individuals to perform useless labour that cannot be capitalized elsewhere. Your described subsidy seems to be by definition inefficient.
I want to discuss the bolded. When we are talking about pure economic growth, do we really care about personal utility? It is clearly less distortionary to the market to give people money to spend on the products they like vs having the government choose which products to subsidize, but if we put that aside (we are talking about economic growth alone) then can't we get the exact same level of growth by having the government buy deck chairs which they just use on military bases, and allowing people to buy whatever deck chairs they like in the quantity they need, to the extent they can afford it? It seems to me that infusing money into the economy at a level where it drives the need for more jobs (I.e., more deck chair salesmen, deck chair shippers, and manufacturers) is what drives growth. Put another way, what matters is that money is used to consume, not that it is given to consumers. Am I missing something here?
1) Do we care about personal utility? Yes. Personal utility is the entire reason we attempt to make economies efficient. If we were not worried about the utility of the people in the polity then we would not be worried about managing our economy. Fuck it lets bring on some pollution and communism all at the same time~
2) Is it less distortionary for the govt to buy something and give it to the people or the people to buy it? Not under the conditions you wanted to discuss. Under conditions i explained afterwards we found that whether a distortion is good or bad depends on the state of the market [defined as the market we have, not a hypothetical market]
Aside: Distortionary policy is not inherently bad. The only reason we tend view distortions as bad is because we tend to look at the non-distorted market as Pareto efficient. But a "non distorted market" implies a lot of things that are not true about the things that governments buy. Pareto efficiency is a term that means "no person can be better off without someone else being worse off", note also, measured in utility. That this does not imply that every pareto point is better for society than a non-pareto point, though it does imply that the societal maximum must be Pareto. A lot of people say that we don't really have a right to judge a social maximum [ i think these people are super duper wrong] but certainly people feel that if we don't have a way to determine whether or not a point is better socially than the pareto point you might as well go with the pareto point.
But this construction and understanding is an understanding that should drive the non-recession government size. In a recession we have a different problem, an output gap.
3) Does government spending drive growth? It depends. Government spending drives growth in recorded GDP [but note that GDP does not measure utility, just total stuff] IF, and this is a big if, the economy is currently experiencing an output gap.[I.E. what we should, but do not call recession]
An output gap means that there is a difference between actual production and potential production. I.E. there exist people who want to work for the prevailing wage but cannot find jobs[and this is not attributed to frictions].
Think of it like this, there are 10 guys in a factory and 10 machines for them to work at. The wage is 10 dollars/hour. All the workers would be willing to work for 9 dollars an hour. How many are working? An output gap means that while the answer should be 10, for some reason its only 9.
If the govt puts that guy to work we get growth, we go from 9 guys working to 10 guys working
Now if, instead, all 10 are working, and the govt puts one of those guys to work, still only 10 people are working.[this is what libertarians mean when they talk about the broken window fallacy]
We can roughly tell if we have an output gap if we have unemployment.
Note also that there are monetary ways to fix this too. And since monetary fixes tend to be easier to implement if you're going to fix something you might as well try monetary policy first. Its only if that fails that you want to use fiscal policy.
4) Why do we care about what we did in 3? Because we are better off when the guy who wants to work is working. The utility of everyone has gone up because the guy who wanted to be working is working[and so is trading his time for goods at a rate that we wants] and no one else has lost anything.
But the same number of dollars are spent either way.
Which is more of a problem with how we do our recording than any kind of support for what we should do. We cannot measure utility. Its impossible[despite people doing welfare analysis, literally they're guessing]
To get at the issue more directly, let's say the choice is giving the rich $100k each which must be spent at retail on luxury goods that month over an above what they would have bought, vs having the government spend the same amount at retail to buy luxury goods to burn. Is the former preferable from a pure economic perspective?
Yes, because at the end of the day people have more stuff.
But then we have to ask "is giving the rich 100k each that has to be spent on luxury goods better than doing something else" and the answer there depends on the relative personal and social value of the other thing, since the size of the spending ought to be determined by the output gap.
My question was more about what we do when there is no productive use for the window makers.
In a recession there is never "no productive use"
"Productive use" implies that the action is less valuable than the alternative action that would occur. But with an output gap, the alternative action is explicitly less valuable than any action which creates any positive value.
It is explicitly less valuable because the alternative action is "not working" and the trade value of not working to working is higher than the persons reservation wage.[I.E. lower unemployment] This means they get benefit out of working.
Since they get benefit out of working all we have to worry about is whether or not we make something.
The question was really if there is more stimulative value in food stamps vs buying food to burn it
Yes. The value in food stamps is that people who were buying food can buy other things which creates a recursive effect as people spend the new money. If we burn food then only the people who got the food purchased from them can do any increased spending.
Think of "food" as infrastructure for poor people. While a bridge may allow me to get to the other side of the river and sell my goods. Food stamps allow a poor person to cross the bridge that was already built and learn a trade[or get a job] without having to spend their time on the immediate concern of food.
I also believe Keynes used this analogy because he also wanted to highlight what his thoughts about gold mines, because when on the gold standard there's a strong connection between digging up physical gold out of the ground and digging up currency. I think he wanted it to seem a bit silly because of that.
Utility matters because it's how we decide to gets stuff. The idea is to maximize our society's utility by making as much stuff as possible and giving it to the people who'd benefit most from it. Often there's a trade as taking stuff from people who have a lower marginal utility to those with higher marginal utility can reduce incentives that govern how much stuff is produced to begin with. So we want to be clever about structuring the system that governs all this.
Resale is very good for our economy as it results in us having more stuff, by keeping it around in a useful fashion for longer. By reselling it the item flow from someone who derives less utility from it to somehow who values it more.
The point of all this is most emphatically not to keep money flowing up the chain. Money is but an instrument. Economics is about physical things.
But doesn't utility maximization point towards massive redistribute, given the diminishing marginal utility of money?
As a primary effect, yes. But that also has secondary effects, namely that if all the stuff is getting distributed equally, then you lose the primary motivation for people to do work and thus make stuff in the first place(unless they happen to like doing what they do). Which results in a decrease in the total amount of stuff being made, as people are no longer making it. So in practice, it ends up being a balance between those two factors, between distributing stuff to maximize utility of the stuff we have, and holding stuff in reserve to use as incentives for people to do work to increase the total amount of stuff being made.
I'd love to transition to a post-scarcity society, where automation, and humans doing things they like doing, and volunteering, is sufficient to supply most of the stuff people need or want, and thus such incentives become unnecessary, but I don't think we're quite there yet.
If we give poor people $100 for food, and they buy $100 worth of food, they now have $100 worth of food, the store has $100, and the poor people might be able to dedicate the $100 they would've spent on food on other things. The quality of their lives has improved through better nutrition, and they are more likely to be productive members of society. From a position of pure self interest, people who are not hungry or starving are less likely to commit crimes in order to rectify that problem, reducing the load on emergency services (police, hospitals, food banks, charities, etc, whom can now dedicate their resources to other areas, issues and people).
If we give a store $100 and tell them to burn $100 of food, all you've done is continued the (potentially artificially enhanced) scarcity of whatever products they chose to destroy. People who are hungry are still hungry, and whatever support structures are in place are strained a little further.
Desperate people do desperate things, which are often self destructive, counter productive and a tax (lol) on society, so society has a vested interest in providing a baseline level of support to those who need it. It isn't easy to attach a dollar value to the benefit of giving someone back a shred of their dignity in letting them make budgeting choices. It's impossible to know just how much less tangible good is done every time a mother or father receives their SNAP card/reload/however it is done and is able to feed their children for another week/month/however often it is done, or whatever tangible losses they might have personally suffered or negative impacts they might have had striving to survive.
The result is greater than the sum of its parts, the Return on Investment is excellent. Why is it better to spend $100 on roads than $100 on digging and filling in ditches? Because you now have repaired roads, which people use! The end product is of value, and the money put into the system (given to construction companies, which in turn pays its employees (and may need to hire more employees), who in turn buy products, which in turn generates demand for products, etc).
Now, I'm not an economist like our powerhouses here, but it seems quite self-evident why it's better to utilize funds towards a common good than to simply throw the money away; we're getting something out of it. People who aren't hungry, infrastructure that's no longer falling apart, whatever. Most people have to play a zero-sum game; they have $X available, and between food, rent, bills, clothes, entertainment, and whatnot that's all they get. If you increase their available funds for food through a support program, you also let that $X get spent on other things (and as noted above, you don't have to waste time, money and stress sending collection companies after them for a fraction of what you'd get if they had the funds to pay their bills, etc).
Again, I think the case for infrastructure is more obvious, since everyone but Mitt Romney relies on infrastructure to build their businesses. The examples for the economic value of feeding people you set out are similar to those mentioned by other posters, and I think they make sense, but I think it is also pretty clear that there is simply a difference between the durable goods which increase efficiencies that infrastructure spending produces and the less tangible benefits of providing a consumable good to the people to allow them to make less constrained choices.
Also, no one has argued in favor of throwing money away. The point of buying food to burn is to infuse money into the entire food industry, including requiring clerks to ring up the food that is bought and burned, truckers to transport it, and farmers to produce it. If you just give the money to people instead of actually consuming (even with flames) the item, you have not necessarily stimulated the entire chain in the same way as food stamps. The question is fundamentally if there is enhanced value, in terms of additional economic growth, in starting below the retail level, by handing money to consumers.
I really don't get why you are so obsessed with negative sum (in terms of the level of existing total wealth) stimulus, when there are obvious if silly examples of zero sum stimulus, as well as positive sum stimulus. You seem to be appealing to some sort of notion that there is an economic principle to ignore the wealth effects of a destructive stimulus program, when the opposite is the case.
The more common area where this sort of fallacy comes up is with the economic impact of war. You can have a lot of growth rebuilding and selling stuff to a place that has been bombed out, but that higher growth is from a lot lower starting place due to how much was lost. You can't just point at how wonderful the growth is while ignoring all the destruction beforehand that led to it.
There was huge levels of growth a few years into the great depression, but the standard of living overall still sucked compared to beforehand due to how much loss there was in the initial downswing. You don't want to enable a huge financial bloodletting like that just so you can have the huge (but still insufficient) recovery after the fact.
Edit: if your question really boils down to "how stimulative are different stimulus programs" then that's something you can't derive from first principles, you have to go out and measure it empirically. Those multiplier numbers that get brought up time to time are the estimates of "how much stimulative bang for our buck are we getting" for the different programs. Food stamps has a big multiplier, but there are others with high multipliers too.
Again, I think the case for infrastructure is more obvious, since everyone but Mitt Romney relies on infrastructure to build their businesses. The examples for the economic value of feeding people you set out are similar to those mentioned by other posters, and I think they make sense, but I think it is also pretty clear that there is simply a difference between the durable goods which increase efficiencies that infrastructure spending produces and the less tangible benefits of providing a consumable good to the people to allow them to make less constrained choices.
