InvisibleBlack
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Joined: 7/24/2009
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quote:
ORIGINAL: hlen5
Just got this in an email. Thought it was interesting. Sometimes a simple thing is a good thing.....
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There are about 40 million people over 50 in the work force. Pay them $1 million apiece severance for early retirement with the following stipulations:
The entire gross product of the world in a year is about sixty trillion dollars. If you could devote two-thirds of the planet's productivity to solving the United States' fiscal problems, you wouldn't need a complex retirement scheme to fix things.
However, the underlying assumption - that the government can help things by giving money to people - has an innate flaw it, even if the amount is realistic. Hang on a sec ... it's been a while ... here I go ...
The concept this is based on is called “demand-pull” and was put forward many years ago by John Maynard Keynes who is, obviously enough, the father of “Keynesian Economics”. Before I go into the issues with “demand-pull” theory there are a couple of things I need to address since over years and a lot of hype, the concept isn’t as clearly understood as it once was.
The simple idea behind “demand-pull” is that if I give you a chunk of money, or create some job, however worthless (I think back during the FDR era one example was paying people to go out all day digging holes and the filling them back in), that earns you some money, you will go out and spend it. Spending that money will reduce inventory. Lower inventories means that companies will need to produce more. Producing more means they will need to hire and pay people. Paid people spend their money – the cycle is complete! Success!
What isn’t mentioned about Keynes’ theories is ... that money you’re spending to entice people to do this is supposed to be money you’d saved up during the successful years. It was from a big stockpile of hoarded cash.
Follow me here. If you’re the government and you give money to someone, we’ll call that person B, to go and spend, since the government produces nothing, you have to take that money from someone – we’ll call that hapless individual A. So either you tax it from A, or borrow it from A, or kill A and take it, or whatever. So B will then go off and blissfully spend that money – but that means that A will not be spending that money – so the net effect to the economy as a whole is zero. If you give B $400 to spend that’s a +$400 to the economy. However, A now spends -$400, so the result is $0. No new demand is created. Maybe B buys comic books and A would have bought a sports car, but the net effect is that DC Comics hires one artist and Ferrari fires one engineer so the result is no change in employment. You follow me?
It can get more abstract, but that’s the gist of the problem.
The government taxes $250,000 to create 5 $50,000 jobs – but that means that there’s $250,000 less money out in the economy, so 10 $25,000 people get laid off. The net effect on spending and consumption is zero.
In specific instances redistribution of income can have a positive effect – say Katrina hits New Orleans. By taking money from the other 49 non-damaged states I slightly reduce their consumption but by pouring that money into Louisiana, I restore it to functionality so that in the end, all is well. If I regard smoking as hazardous and full of nasty side-effects (increased healthcare costs, second-smoke inhalation, etc.) I can penalize smokers by taxing cigarettes more and using that money for something else. Therefore, fewer cigarettes get made and more textbooks (or bombs or whatever) get produced. This may be a “net-zero” transaction to the overall economy, but it’s viewed as having substantial social or ancillary benefits.
When you’re talking about a systemic failure where the whole global economy is down, moving money around cannot increase production – so the government’s efforts have (at best) a zero effect. They actually have a negative effect in two ways – one they take time, so in the time it takes to borrow, tax, or acquire that money and move it from A to B, that money isn’t being spent and so the benefit of A’s spending is delayed by however long it takes to get that money over to B to spend (and judging by all the unspent bailout and stimulus money – that time may be months or even years) and two, it adds to uncertainty in the system. As a company or an investor, I have a pretty good idea what A is going to do. I have years of market studies and research and the like to judge A’s preferences – I have no idea who B is, or when B will get this money, or even how much money B might get – nor really, who that A is that’s going to not be spending money. What the prudent investor or businessman then does is wait. Delay those manufacturing or production decisions until I know what’s going on – which is exactly the opposite of what you want in the middle of an economic crisis.
Now if, on the other hand, the government had been run by fiscally prudent individuals (and what are the chances of that?) and had run a surplus all through the 90s and stockpiled up trillions of dollars, then pumping it into the economy now would have a stimulative effect. We didn't do that. So the government is borrowing the money. How "stimulative" the effect is depends on a batch of factors.
Who are they borrowing it from? If it's from U.S. citizens, then it has no positive effect. Instead of Citizen A spending it, the government gives Citizen A a bond and hands the money to Citizen B to spend. The same amount of money is spent. If it's from non-U.S. citizens, then it's transferring money from another nation to U.S. which may have a stimulative effect, but at the price of reducing the country's future earnings/wealth when the bond has to be repaid. So you take money from some Brazilian or Chinese and give it to U. S. citizens to spend. If they spend it, that should result in a short-term stimulus. If they don't, or they spend only a fraction of it and sit on the rest (perhaps because they're scared of the future), then it does very little. (This ignores the concept that if that Brazilian or Chinese was using that money to invest in American investments or purchase American goods (which is also the most common foreign use of U. S. dollars) then the stimulative effect would be zero.)
I suppose the boil down of my thesis is that simply handing money out is not going to resolve the embedded structural problems in our economy.
_____________________________
Consider the daffodil. And while you're doing that, I'll be over here, looking through your stuff.
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RE: A Solution.... - 
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