Also, no one has argued in favor of throwing money away. The point of buying food to burn is to infuse money into the entire food industry, including requiring clerks to ring up the food that is bought and burned, truckers to transport it, and farmers to produce it. If you just give the money to people instead of actually consuming (even with flames) the item, you have not necessarily stimulated the entire chain in the same way as food stamps. The question is fundamentally if there is enhanced value, in terms of additional economic growth, in starting below the retail level, by handing money to consumers.
Um. In that case, we're just paying people to do nothing. If the food is going to be burned, then you might as well not produce and transport and sell the food at all. It's fundamentally inefficient, from an economic point of view. If you can't get over that, then I don't think the question you have is an economics question but rather a question you have of economics.
Like I said earlier, we could design efficient subsidies instead. But I think we have stretched this experiment out further than we should have, so I'm happy to stop, and go back to talking about other economic issues.
What? No. Subsidies don't ... they're not relevant to the conversation at hand. Fundamentally, currency is a tool that facilitates the bartering process. At the most basic level, an economy is the exchange of something people have (labour) for something people need (food, shelter, etc,). If you're buying stuff just to destroy it, you're exchanging something for nothing. This is not economically efficient. If you provide a subsidy for people to produce undesirable goods, you're also exchanging something for nothing. Either way, societally speaking, we've committed resources, in terms of labour, raw materials, time, technology, etc, into something that we do not desire as a society.
The hardcore economists in the thread can describe it better than I can, but there are, I believe, specific scenarios in which subsidies are desirable, economically speaking. These include ameliorating start-up costs, buffering against economic downturns, correcting economic distortions, etc, but I do not believe putting people to work producing unwanted goods and services count. Such subsidies are strictly worse than welfare, because while with welfare the state pays individuals despite their not providing the state labour, these subsidies would entail the state paying individuals to perform useless labour that cannot be capitalized elsewhere. Your described subsidy seems to be by definition inefficient.
Subsidies by their design manipulate and distort the market of what is being subsidized. If you are talking about a good in an ideal free market, then it is clearly inefficient and the real price of the good taking into account the subsidization costs will be different than what supply and demand would have dictated naturally.
Whether you resort to subsidies or not is due to whether you are fine with manipulating what the market would give you for whatever purpose you are trying to achieve. This is more obvious in cases where you aren't dealing with an ideal market, but one laden with market failures and oddities. But it can even make sense in other cases where it would cause inefficiencies, like say protecting an industry important to national security so you don't have to be dependent on foreign businesses and countries that might become a lot less reliable if a war starts.
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
These posts are getting so long it's hard to respond (especially on my phone!)
1. On the problem with wealth destruction, the one case where I could see you actually wanting to subsidize destruction and rebuilding is where skills need to be honed and maintained, and there is no real work for them to be put to. Target practice with a gun comes to mind. The bullets are wasted in that they have not been used to shoot someone, and in a world with more violence the army would have more occasion to do real shooting, but it is worth the cost of wafted bullets to maintains their skill for when it is needed, IMO.
2. On utility, I agree that this is the point of economics (we aren't trying to ensure the system produces wealth for wealth's sake) so I can see now why my thought experiment may be too artificial to really yield any coherent truths about economics. Thanks to all who explained this so well.
3. The one thing I still don't understand is how the sale of used goods helps the economy. It still seems to me that it just causes money to move from one pocket to another without creating any new value.
These posts are getting so long it's hard to respond (especially on my phone!)
1. On the problem with wealth destruction, the one case where I could see you actually wanting to subsidize destruction and rebuilding is where skills need to be honed and maintained, and there is no real work for them to be put to. Target practice with a gun comes to mind. The bullets are wasted in that they have not been used to shoot someone, and in a world with more violence the army would have more occasion to do real shooting, but it is worth the cost of wafted bullets to maintains their skill for when it is needed, IMO.
We would tend to classify that as "consumed". In the same way that you can consume food to receive a benefit of energy and reduction in hunger. When you write something on paper, the pencil is not "wasted"
3. The one thing I still don't understand is how the sale of used goods helps the economy. It still seems to me that it just causes money to move from one pocket to another without creating any new value.
The trick is to figure out what it does to the original purchaser. Whom, if they can sell it, or expect to be able to resell it, will include the resale value of the item in their evaluation of the product.
This way a person with a low value for the item can use it and a person with a high value for the item can use it and the producer can actually get the payment of both of those people when they sell it. And since each trade is utility improving we actually move to a situation where everyone is better off.
I suppose it could make sense to think that you "don't create any new value" since there is only one good, but value is created by use. And we expect trades when the use value of an individual who owns the good is lower than the price with the opposite being true of the purchaser. Such the trade creates value [one person gets the price worth of value > his value, the other gets his value > price. Such total value is now Price+new value - price -old value >0. The trade has created value]
It might also make sense to say "but the guy who bought it could have bought something new and since he didn't nothing new got made". This is incorrect, while the guy who bought it could have bought something else, his purchasing of that thing indicates he got more value out of it. And since the person who now has the money can spend it, he can buy something new, thus not preventing us from making new things. If he doesn't buy something new he can trade for another second hand good and so on and so forth until someone does buy something new.
It might make sense to think of a situation like this. Everyone has an endowment of goods and labor. They can trade goods between themselves and labor to firms which produce goods. Trading goods between yourselves doesn't change the fact that a person can still trade labor to a firm and people trading goods between themselves will never make a situation where someone can't trade his labor to a firm if he wants to*. All trading goods between people does is change the allocation of goods.
*note that this is a micro-economic general equilibrium framework and such disequilibrium concepts like output gaps are not considered.
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
These posts are getting so long it's hard to respond (especially on my phone!)
1. On the problem with wealth destruction, the one case where I could see you actually wanting to subsidize destruction and rebuilding is where skills need to be honed and maintained, and there is no real work for them to be put to. Target practice with a gun comes to mind. The bullets are wasted in that they have not been used to shoot someone, and in a world with more violence the army would have more occasion to do real shooting, but it is worth the cost of wafted bullets to maintains their skill for when it is needed, IMO.
We would tend to classify that as "consumed". In the same way that you can consume food to receive a benefit of energy and reduction in hunger. When you write something on paper, the pencil is not "wasted"
3. The one thing I still don't understand is how the sale of used goods helps the economy. It still seems to me that it just causes money to move from one pocket to another without creating any new value.
The trick is to figure out what it does to the original purchaser. Whom, if they can sell it, or expect to be able to resell it, will include the resale value of the item in their evaluation of the product.
This way a person with a low value for the item can use it and a person with a high value for the item can use it and the producer can actually get the payment of both of those people when they sell it. And since each trade is utility improving we actually move to a situation where everyone is better off.
I suppose it could make sense to think that you "don't create any new value" since there is only one good, but value is created by use. And we expect trades when the use value of an individual who owns the good is lower than the price with the opposite being true of the purchaser. Such the trade creates value [one person gets the price worth of value > his value, the other gets his value > price. Such total value is now Price+new value - price -old value >0. The trade has created value]
It might also make sense to say "but the guy who bought it could have bought something new and since he didn't nothing new got made". This is incorrect, while the guy who bought it could have bought something else, his purchasing of that thing indicates he got more value out of it. And since the person who now has the money can spend it, he can buy something new, thus not preventing us from making new things. If he doesn't buy something new he can trade for another second hand good and so on and so forth until someone does buy something new.
It might make sense to think of a situation like this. Everyone has an endowment of goods and labor. They can trade goods between themselves and labor to firms which produce goods. Trading goods between yourselves doesn't change the fact that a person can still trade labor to a firm and people trading goods between themselves will never make a situation where someone can't trade his labor to a firm if he wants to*. All trading goods between people does is change the allocation of goods.
*note that this is a micro-economic general equilibrium framework and such disequilibrium concepts like output gaps are not considered.
Food can also be consumed by cooking too much and then throwing out the left overs. It has been consumed in that it has been used up, but it has not been put to a productive use. Taken one step further, someone may attempt and ruin a dish ten times before succeeding, in which case the all of the food is "used" but only 1/11th of it is consumed. Importantly, all of that food was purchased though, and the first 10 portions impact the market just as much as the 11th.
I suppose the question that arises is if we should prefer trading among parties or trading labor to a firm. It seems that if we are concerned with job creation, we should want to encourage trades of labor for new goods, since the production of those new goods requires people to produce them, whereas trades among people do not.
On pricing, shouldn't the concern only be the people who would not buy the new good at the new good price in a world where second hand goods did not exist? It seems to me that those are the only lost sales, and if eliminating the second hand market does not take many consumers out of the market entirely, then it seems like the destruction of the second hand market should result in a net gain in the purchase of new goods, which presumably carries a Keynesian multiplier of its own, since new item purchases create demand for jobs.
If there was no such thing as trading in a car towards a purchase of a new car (or alternatively selling your old car to somebody else and using that money to help purchase a new car) then it would follow that people would purchase cars less often. The people that rely on the lower price of a used car to afford a vehicle might not have a vehicle at all, making them rely upon whatever public transportation is available to get to work and limiting their employment options.
I don't think the destruction of the second hand market is guaranteed to result in a net gain of the purchase of new goods. Most people do not have unlimited money to spend, so either they would participate in the market for new goods less often or the prices of new goods would have to come down, lowering profit margins for the people selling said new goods.
I was debating throwing this in the Presidency thread since economic policy is a major issue this election cycle; however, I don't want to have this get drowned out by a major news story nor do I want the discussion to necessarily overshadow Romney's fail. The Scrooge Mcduck money circulation thing has been brought up a few times and I decided to see if I could find it on youtube. Here's both parts of the clip. Sorry didn't see it as one whole clip anywhere.
So would this actually be a good one to circulated around facebook or could it cause people to fail to grasp the important things? As in are there any out of date pieces, parts that aren't correct or areas that need better explanation that should be also be covered in the post that links these two clips? The budget part worries just a little.
Food can also be consumed by cooking too much and then throwing out the left overs. It has been consumed in that it has been used up, but it has not been put to a productive use.
:roll:
I suppose the question that arises is if we should prefer trading among parties or trading labor to a firm. It seems that if we are concerned with job creation, we should want to encourage trades of labor for new goods, since the production of those new goods requires people to produce them, whereas trades among people do not.
Trading among households is not mutually exclusive with trading labor to a firm! Like am I unable to work if i hold a garage sale on Saturday? Does the money you spend at a garage sale disappear or do I, the guy who sold you that used car get to go spend it?
On pricing, shouldn't the concern only be the people who would not buy the new good at the new good price in a world where second hand goods did not exist? It seems to me that those are the only lost sales, and if eliminating the second hand market does not take many consumers out of the market entirely, then it seems like the destruction of the second hand market should result in a net gain in the purchase of new goods, which presumably carries a Keynesian multiplier of its own, since new item purchases create demand for jobs.
OK, its ground up time.
Super-duper simple Micro-economic General Equilibrium:
There exist households (people) and firms(entities which organize capital) for easy we assume they're identical, but it works when they're not.
Households own capital which they rent to firms, labor which they sell, and an endowment of goods.
Firms take labor and capital and produce goods which they sell back to households
We generalize: Firms are profit maximizing and competitive. [we can model monopolies/not perfectly competitive things but it gets a bit more complicated to explain]
Because firms are profit maximizing and competitive they will pay wages equal to the marginal revenue product of labor and rents equal to the marginal revenue product of capital. Because they're competitive they make zero profits[everything goes to labor or capital]. We can be more specific and separate out types of labor if we want but for now all labor is the same.
Households are utility maximizing, balancing the utility of goods and the disutility of labor [I.E. utility of leisure]. A household will supply labor if the utility of the goods purchased from their wage is higher than disutility of their labor
Since households are utility maximizing we know that households will supply labor until their marginal utility of consumption [for all goods they're buying] falls to the wage. Since firms are profit maximizing we know they will continue to hire at the wage.
From here we can get a solution to figure out what the wage will be once we make some reasonable assumptions about using everything. Though to do so we need to normalize one of the prices [labor or goods].
What you're suggesting is that we get unemployment if we change the endowment of goods[I.E. we trade between each other]. And the answer to that is no; while it will make people want to work less people wanting to work less is not unemployment[its called "being better off"].
But the world doesn't really exist in a General Equilibrium, a "General Disequilibrium" is probably more true. We can think of the world in GD due to various stochastic shocks or due to prices simply being wrong[slow adjustment periods]. This makes GE a poor system to model the macro economy on, but a decent enough system to develop general principles about in which direction we expect things to move.
Question: if prices are wrong and our model above is in disequilibrium does a change in endowment cause unemployment? Again, no, since people will still want to supply labor until the wage is equal to their marginal utility of consumption. Trade will reduce the marginal utility of consumption and so reduce the supplied labor... which has no effect if we are in a disequilibrium of "over supplied labor". Hell, it might even help reduce unemployment. It can only be bad if prices are wrong the other way, if there is an under supply of labor[since it will exacerbate the under supply]
Thinking about it again, the reason we most likely see wide variations in multipliers on a practical level is the tax rate of the people who receive the funding. If i give you income, its always taxed, so your MPC will be lower if you have a high tax rate.
We can think of the actual multiplier as the cumulative MPC of the people the money hits. The first person gets it and spend X% then the next guy gets that and spends y% and so on and so forth.
You do not get a Keynesian multiplier by destroying a secondary market, destroying a secondary market does mean people are going to make "more new stuff". To imply that you much ignore the stuff the people who are selling in the secondary market are purchasing with their revenues.
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
Food can also be consumed by cooking too much and then throwing out the left overs. It has been consumed in that it has been used up, but it has not been put to a productive use.
:roll:
I suppose the question that arises is if we should prefer trading among parties or trading labor to a firm. It seems that if we are concerned with job creation, we should want to encourage trades of labor for new goods, since the production of those new goods requires people to produce them, whereas trades among people do not.
Trading among households is not mutually exclusive with trading labor to a firm! Like am I unable to work if i hold a garage sale on Saturday? Does the money you spend at a garage sale disappear or do I, the guy who sold you that used car get to go spend it?
On pricing, shouldn't the concern only be the people who would not buy the new good at the new good price in a world where second hand goods did not exist? It seems to me that those are the only lost sales, and if eliminating the second hand market does not take many consumers out of the market entirely, then it seems like the destruction of the second hand market should result in a net gain in the purchase of new goods, which presumably carries a Keynesian multiplier of its own, since new item purchases create demand for jobs.
OK, its ground up time.
Super-duper simple Micro-economic General Equilibrium:
There exist households (people) and firms(entities which organize capital) for easy we assume they're identical, but it works when they're not.
Households own capital which they rent to firms, labor which they sell, and an endowment of goods.
Firms take labor and capital and produce goods which they sell back to households
We generalize: Firms are profit maximizing and competitive. [we can model monopolies/not perfectly competitive things but it gets a bit more complicated to explain]
Because firms are profit maximizing and competitive they will pay wages equal to the marginal revenue product of labor and rents equal to the marginal revenue product of capital. Because they're competitive they make zero profits[everything goes to labor or capital]. We can be more specific and separate out types of labor if we want but for now all labor is the same.
Households are utility maximizing, balancing the utility of goods and the disutility of labor [I.E. utility of leisure]. A household will supply labor if the utility of the goods purchased from their wage is higher than disutility of their labor
Since households are utility maximizing we know that households will supply labor until their marginal utility of consumption [for all goods they're buying] falls to the wage. Since firms are profit maximizing we know they will continue to hire at the wage.
From here we can get a solution to figure out what the wage will be once we make some reasonable assumptions about using everything. Though to do so we need to normalize one of the prices [labor or goods].
What you're suggesting is that we get unemployment if we change the endowment of goods[I.E. we trade between each other]. And the answer to that is no; while it will make people want to work less people wanting to work less is not unemployment[its called "being better off"].
But the world doesn't really exist in a General Equilibrium, a "General Disequilibrium" is probably more true. We can think of the world in GD due to various stochastic shocks or due to prices simply being wrong[slow adjustment periods]. This makes GE a poor system to model the macro economy on, but a decent enough system to develop general principles about in which direction we expect things to move.
Question: if prices are wrong and our model above is in disequilibrium does a change in endowment cause unemployment? Again, no, since people will still want to supply labor until the wage is equal to their marginal utility of consumption. Trade will reduce the marginal utility of consumption and so reduce the supplied labor... which has no effect if we are in a disequilibrium of "over supplied labor". Hell, it might even help reduce unemployment. It can only be bad if prices are wrong the other way, if there is an under supply of labor[since it will exacerbate the under supply]
Thinking about it again, the reason we most likely see wide variations in multipliers on a practical level is the tax rate of the people who receive the funding. If i give you income, its always taxed, so your MPC will be lower if you have a high tax rate.
We can think of the actual multiplier as the cumulative MPC of the people the money hits. The first person gets it and spend X% then the next guy gets that and spends y% and so on and so forth.
You do not get a Keynesian multiplier by destroying a secondary market, destroying a secondary market does mean people are going to make "more new stuff". To imply that you much ignore the stuff the people who are selling in the secondary market are purchasing with their revenues.
1. I get that the food is put to a productive use (learning to cook the meal) so the example was silly.
2. But if secondary market trading becomes prevalent enough, the firms can shut down, right? We see this exact situation in videogames, with GameStop and other secondary market sources cannibalizing new game sales during period in which the publisher is deciding if sales warrant a sequel.
Food can also be consumed by cooking too much and then throwing out the left overs. It has been consumed in that it has been used up, but it has not been put to a productive use.
:roll:
I suppose the question that arises is if we should prefer trading among parties or trading labor to a firm. It seems that if we are concerned with job creation, we should want to encourage trades of labor for new goods, since the production of those new goods requires people to produce them, whereas trades among people do not.
Trading among households is not mutually exclusive with trading labor to a firm! Like am I unable to work if i hold a garage sale on Saturday? Does the money you spend at a garage sale disappear or do I, the guy who sold you that used car get to go spend it?
On pricing, shouldn't the concern only be the people who would not buy the new good at the new good price in a world where second hand goods did not exist? It seems to me that those are the only lost sales, and if eliminating the second hand market does not take many consumers out of the market entirely, then it seems like the destruction of the second hand market should result in a net gain in the purchase of new goods, which presumably carries a Keynesian multiplier of its own, since new item purchases create demand for jobs.
OK, its ground up time.
Super-duper simple Micro-economic General Equilibrium:
There exist households (people) and firms(entities which organize capital) for easy we assume they're identical, but it works when they're not.
Households own capital which they rent to firms, labor which they sell, and an endowment of goods.
Firms take labor and capital and produce goods which they sell back to households
We generalize: Firms are profit maximizing and competitive. [we can model monopolies/not perfectly competitive things but it gets a bit more complicated to explain]
Because firms are profit maximizing and competitive they will pay wages equal to the marginal revenue product of labor and rents equal to the marginal revenue product of capital. Because they're competitive they make zero profits[everything goes to labor or capital]. We can be more specific and separate out types of labor if we want but for now all labor is the same.
Households are utility maximizing, balancing the utility of goods and the disutility of labor [I.E. utility of leisure]. A household will supply labor if the utility of the goods purchased from their wage is higher than disutility of their labor
Since households are utility maximizing we know that households will supply labor until their marginal utility of consumption [for all goods they're buying] falls to the wage. Since firms are profit maximizing we know they will continue to hire at the wage.
From here we can get a solution to figure out what the wage will be once we make some reasonable assumptions about using everything. Though to do so we need to normalize one of the prices [labor or goods].
What you're suggesting is that we get unemployment if we change the endowment of goods[I.E. we trade between each other]. And the answer to that is no; while it will make people want to work less people wanting to work less is not unemployment[its called "being better off"].
But the world doesn't really exist in a General Equilibrium, a "General Disequilibrium" is probably more true. We can think of the world in GD due to various stochastic shocks or due to prices simply being wrong[slow adjustment periods]. This makes GE a poor system to model the macro economy on, but a decent enough system to develop general principles about in which direction we expect things to move.
Question: if prices are wrong and our model above is in disequilibrium does a change in endowment cause unemployment? Again, no, since people will still want to supply labor until the wage is equal to their marginal utility of consumption. Trade will reduce the marginal utility of consumption and so reduce the supplied labor... which has no effect if we are in a disequilibrium of "over supplied labor". Hell, it might even help reduce unemployment. It can only be bad if prices are wrong the other way, if there is an under supply of labor[since it will exacerbate the under supply]
Thinking about it again, the reason we most likely see wide variations in multipliers on a practical level is the tax rate of the people who receive the funding. If i give you income, its always taxed, so your MPC will be lower if you have a high tax rate.
We can think of the actual multiplier as the cumulative MPC of the people the money hits. The first person gets it and spend X% then the next guy gets that and spends y% and so on and so forth.
You do not get a Keynesian multiplier by destroying a secondary market, destroying a secondary market does mean people are going to make "more new stuff". To imply that you much ignore the stuff the people who are selling in the secondary market are purchasing with their revenues.
1. I get that the food is put to a productive use (learning to cook the meal) so the example was silly.
2. But if secondary market trading becomes prevalent enough, the firms can shut down, right? We see this exact situation in videogames, with GameStop and other secondary market sources cannibalizing new game sales during period in which the publisher is deciding if sales warrant a sequel.
@2: we see that argument being made, but, tbh, I've always considered it a fallacy by an industry which has problems MUCH larger than gamestop. People factor in the price they can get for a second-hand item (where second-hand sales are an option) in their decision whether or not the product is worth buying at retail price.
Consider the car industry (where resale value is unequivocally "a thing"): would it be better off if cars were "first time buyer only"? What would that do to consumer's willingness to pay for a new car, do you think? What would that do to the economy? The answer is long, complicated, and depends on a lot of price sensitivity analysis, comparability of new vs. used goods, etc...
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
Food can also be consumed by cooking too much and then throwing out the left overs. It has been consumed in that it has been used up, but it has not been put to a productive use.
:roll:
I suppose the question that arises is if we should prefer trading among parties or trading labor to a firm. It seems that if we are concerned with job creation, we should want to encourage trades of labor for new goods, since the production of those new goods requires people to produce them, whereas trades among people do not.
Trading among households is not mutually exclusive with trading labor to a firm! Like am I unable to work if i hold a garage sale on Saturday? Does the money you spend at a garage sale disappear or do I, the guy who sold you that used car get to go spend it?
On pricing, shouldn't the concern only be the people who would not buy the new good at the new good price in a world where second hand goods did not exist? It seems to me that those are the only lost sales, and if eliminating the second hand market does not take many consumers out of the market entirely, then it seems like the destruction of the second hand market should result in a net gain in the purchase of new goods, which presumably carries a Keynesian multiplier of its own, since new item purchases create demand for jobs.
OK, its ground up time.
Super-duper simple Micro-economic General Equilibrium:
There exist households (people) and firms(entities which organize capital) for easy we assume they're identical, but it works when they're not.
Households own capital which they rent to firms, labor which they sell, and an endowment of goods.
Firms take labor and capital and produce goods which they sell back to households
We generalize: Firms are profit maximizing and competitive. [we can model monopolies/not perfectly competitive things but it gets a bit more complicated to explain]
Because firms are profit maximizing and competitive they will pay wages equal to the marginal revenue product of labor and rents equal to the marginal revenue product of capital. Because they're competitive they make zero profits[everything goes to labor or capital]. We can be more specific and separate out types of labor if we want but for now all labor is the same.
Households are utility maximizing, balancing the utility of goods and the disutility of labor [I.E. utility of leisure]. A household will supply labor if the utility of the goods purchased from their wage is higher than disutility of their labor
Since households are utility maximizing we know that households will supply labor until their marginal utility of consumption [for all goods they're buying] falls to the wage. Since firms are profit maximizing we know they will continue to hire at the wage.
From here we can get a solution to figure out what the wage will be once we make some reasonable assumptions about using everything. Though to do so we need to normalize one of the prices [labor or goods].
What you're suggesting is that we get unemployment if we change the endowment of goods[I.E. we trade between each other]. And the answer to that is no; while it will make people want to work less people wanting to work less is not unemployment[its called "being better off"].
But the world doesn't really exist in a General Equilibrium, a "General Disequilibrium" is probably more true. We can think of the world in GD due to various stochastic shocks or due to prices simply being wrong[slow adjustment periods]. This makes GE a poor system to model the macro economy on, but a decent enough system to develop general principles about in which direction we expect things to move.
Question: if prices are wrong and our model above is in disequilibrium does a change in endowment cause unemployment? Again, no, since people will still want to supply labor until the wage is equal to their marginal utility of consumption. Trade will reduce the marginal utility of consumption and so reduce the supplied labor... which has no effect if we are in a disequilibrium of "over supplied labor". Hell, it might even help reduce unemployment. It can only be bad if prices are wrong the other way, if there is an under supply of labor[since it will exacerbate the under supply]
Thinking about it again, the reason we most likely see wide variations in multipliers on a practical level is the tax rate of the people who receive the funding. If i give you income, its always taxed, so your MPC will be lower if you have a high tax rate.
We can think of the actual multiplier as the cumulative MPC of the people the money hits. The first person gets it and spend X% then the next guy gets that and spends y% and so on and so forth.
You do not get a Keynesian multiplier by destroying a secondary market, destroying a secondary market does mean people are going to make "more new stuff". To imply that you much ignore the stuff the people who are selling in the secondary market are purchasing with their revenues.
1. I get that the food is put to a productive use (learning to cook the meal) so the example was silly.
2. But if secondary market trading becomes prevalent enough, the firms can shut down, right? We see this exact situation in videogames, with GameStop and other secondary market sources cannibalizing new game sales during period in which the publisher is deciding if sales warrant a sequel.
@2: we see that argument being made, but, tbh, I've always considered it a fallacy by an industry which has problems MUCH larger than gamestop. People factor in the price they can get for a second-hand item (where second-hand sales are an option) in their decision whether or not the product is worth buying at retail price.
Consider the car industry (where resale value is unequivocally "a thing"): would it be better off if cars were "first time buyer only"? What would that do to consumer's willingness to pay for a new car, do you think? What would that do to the economy? The answer is long, complicated, and depends on a lot of price sensitivity analysis, comparability of new vs. used goods, etc...
You're right. The games industry is a bad example, and the secondary market makes sense when it comes to things like cars and homes for sure. I guess my issue is more that I believe in a moral right of the creator to profit from his creations, but that is not a topic for the economics thread, so all arguments withdrawn. Thanks to everyone for what was (as always) a really interesting conversation, and for indulging in my devil's advocate thought experiment.
Food can also be consumed by cooking too much and then throwing out the left overs. It has been consumed in that it has been used up, but it has not been put to a productive use.
:roll:
I suppose the question that arises is if we should prefer trading among parties or trading labor to a firm. It seems that if we are concerned with job creation, we should want to encourage trades of labor for new goods, since the production of those new goods requires people to produce them, whereas trades among people do not.
Trading among households is not mutually exclusive with trading labor to a firm! Like am I unable to work if i hold a garage sale on Saturday? Does the money you spend at a garage sale disappear or do I, the guy who sold you that used car get to go spend it?
On pricing, shouldn't the concern only be the people who would not buy the new good at the new good price in a world where second hand goods did not exist? It seems to me that those are the only lost sales, and if eliminating the second hand market does not take many consumers out of the market entirely, then it seems like the destruction of the second hand market should result in a net gain in the purchase of new goods, which presumably carries a Keynesian multiplier of its own, since new item purchases create demand for jobs.
OK, its ground up time.
Super-duper simple Micro-economic General Equilibrium:
There exist households (people) and firms(entities which organize capital) for easy we assume they're identical, but it works when they're not.
Households own capital which they rent to firms, labor which they sell, and an endowment of goods.
Firms take labor and capital and produce goods which they sell back to households
We generalize: Firms are profit maximizing and competitive. [we can model monopolies/not perfectly competitive things but it gets a bit more complicated to explain]
Because firms are profit maximizing and competitive they will pay wages equal to the marginal revenue product of labor and rents equal to the marginal revenue product of capital. Because they're competitive they make zero profits[everything goes to labor or capital]. We can be more specific and separate out types of labor if we want but for now all labor is the same.
Households are utility maximizing, balancing the utility of goods and the disutility of labor [I.E. utility of leisure]. A household will supply labor if the utility of the goods purchased from their wage is higher than disutility of their labor
Since households are utility maximizing we know that households will supply labor until their marginal utility of consumption [for all goods they're buying] falls to the wage. Since firms are profit maximizing we know they will continue to hire at the wage.
From here we can get a solution to figure out what the wage will be once we make some reasonable assumptions about using everything. Though to do so we need to normalize one of the prices [labor or goods].
What you're suggesting is that we get unemployment if we change the endowment of goods[I.E. we trade between each other]. And the answer to that is no; while it will make people want to work less people wanting to work less is not unemployment[its called "being better off"].
But the world doesn't really exist in a General Equilibrium, a "General Disequilibrium" is probably more true. We can think of the world in GD due to various stochastic shocks or due to prices simply being wrong[slow adjustment periods]. This makes GE a poor system to model the macro economy on, but a decent enough system to develop general principles about in which direction we expect things to move.
Question: if prices are wrong and our model above is in disequilibrium does a change in endowment cause unemployment? Again, no, since people will still want to supply labor until the wage is equal to their marginal utility of consumption. Trade will reduce the marginal utility of consumption and so reduce the supplied labor... which has no effect if we are in a disequilibrium of "over supplied labor". Hell, it might even help reduce unemployment. It can only be bad if prices are wrong the other way, if there is an under supply of labor[since it will exacerbate the under supply]
Thinking about it again, the reason we most likely see wide variations in multipliers on a practical level is the tax rate of the people who receive the funding. If i give you income, its always taxed, so your MPC will be lower if you have a high tax rate.
We can think of the actual multiplier as the cumulative MPC of the people the money hits. The first person gets it and spend X% then the next guy gets that and spends y% and so on and so forth.
You do not get a Keynesian multiplier by destroying a secondary market, destroying a secondary market does mean people are going to make "more new stuff". To imply that you much ignore the stuff the people who are selling in the secondary market are purchasing with their revenues.
1. I get that the food is put to a productive use (learning to cook the meal) so the example was silly.
2. But if secondary market trading becomes prevalent enough, the firms can shut down, right? We see this exact situation in videogames, with GameStop and other secondary market sources cannibalizing new game sales during period in which the publisher is deciding if sales warrant a sequel.
@2: we see that argument being made, but, tbh, I've always considered it a fallacy by an industry which has problems MUCH larger than gamestop. People factor in the price they can get for a second-hand item (where second-hand sales are an option) in their decision whether or not the product is worth buying at retail price.
Consider the car industry (where resale value is unequivocally "a thing"): would it be better off if cars were "first time buyer only"? What would that do to consumer's willingness to pay for a new car, do you think? What would that do to the economy? The answer is long, complicated, and depends on a lot of price sensitivity analysis, comparability of new vs. used goods, etc...
You're right. The games industry is a bad example, and the secondary market makes sense when it comes to things like cars and homes for sure. I guess my issue is more that I believe in a moral right of the creator to profit from his creations, but that is not a topic for the economics thread, so all arguments withdrawn. Thanks to everyone for what was (as always) a really interesting conversation, and for indulging in my devil's advocate thought experiment.
The answer to this is twofold:
1) We don't expect that secondary markets would shut down a primary market. It can happen, but requires that the new products be worse than the old products even after the old products have been used. And well if you keep making things that are worse then you don't deserve to be in business
2) The concept of "it is moral for the creator to profit from his creations" doesn't make sense within an economic context. The reason for this is because the only way to determine the value of a product is by selling it on the market. If the creator is entitled to the value of his production as defined by the market then resale markets, as they transfer their value to the primary market, uphold this. If someone continues to produce new stuff and its not purchased then he is morally entitled to no profit since the market has determined that his product is not good enough to buy.
If we don't think of the market as a price finder then we have the problem of people making shit and then having a "moral right to profit from their creations". The requirement for profit implies that I must be able to sell what I make higher than my cost which imposes restrictions on the actions of everyone else, who must purchase your product even though its not good for them.
The reason this argument tends to come into play is because a similar statement that looks equivalent [but is not] is more easily considered to be true. That statement is "it is immoral to profit off the work of others".
edit: IIRC that last statement can fall out of a lot of the results of various economic models such that we will often attempt to craft the system to ensure that it does not happen.
I'm wondering if anyone can shed light on something a friend of mine and I have been going back and forth over.
Basically, he maintains that an imbalance of trade (ie. importing more than you export) is unsustainable in the long run, and I'm tempted to agree based on just the Macro 101 class I took... but I feel like that kind of simplified conclusion fails to take into account service-based economies (ie. the U.S.). I mean, we've had an imbalance of trade for the last couple of decades, and 2008 and the ensuing shitstorm notwithstanding, such an arrangement didn't seem to ruin us.
I was debating throwing this in the Presidency thread since economic policy is a major issue this election cycle; however, I don't want to have this get drowned out by a major news story nor do I want the discussion to necessarily overshadow Romney's fail. The Scrooge Mcduck money circulation thing has been brought up a few times and I decided to see if I could find it on youtube. Here's both parts of the clip. Sorry didn't see it as one whole clip anywhere.
So would this actually be a good one to circulated around facebook or could it cause people to fail to grasp the important things? As in are there any out of date pieces, parts that aren't correct or areas that need better explanation that should be also be covered in the post that links these two clips? The budget part worries just a little.
Oh, you found them. Aren't these videos the best? We need more of this kind of thing teaching people how money works and that taxes win wars and such. It doesn't necessarily have to be a cartoon.
3DS Friendcode 5413-1311-3767
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spacekungfumanPoor and minority-filledRegistered User, __BANNED USERSregular
Food can also be consumed by cooking too much and then throwing out the left overs. It has been consumed in that it has been used up, but it has not been put to a productive use.
:roll:
I suppose the question that arises is if we should prefer trading among parties or trading labor to a firm. It seems that if we are concerned with job creation, we should want to encourage trades of labor for new goods, since the production of those new goods requires people to produce them, whereas trades among people do not.
Trading among households is not mutually exclusive with trading labor to a firm! Like am I unable to work if i hold a garage sale on Saturday? Does the money you spend at a garage sale disappear or do I, the guy who sold you that used car get to go spend it?
On pricing, shouldn't the concern only be the people who would not buy the new good at the new good price in a world where second hand goods did not exist? It seems to me that those are the only lost sales, and if eliminating the second hand market does not take many consumers out of the market entirely, then it seems like the destruction of the second hand market should result in a net gain in the purchase of new goods, which presumably carries a Keynesian multiplier of its own, since new item purchases create demand for jobs.
OK, its ground up time.
Super-duper simple Micro-economic General Equilibrium:
There exist households (people) and firms(entities which organize capital) for easy we assume they're identical, but it works when they're not.
Households own capital which they rent to firms, labor which they sell, and an endowment of goods.
Firms take labor and capital and produce goods which they sell back to households
We generalize: Firms are profit maximizing and competitive. [we can model monopolies/not perfectly competitive things but it gets a bit more complicated to explain]
Because firms are profit maximizing and competitive they will pay wages equal to the marginal revenue product of labor and rents equal to the marginal revenue product of capital. Because they're competitive they make zero profits[everything goes to labor or capital]. We can be more specific and separate out types of labor if we want but for now all labor is the same.
Households are utility maximizing, balancing the utility of goods and the disutility of labor [I.E. utility of leisure]. A household will supply labor if the utility of the goods purchased from their wage is higher than disutility of their labor
Since households are utility maximizing we know that households will supply labor until their marginal utility of consumption [for all goods they're buying] falls to the wage. Since firms are profit maximizing we know they will continue to hire at the wage.
From here we can get a solution to figure out what the wage will be once we make some reasonable assumptions about using everything. Though to do so we need to normalize one of the prices [labor or goods].
What you're suggesting is that we get unemployment if we change the endowment of goods[I.E. we trade between each other]. And the answer to that is no; while it will make people want to work less people wanting to work less is not unemployment[its called "being better off"].
But the world doesn't really exist in a General Equilibrium, a "General Disequilibrium" is probably more true. We can think of the world in GD due to various stochastic shocks or due to prices simply being wrong[slow adjustment periods]. This makes GE a poor system to model the macro economy on, but a decent enough system to develop general principles about in which direction we expect things to move.
Question: if prices are wrong and our model above is in disequilibrium does a change in endowment cause unemployment? Again, no, since people will still want to supply labor until the wage is equal to their marginal utility of consumption. Trade will reduce the marginal utility of consumption and so reduce the supplied labor... which has no effect if we are in a disequilibrium of "over supplied labor". Hell, it might even help reduce unemployment. It can only be bad if prices are wrong the other way, if there is an under supply of labor[since it will exacerbate the under supply]
Thinking about it again, the reason we most likely see wide variations in multipliers on a practical level is the tax rate of the people who receive the funding. If i give you income, its always taxed, so your MPC will be lower if you have a high tax rate.
We can think of the actual multiplier as the cumulative MPC of the people the money hits. The first person gets it and spend X% then the next guy gets that and spends y% and so on and so forth.
You do not get a Keynesian multiplier by destroying a secondary market, destroying a secondary market does mean people are going to make "more new stuff". To imply that you much ignore the stuff the people who are selling in the secondary market are purchasing with their revenues.
1. I get that the food is put to a productive use (learning to cook the meal) so the example was silly.
2. But if secondary market trading becomes prevalent enough, the firms can shut down, right? We see this exact situation in videogames, with GameStop and other secondary market sources cannibalizing new game sales during period in which the publisher is deciding if sales warrant a sequel.
@2: we see that argument being made, but, tbh, I've always considered it a fallacy by an industry which has problems MUCH larger than gamestop. People factor in the price they can get for a second-hand item (where second-hand sales are an option) in their decision whether or not the product is worth buying at retail price.
Consider the car industry (where resale value is unequivocally "a thing"): would it be better off if cars were "first time buyer only"? What would that do to consumer's willingness to pay for a new car, do you think? What would that do to the economy? The answer is long, complicated, and depends on a lot of price sensitivity analysis, comparability of new vs. used goods, etc...
You're right. The games industry is a bad example, and the secondary market makes sense when it comes to things like cars and homes for sure. I guess my issue is more that I believe in a moral right of the creator to profit from his creations, but that is not a topic for the economics thread, so all arguments withdrawn. Thanks to everyone for what was (as always) a really interesting conversation, and for indulging in my devil's advocate thought experiment.
The answer to this is twofold:
1) We don't expect that secondary markets would shut down a primary market. It can happen, but requires that the new products be worse than the old products even after the old products have been used. And well if you keep making things that are worse then you don't deserve to be in business
2) The concept of "it is moral for the creator to profit from his creations" doesn't make sense within an economic context. The reason for this is because the only way to determine the value of a product is by selling it on the market. If the creator is entitled to the value of his production as defined by the market then resale markets, as they transfer their value to the primary market, uphold this. If someone continues to produce new stuff and its not purchased then he is morally entitled to no profit since the market has determined that his product is not good enough to buy.
If we don't think of the market as a price finder then we have the problem of people making shit and then having a "moral right to profit from their creations". The requirement for profit implies that I must be able to sell what I make higher than my cost which imposes restrictions on the actions of everyone else, who must purchase your product even though its not good for them.
The reason this argument tends to come into play is because a similar statement that looks equivalent [but is not] is more easily considered to be true. That statement is "it is immoral to profit off the work of others".
edit: IIRC that last statement can fall out of a lot of the results of various economic models such that we will often attempt to craft the system to ensure that it does not happen.
I know this is counter-factual, but we can imagine a world in which someone creates a widget which is in steady, but not generally in high demand, and which is of very high quality, so that it is capable of being resold many times. He then creates another, similar widget which is better in every way, but which he needs to sell for more than the cost of the first widget on the secondary market in order to make a profit. Since demand is low, but steady, there are people who need these types of widgets, but the creator could very well go out of business because of the secondary market, correct?
I suppose the real world example is data, where the ability to make perfect copies means creators can lose their ability to monetize their work to a "market" in which everything is effectively costless.
I'm wondering if anyone can shed light on something a friend of mine and I have been going back and forth over.
Basically, he maintains that an imbalance of trade (ie. importing more than you export) is unsustainable in the long run, and I'm tempted to agree based on just the Macro 101 class I took... but I feel like that kind of simplified conclusion fails to take into account service-based economies (ie. the U.S.). I mean, we've had an imbalance of trade for the last couple of decades, and 2008 and the ensuing shitstorm notwithstanding, such an arrangement didn't seem to ruin us.
This is surprisingly simple and has nothing to do with whether the imbalance is in goods or services. Running a trade deficit means you are going in debt to other countries by the amount of the trade imbalance. In econspeak we say that your current account deficit must equal your capital and financial account deficits. If your economic growth is larger than the trade deficit, it's sustainable. Foreigners are owning more and more of your country, but it's new bits of the country and you are as wealthy or more wealthy than before.
If your economic growth is less than your trade deficit it is not sustainable because eventually you will run out of country to sell. Before that point is reached foreigners will stop lending to you at with point your trade deficit comes to a sudden halt and you enter a combination of a financial and currency crisis.
To draw a household budget analogy: running a trade deficit is like increasing your debt load. If your income growth is faster than your debt growth, it's sustainable. If not, it's not.
I know this is counter-factual, but we can imagine a world in which someone creates a widget which is in steady, but not generally in high demand, and which is of very high quality, so that it is capable of being resold many times. He then creates another, similar widget which is better in every way, but which he needs to sell for more than the cost of the first widget on the secondary market in order to make a profit. Since demand is low, but steady, there are people who need these types of widgets, but the creator could very well go out of business because of the secondary market, correct?
I suppose the real world example is data, where the ability to make perfect copies means creators can lose their ability to monetize their work to a "market" in which everything is effectively costless.
If its better then he can sell it for more than the cost of the first widget will sell for on the secondary market. Given that the widgets share the same consumer base. In order for what you're suggesting to be true, it must be the case that people must be willing to pay less for a better widget.
If the "required cost of the new widget" is significantly higher such that it has no buyers then the widget is not an efficient use of resources.
I know this is counter-factual, but we can imagine a world in which someone creates a widget which is in steady, but not generally in high demand, and which is of very high quality, so that it is capable of being resold many times. He then creates another, similar widget which is better in every way, but which he needs to sell for more than the cost of the first widget on the secondary market in order to make a profit. Since demand is low, but steady, there are people who need these types of widgets, but the creator could very well go out of business because of the secondary market, correct?
I suppose the real world example is data, where the ability to make perfect copies means creators can lose their ability to monetize their work to a "market" in which everything is effectively costless.
If its better then he can sell it for more than the cost of the first widget will sell for on the secondary market. Given that the widgets share the same consumer base. In order for what you're suggesting to be true, it must be the case that people must be willing to pay less for a better widget.
If the "required cost of the new widget" is significantly higher such that it has no buyers then the widget is not an efficient use of resources.
Doesn't this incentivize creators to make their products less durable or to hold back key features for future versions? Why wouldn't we prefer to incentivize the creation of the best products possible?
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I know this is counter-factual, but we can imagine a world in which someone creates a widget which is in steady, but not generally in high demand, and which is of very high quality, so that it is capable of being resold many times. He then creates another, similar widget which is better in every way, but which he needs to sell for more than the cost of the first widget on the secondary market in order to make a profit. Since demand is low, but steady, there are people who need these types of widgets, but the creator could very well go out of business because of the secondary market, correct?
I suppose the real world example is data, where the ability to make perfect copies means creators can lose their ability to monetize their work to a "market" in which everything is effectively costless.
If its better then he can sell it for more than the cost of the first widget will sell for on the secondary market. Given that the widgets share the same consumer base. In order for what you're suggesting to be true, it must be the case that people must be willing to pay less for a better widget.
If the "required cost of the new widget" is significantly higher such that it has no buyers then the widget is not an efficient use of resources.
Doesn't this incentivize creators to make their products less durable or to hold back key features for future versions? Why wouldn't we prefer to incentivize the creation of the best products possible?
No, it would incentivize them to ensure that each version was better than the last and new and interesting I would think.
I know this is counter-factual, but we can imagine a world in which someone creates a widget which is in steady, but not generally in high demand, and which is of very high quality, so that it is capable of being resold many times. He then creates another, similar widget which is better in every way, but which he needs to sell for more than the cost of the first widget on the secondary market in order to make a profit. Since demand is low, but steady, there are people who need these types of widgets, but the creator could very well go out of business because of the secondary market, correct?
I suppose the real world example is data, where the ability to make perfect copies means creators can lose their ability to monetize their work to a "market" in which everything is effectively costless.
If its better then he can sell it for more than the cost of the first widget will sell for on the secondary market. Given that the widgets share the same consumer base. In order for what you're suggesting to be true, it must be the case that people must be willing to pay less for a better widget.
If the "required cost of the new widget" is significantly higher such that it has no buyers then the widget is not an efficient use of resources.
Doesn't this incentivize creators to make their products less durable or to hold back key features for future versions? Why wouldn't we prefer to incentivize the creation of the best products possible?
I know this is counter-factual, but we can imagine a world in which someone creates a widget which is in steady, but not generally in high demand, and which is of very high quality, so that it is capable of being resold many times. He then creates another, similar widget which is better in every way, but which he needs to sell for more than the cost of the first widget on the secondary market in order to make a profit. Since demand is low, but steady, there are people who need these types of widgets, but the creator could very well go out of business because of the secondary market, correct?
I suppose the real world example is data, where the ability to make perfect copies means creators can lose their ability to monetize their work to a "market" in which everything is effectively costless.
If its better then he can sell it for more than the cost of the first widget will sell for on the secondary market. Given that the widgets share the same consumer base. In order for what you're suggesting to be true, it must be the case that people must be willing to pay less for a better widget.
If the "required cost of the new widget" is significantly higher such that it has no buyers then the widget is not an efficient use of resources.
Doesn't this incentivize creators to make their products less durable or to hold back key features for future versions? Why wouldn't we prefer to incentivize the creation of the best products possible?
No, it would incentivize them to ensure that each version was better than the last and new and interesting I would think.
People buy new multihead razors as they come out, but do they leap to replace their straight edge razor? A good straight edge razor is a lifetime investment if cared for properly, and if the market for straight edges stayed small and there were enough being sold on the secondary market, the straight edge razor maker could go out of business because they produced a product that lasts. Do we want a world where only multi head monstrosity makers can profit?
That maker of straight headed razors has provided a durable good, made a bunch of money doing it and can now go on to do other things, having effectively increased the wealth of everyone involved
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I'm getting the impression you aren't really understanding what I'm trying to say, and I'm not sure how to get it across.
If you want to prop up the whole glass industry supply chain and increase demand for windows as the end product, then it is a lot better idea to have a public works project that uses a lot of windows than it is to go around and break people's windows so the glass workers can go replace them. Because breaking the windows, and I'll say this again, causes a completely unnecessary destruction of wealth.
You seem to be fixated on the idea that the purpose of these sorts of programs in general is to manipulate the supply and demand of an individual good on the micro level. Subsidies are aimed at manipulating a particular industry, yes, but for more pure stimulus programs you are more focused on what the aggregate effect on the economy is. Screwing around with the price of food in isolation from the price levels in the economy of the whole is not the point of food stamps, but instead to feed people with the add on boost aggregate demand when it is low and the economy is in a rut.
This stuff isn't really talked about on the public theater well enough, but whether you want to employ more pure stimulus programs is actually rather situational. When you are stuck in an economic slowdown with high unemployment and underutilization is when you want stimulus, because it increases growth and adds inflationary pressure that pushes you away from disinflation and deflation. This is especially the case for fiscal stimulus when you reach the limits of monetary policy when interest rates start bumping up against the zero lower bound. However, when your economy is booming and you have a bunch inflation already? No, don't bust out the stimulus programs then.
But there is more to evaluate public spending on than purely the stimulative effect. Infrastructure spending in particular is something where you get more returns out of it than simply a short term stimulative effect on the economy, as it can support more long term economic growth. So you need to keep in mind what the timeframe of your economic problems are when choosing what the money is spent on.
So when you ask what the difference is between giving food stamps to poor people versus buying and burning the food in purely economic terms; then the answer is that in one scenario people get to eat, in the other we destroy a bunch of food. It should be breathtakingly obvious what the better economic policy is.
Likewise with the example of burying jars of money. Obviously it's a non-productive activity. The difference is that during full employment this would reduce how much stuff we have since it would take able labor away from other activities. (Rather like the zero-sum games we have so many smart financiers and lawyers play. Pure waste.) But during a recession this labor would have sat idle anyway so you're not losing anything by employing it. Moreover, by making them work for their free money, you're not destroying incentives to seek other gainful employment.
So the conclusion of that thought experiment is: if putting people to work in the most ridiculous and senseless activity imaginable does no harm to our economy's output and is an effective way to give them income support during a recession, then surely having them to anything even remotely smart (public works) would represent a huge boon to our economy. Tada! We're all Keynesians now.
Again, economics is not about money. It's about stuff. And having millions of our unemployed labor force do anything remotely sensible will always result in us having more stuff than if they sit around idle. Growing and burning food is not sensible. There are obviously better uses.
Resale is very good for our economy as it results in us having more stuff, by keeping it around in a useful fashion for longer. By reselling it the item flow from someone who derives less utility from it to somehow who values it more.
The point of all this is most emphatically not to keep money flowing up the chain. Money is but an instrument. Economics is about physical things.
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What? No, resale is good for an economy- even at the level of analysis you're requesting, it's an additional economic transaction. The person selling the object is getting money they would not otherwise get and can spend it again as well, perhaps on something that incurs a sales tax.
We only value economic growth in the abstract because of its utility in the first place. The utility of a given activity is therefore relevant. Especially with the argument for stimulative spending- while it is true the stimulative effect might be the primary objective and so paying people to dig ditches might work just fine for that goal, paying people to build something of greater value has the stimulative effect *and* the value of the thing constructed.
When stimulus is necessary it really only means that malinvestment is not a concern; we don't ultimately worry about whether or not we need those ditches, what we need is people digging them. But if we can have both (like, say, have those people dig a canal, or pave a road, etc) we get investment returns over the long term which can offset the cost of stimulus. As well as providing whatever other benefits of a given project.
Yes, the same number of dollars is spent. However, in the situation where you're not burning food you are utilizing the products you buy. When you burn it, you end up with the same situation essentially (people fed) but there is twice as much money spent on it.
If we give a store $100 and tell them to burn $100 of food, all you've done is continued the (potentially artificially enhanced) scarcity of whatever products they chose to destroy. People who are hungry are still hungry, and whatever support structures are in place are strained a little further.
Desperate people do desperate things, which are often self destructive, counter productive and a tax (lol) on society, so society has a vested interest in providing a baseline level of support to those who need it. It isn't easy to attach a dollar value to the benefit of giving someone back a shred of their dignity in letting them make budgeting choices. It's impossible to know just how much less tangible good is done every time a mother or father receives their SNAP card/reload/however it is done and is able to feed their children for another week/month/however often it is done, or whatever tangible losses they might have personally suffered or negative impacts they might have had striving to survive.
The result is greater than the sum of its parts, the Return on Investment is excellent. Why is it better to spend $100 on roads than $100 on digging and filling in ditches? Because you now have repaired roads, which people use! The end product is of value, and the money put into the system (given to construction companies, which in turn pays its employees (and may need to hire more employees), who in turn buy products, which in turn generates demand for products, etc).
Now, I'm not an economist like our powerhouses here, but it seems quite self-evident why it's better to utilize funds towards a common good than to simply throw the money away; we're getting something out of it. People who aren't hungry, infrastructure that's no longer falling apart, whatever. Most people have to play a zero-sum game; they have $X available, and between food, rent, bills, clothes, entertainment, and whatnot that's all they get. If you increase their available funds for food through a support program, you also let that $X get spent on other things (and as noted above, you don't have to waste time, money and stress sending collection companies after them for a fraction of what you'd get if they had the funds to pay their bills, etc).
No, I get and agree with that. My question was more about what we do when there is no productive use for the window makers. We can have specifically tailored subsidies, but need to be very careful in how we craft them to avoid the problems I described above, we can create more demand for windows, or we can let the window makers go out of business. Breaking the windows takes something of value out of the world, which is bad, but we have people immediately replacing them, so the windows stay in equilibrium. but we maintain our capacity to build new windows when the time comes, because our window makers are still in business and still honing their skills.
I agree that infrastructure is fantastic, and want to see a lot more of it. In fact, this all started because I said I thought the pure economic case for infrastructure was stronger than food stamps (at the very least, the origin of the multiplier is easier to understand) and some people pointed out that the administration has tagged food stamps with a higher multiplier than infrastructure. That is the origin of this mental exercise to determine the pure economic benefits of food stamps, in a world where we don't care about feeding people as an end.
But doesn't utility maximization point towards massive redistribute, given the diminishing marginal utility of money?
I don't understand the resale point, since resale seems by definition to mean just moving money from one pocket to another, without creating new wealth.
All understood. The question was really if there is more stimulative value in food stamps vs buying food to burn it. Please see my first response in this post.
Well, the question is what are we buying. If we value feeding people, I agree we are just paying 2x as much to feed the same number of people. But if we value retail sales and the flow of revenue of the chain from those sales, and ignore feeding people entirely, the difference seems to drop out, doesn't it? This is why we need examples of the economic benefits of feeding people (and a number have been set out here).
Again, I think the case for infrastructure is more obvious, since everyone but Mitt Romney relies on infrastructure to build their businesses. The examples for the economic value of feeding people you set out are similar to those mentioned by other posters, and I think they make sense, but I think it is also pretty clear that there is simply a difference between the durable goods which increase efficiencies that infrastructure spending produces and the less tangible benefits of providing a consumable good to the people to allow them to make less constrained choices.
Also, no one has argued in favor of throwing money away. The point of buying food to burn is to infuse money into the entire food industry, including requiring clerks to ring up the food that is bought and burned, truckers to transport it, and farmers to produce it. If you just give the money to people instead of actually consuming (even with flames) the item, you have not necessarily stimulated the entire chain in the same way as food stamps. The question is fundamentally if there is enhanced value, in terms of additional economic growth, in starting below the retail level, by handing money to consumers.
Um. In that case, we're just paying people to do nothing. If the food is going to be burned, then you might as well not produce and transport and sell the food at all. It's fundamentally inefficient, from an economic point of view. If you can't get over that, then I don't think the question you have is an economics question but rather a question you have of economics.
Let things get bad enough and the 'problem' will sort itself out.
If we decided to go full sociopath as a society.
And it's a bad point. It continues to ignore the benefits of putting that material to use rather than simply cutting a loop of the chain out and assuming it'd be more efficient. Those people still need to eat.
The people who own grocery stores, the people who work in them, the people who own farms and transportation lines are generally not the ones also on the verge of starving (granted there are probably some staff who are on support of one kind or another). This thought experiment continues to ignore the key point of supporting to those in need; that feeding people has greater benefits than simply them meeting their ~2,000 calories per day nutritional requirements. It increases their productivity, reduces their susceptibility to illness, and simply being less stressed and perhaps even happier all provide tangible societal benefits.
"Burning" food *is* throwing money away. It's ignoring the need of the many while playing a macabre piece of performance art so that the grocery stores and farmers and everyone in between continues to see the same X00 tons of CROP A B and C sent out and the same $Y,000,000 in weekly profits in return, as though people becoming increasingly ill and desperate is a side note.
Like I said earlier, we could design efficient subsidies instead. But I think we have stretched this experiment out further than we should have, so I'm happy to stop, and go back to talking about other economic issues.
No we don't have to value feeding people, we have to not waste the value of the products we buy. Why do you think food even costs money?
What? No. Subsidies don't ... they're not relevant to the conversation at hand. Fundamentally, currency is a tool that facilitates the bartering process. At the most basic level, an economy is the exchange of something people have (labour) for something people need (food, shelter, etc,). If you're buying stuff just to destroy it, you're exchanging something for nothing. This is not economically efficient. If you provide a subsidy for people to produce undesirable goods, you're also exchanging something for nothing. Either way, societally speaking, we've committed resources, in terms of labour, raw materials, time, technology, etc, into something that we do not desire as a society.
The hardcore economists in the thread can describe it better than I can, but there are, I believe, specific scenarios in which subsidies are desirable, economically speaking. These include ameliorating start-up costs, buffering against economic downturns, correcting economic distortions, etc, but I do not believe putting people to work producing unwanted goods and services count. Such subsidies are strictly worse than welfare, because while with welfare the state pays individuals despite their not providing the state labour, these subsidies would entail the state paying individuals to perform useless labour that cannot be capitalized elsewhere. Your described subsidy seems to be by definition inefficient.
1) Do we care about personal utility? Yes. Personal utility is the entire reason we attempt to make economies efficient. If we were not worried about the utility of the people in the polity then we would not be worried about managing our economy. Fuck it lets bring on some pollution and communism all at the same time~
2) Is it less distortionary for the govt to buy something and give it to the people or the people to buy it? Not under the conditions you wanted to discuss. Under conditions i explained afterwards we found that whether a distortion is good or bad depends on the state of the market [defined as the market we have, not a hypothetical market]
Aside: Distortionary policy is not inherently bad. The only reason we tend view distortions as bad is because we tend to look at the non-distorted market as Pareto efficient. But a "non distorted market" implies a lot of things that are not true about the things that governments buy. Pareto efficiency is a term that means "no person can be better off without someone else being worse off", note also, measured in utility. That this does not imply that every pareto point is better for society than a non-pareto point, though it does imply that the societal maximum must be Pareto. A lot of people say that we don't really have a right to judge a social maximum [ i think these people are super duper wrong] but certainly people feel that if we don't have a way to determine whether or not a point is better socially than the pareto point you might as well go with the pareto point.
But this construction and understanding is an understanding that should drive the non-recession government size. In a recession we have a different problem, an output gap.
3) Does government spending drive growth? It depends. Government spending drives growth in recorded GDP [but note that GDP does not measure utility, just total stuff] IF, and this is a big if, the economy is currently experiencing an output gap.[I.E. what we should, but do not call recession]
An output gap means that there is a difference between actual production and potential production. I.E. there exist people who want to work for the prevailing wage but cannot find jobs[and this is not attributed to frictions].
Think of it like this, there are 10 guys in a factory and 10 machines for them to work at. The wage is 10 dollars/hour. All the workers would be willing to work for 9 dollars an hour. How many are working? An output gap means that while the answer should be 10, for some reason its only 9.
If the govt puts that guy to work we get growth, we go from 9 guys working to 10 guys working
Now if, instead, all 10 are working, and the govt puts one of those guys to work, still only 10 people are working.[this is what libertarians mean when they talk about the broken window fallacy]
We can roughly tell if we have an output gap if we have unemployment.
Note also that there are monetary ways to fix this too. And since monetary fixes tend to be easier to implement if you're going to fix something you might as well try monetary policy first. Its only if that fails that you want to use fiscal policy.
4) Why do we care about what we did in 3? Because we are better off when the guy who wants to work is working. The utility of everyone has gone up because the guy who wanted to be working is working[and so is trading his time for goods at a rate that we wants] and no one else has lost anything.
Which is more of a problem with how we do our recording than any kind of support for what we should do. We cannot measure utility. Its impossible[despite people doing welfare analysis, literally they're guessing]
Yes, because at the end of the day people have more stuff.
But then we have to ask "is giving the rich 100k each that has to be spent on luxury goods better than doing something else" and the answer there depends on the relative personal and social value of the other thing, since the size of the spending ought to be determined by the output gap.
In a recession there is never "no productive use"
"Productive use" implies that the action is less valuable than the alternative action that would occur. But with an output gap, the alternative action is explicitly less valuable than any action which creates any positive value.
It is explicitly less valuable because the alternative action is "not working" and the trade value of not working to working is higher than the persons reservation wage.[I.E. lower unemployment] This means they get benefit out of working.
Since they get benefit out of working all we have to worry about is whether or not we make something.
Yes. The value in food stamps is that people who were buying food can buy other things which creates a recursive effect as people spend the new money. If we burn food then only the people who got the food purchased from them can do any increased spending.
Think of "food" as infrastructure for poor people. While a bridge may allow me to get to the other side of the river and sell my goods. Food stamps allow a poor person to cross the bridge that was already built and learn a trade[or get a job] without having to spend their time on the immediate concern of food.
No. Resale allows efficient price discrimination. Which is an overall net gain for the economy. Literally everyone wins.
Its not a "strong connection". Its equivalent.
I'd love to transition to a post-scarcity society, where automation, and humans doing things they like doing, and volunteering, is sufficient to supply most of the stuff people need or want, and thus such incentives become unnecessary, but I don't think we're quite there yet.
I really don't get why you are so obsessed with negative sum (in terms of the level of existing total wealth) stimulus, when there are obvious if silly examples of zero sum stimulus, as well as positive sum stimulus. You seem to be appealing to some sort of notion that there is an economic principle to ignore the wealth effects of a destructive stimulus program, when the opposite is the case.
The more common area where this sort of fallacy comes up is with the economic impact of war. You can have a lot of growth rebuilding and selling stuff to a place that has been bombed out, but that higher growth is from a lot lower starting place due to how much was lost. You can't just point at how wonderful the growth is while ignoring all the destruction beforehand that led to it.
There was huge levels of growth a few years into the great depression, but the standard of living overall still sucked compared to beforehand due to how much loss there was in the initial downswing. You don't want to enable a huge financial bloodletting like that just so you can have the huge (but still insufficient) recovery after the fact.
Edit: if your question really boils down to "how stimulative are different stimulus programs" then that's something you can't derive from first principles, you have to go out and measure it empirically. Those multiplier numbers that get brought up time to time are the estimates of "how much stimulative bang for our buck are we getting" for the different programs. Food stamps has a big multiplier, but there are others with high multipliers too.
Subsidies by their design manipulate and distort the market of what is being subsidized. If you are talking about a good in an ideal free market, then it is clearly inefficient and the real price of the good taking into account the subsidization costs will be different than what supply and demand would have dictated naturally.
Whether you resort to subsidies or not is due to whether you are fine with manipulating what the market would give you for whatever purpose you are trying to achieve. This is more obvious in cases where you aren't dealing with an ideal market, but one laden with market failures and oddities. But it can even make sense in other cases where it would cause inefficiencies, like say protecting an industry important to national security so you don't have to be dependent on foreign businesses and countries that might become a lot less reliable if a war starts.
1. On the problem with wealth destruction, the one case where I could see you actually wanting to subsidize destruction and rebuilding is where skills need to be honed and maintained, and there is no real work for them to be put to. Target practice with a gun comes to mind. The bullets are wasted in that they have not been used to shoot someone, and in a world with more violence the army would have more occasion to do real shooting, but it is worth the cost of wafted bullets to maintains their skill for when it is needed, IMO.
2. On utility, I agree that this is the point of economics (we aren't trying to ensure the system produces wealth for wealth's sake) so I can see now why my thought experiment may be too artificial to really yield any coherent truths about economics. Thanks to all who explained this so well.
3. The one thing I still don't understand is how the sale of used goods helps the economy. It still seems to me that it just causes money to move from one pocket to another without creating any new value.
We would tend to classify that as "consumed". In the same way that you can consume food to receive a benefit of energy and reduction in hunger. When you write something on paper, the pencil is not "wasted"
The trick is to figure out what it does to the original purchaser. Whom, if they can sell it, or expect to be able to resell it, will include the resale value of the item in their evaluation of the product.
This way a person with a low value for the item can use it and a person with a high value for the item can use it and the producer can actually get the payment of both of those people when they sell it. And since each trade is utility improving we actually move to a situation where everyone is better off.
I suppose it could make sense to think that you "don't create any new value" since there is only one good, but value is created by use. And we expect trades when the use value of an individual who owns the good is lower than the price with the opposite being true of the purchaser. Such the trade creates value [one person gets the price worth of value > his value, the other gets his value > price. Such total value is now Price+new value - price -old value >0. The trade has created value]
It might also make sense to say "but the guy who bought it could have bought something new and since he didn't nothing new got made". This is incorrect, while the guy who bought it could have bought something else, his purchasing of that thing indicates he got more value out of it. And since the person who now has the money can spend it, he can buy something new, thus not preventing us from making new things. If he doesn't buy something new he can trade for another second hand good and so on and so forth until someone does buy something new.
It might make sense to think of a situation like this. Everyone has an endowment of goods and labor. They can trade goods between themselves and labor to firms which produce goods. Trading goods between yourselves doesn't change the fact that a person can still trade labor to a firm and people trading goods between themselves will never make a situation where someone can't trade his labor to a firm if he wants to*. All trading goods between people does is change the allocation of goods.
*note that this is a micro-economic general equilibrium framework and such disequilibrium concepts like output gaps are not considered.
Food can also be consumed by cooking too much and then throwing out the left overs. It has been consumed in that it has been used up, but it has not been put to a productive use. Taken one step further, someone may attempt and ruin a dish ten times before succeeding, in which case the all of the food is "used" but only 1/11th of it is consumed. Importantly, all of that food was purchased though, and the first 10 portions impact the market just as much as the 11th.
I suppose the question that arises is if we should prefer trading among parties or trading labor to a firm. It seems that if we are concerned with job creation, we should want to encourage trades of labor for new goods, since the production of those new goods requires people to produce them, whereas trades among people do not.
On pricing, shouldn't the concern only be the people who would not buy the new good at the new good price in a world where second hand goods did not exist? It seems to me that those are the only lost sales, and if eliminating the second hand market does not take many consumers out of the market entirely, then it seems like the destruction of the second hand market should result in a net gain in the purchase of new goods, which presumably carries a Keynesian multiplier of its own, since new item purchases create demand for jobs.
I don't think the destruction of the second hand market is guaranteed to result in a net gain of the purchase of new goods. Most people do not have unlimited money to spend, so either they would participate in the market for new goods less often or the prices of new goods would have to come down, lowering profit margins for the people selling said new goods.
So would this actually be a good one to circulated around facebook or could it cause people to fail to grasp the important things? As in are there any out of date pieces, parts that aren't correct or areas that need better explanation that should be also be covered in the post that links these two clips? The budget part worries just a little.
battletag: Millin#1360
Nice chart to figure out how honest a news source is.
:roll:
Trading among households is not mutually exclusive with trading labor to a firm! Like am I unable to work if i hold a garage sale on Saturday? Does the money you spend at a garage sale disappear or do I, the guy who sold you that used car get to go spend it?
OK, its ground up time.
Super-duper simple Micro-economic General Equilibrium:
There exist households (people) and firms(entities which organize capital) for easy we assume they're identical, but it works when they're not.
Households own capital which they rent to firms, labor which they sell, and an endowment of goods.
Firms take labor and capital and produce goods which they sell back to households
We generalize: Firms are profit maximizing and competitive. [we can model monopolies/not perfectly competitive things but it gets a bit more complicated to explain]
Because firms are profit maximizing and competitive they will pay wages equal to the marginal revenue product of labor and rents equal to the marginal revenue product of capital. Because they're competitive they make zero profits[everything goes to labor or capital]. We can be more specific and separate out types of labor if we want but for now all labor is the same.
Households are utility maximizing, balancing the utility of goods and the disutility of labor [I.E. utility of leisure]. A household will supply labor if the utility of the goods purchased from their wage is higher than disutility of their labor
Since households are utility maximizing we know that households will supply labor until their marginal utility of consumption [for all goods they're buying] falls to the wage. Since firms are profit maximizing we know they will continue to hire at the wage.
From here we can get a solution to figure out what the wage will be once we make some reasonable assumptions about using everything. Though to do so we need to normalize one of the prices [labor or goods].
What you're suggesting is that we get unemployment if we change the endowment of goods[I.E. we trade between each other]. And the answer to that is no; while it will make people want to work less people wanting to work less is not unemployment[its called "being better off"].
But the world doesn't really exist in a General Equilibrium, a "General Disequilibrium" is probably more true. We can think of the world in GD due to various stochastic shocks or due to prices simply being wrong[slow adjustment periods]. This makes GE a poor system to model the macro economy on, but a decent enough system to develop general principles about in which direction we expect things to move.
Question: if prices are wrong and our model above is in disequilibrium does a change in endowment cause unemployment? Again, no, since people will still want to supply labor until the wage is equal to their marginal utility of consumption. Trade will reduce the marginal utility of consumption and so reduce the supplied labor... which has no effect if we are in a disequilibrium of "over supplied labor". Hell, it might even help reduce unemployment. It can only be bad if prices are wrong the other way, if there is an under supply of labor[since it will exacerbate the under supply]
Thinking about it again, the reason we most likely see wide variations in multipliers on a practical level is the tax rate of the people who receive the funding. If i give you income, its always taxed, so your MPC will be lower if you have a high tax rate.
We can think of the actual multiplier as the cumulative MPC of the people the money hits. The first person gets it and spend X% then the next guy gets that and spends y% and so on and so forth.
You do not get a Keynesian multiplier by destroying a secondary market, destroying a secondary market does mean people are going to make "more new stuff". To imply that you much ignore the stuff the people who are selling in the secondary market are purchasing with their revenues.
1. I get that the food is put to a productive use (learning to cook the meal) so the example was silly.
2. But if secondary market trading becomes prevalent enough, the firms can shut down, right? We see this exact situation in videogames, with GameStop and other secondary market sources cannibalizing new game sales during period in which the publisher is deciding if sales warrant a sequel.
@2: we see that argument being made, but, tbh, I've always considered it a fallacy by an industry which has problems MUCH larger than gamestop. People factor in the price they can get for a second-hand item (where second-hand sales are an option) in their decision whether or not the product is worth buying at retail price.
Consider the car industry (where resale value is unequivocally "a thing"): would it be better off if cars were "first time buyer only"? What would that do to consumer's willingness to pay for a new car, do you think? What would that do to the economy? The answer is long, complicated, and depends on a lot of price sensitivity analysis, comparability of new vs. used goods, etc...
You're right. The games industry is a bad example, and the secondary market makes sense when it comes to things like cars and homes for sure. I guess my issue is more that I believe in a moral right of the creator to profit from his creations, but that is not a topic for the economics thread, so all arguments withdrawn. Thanks to everyone for what was (as always) a really interesting conversation, and for indulging in my devil's advocate thought experiment.
The answer to this is twofold:
1) We don't expect that secondary markets would shut down a primary market. It can happen, but requires that the new products be worse than the old products even after the old products have been used. And well if you keep making things that are worse then you don't deserve to be in business
2) The concept of "it is moral for the creator to profit from his creations" doesn't make sense within an economic context. The reason for this is because the only way to determine the value of a product is by selling it on the market. If the creator is entitled to the value of his production as defined by the market then resale markets, as they transfer their value to the primary market, uphold this. If someone continues to produce new stuff and its not purchased then he is morally entitled to no profit since the market has determined that his product is not good enough to buy.
If we don't think of the market as a price finder then we have the problem of people making shit and then having a "moral right to profit from their creations". The requirement for profit implies that I must be able to sell what I make higher than my cost which imposes restrictions on the actions of everyone else, who must purchase your product even though its not good for them.
The reason this argument tends to come into play is because a similar statement that looks equivalent [but is not] is more easily considered to be true. That statement is "it is immoral to profit off the work of others".
edit: IIRC that last statement can fall out of a lot of the results of various economic models such that we will often attempt to craft the system to ensure that it does not happen.
Basically, he maintains that an imbalance of trade (ie. importing more than you export) is unsustainable in the long run, and I'm tempted to agree based on just the Macro 101 class I took... but I feel like that kind of simplified conclusion fails to take into account service-based economies (ie. the U.S.). I mean, we've had an imbalance of trade for the last couple of decades, and 2008 and the ensuing shitstorm notwithstanding, such an arrangement didn't seem to ruin us.
Oh, you found them. Aren't these videos the best? We need more of this kind of thing teaching people how money works and that taxes win wars and such. It doesn't necessarily have to be a cartoon.
I know this is counter-factual, but we can imagine a world in which someone creates a widget which is in steady, but not generally in high demand, and which is of very high quality, so that it is capable of being resold many times. He then creates another, similar widget which is better in every way, but which he needs to sell for more than the cost of the first widget on the secondary market in order to make a profit. Since demand is low, but steady, there are people who need these types of widgets, but the creator could very well go out of business because of the secondary market, correct?
I suppose the real world example is data, where the ability to make perfect copies means creators can lose their ability to monetize their work to a "market" in which everything is effectively costless.
This is surprisingly simple and has nothing to do with whether the imbalance is in goods or services. Running a trade deficit means you are going in debt to other countries by the amount of the trade imbalance. In econspeak we say that your current account deficit must equal your capital and financial account deficits. If your economic growth is larger than the trade deficit, it's sustainable. Foreigners are owning more and more of your country, but it's new bits of the country and you are as wealthy or more wealthy than before.
If your economic growth is less than your trade deficit it is not sustainable because eventually you will run out of country to sell. Before that point is reached foreigners will stop lending to you at with point your trade deficit comes to a sudden halt and you enter a combination of a financial and currency crisis.
To draw a household budget analogy: running a trade deficit is like increasing your debt load. If your income growth is faster than your debt growth, it's sustainable. If not, it's not.
If its better then he can sell it for more than the cost of the first widget will sell for on the secondary market. Given that the widgets share the same consumer base. In order for what you're suggesting to be true, it must be the case that people must be willing to pay less for a better widget.
If the "required cost of the new widget" is significantly higher such that it has no buyers then the widget is not an efficient use of resources.
Doesn't this incentivize creators to make their products less durable or to hold back key features for future versions? Why wouldn't we prefer to incentivize the creation of the best products possible?
No, it would incentivize them to ensure that each version was better than the last and new and interesting I would think.
Planned obsolescence is A Thing
People buy new multihead razors as they come out, but do they leap to replace their straight edge razor? A good straight edge razor is a lifetime investment if cared for properly, and if the market for straight edges stayed small and there were enough being sold on the secondary market, the straight edge razor maker could go out of business because they produced a product that lasts. Do we want a world where only multi head monstrosity makers can profit?