Wednesday, May 4, 2011

A Diller, A Dollar, A Ten O'Clock Scholar

Ace had this up yesterday but it was buried due to all the Osama Bin Laden posts. It's worth bringing up again:

There’s a growing amount of evidence that the spending multiplier is much smaller than stimulus advocates have argued. As a reminder, the multiplier effect or spending multiplier refers to the idea that a certain amount of government spending leads to a certain amount of change in the activity of the larger economy. In other words, a change in the total demand for goods and services (what economists term aggregate demand) causes a change in total output for the economy that is a multiple of the initial change. For example, if the government spends one dollar and, as a result of this spending, the economy (as expressed by the gross domestic product, or GDP) grows by $2, the spending multiplier is 2. If the economy grows by $1.50, the spending multiplier is 1.5. However, if the economy only grows by 50 cents (a loss from the original $1 spent), the spending multiplier is 0.5. And if the multiplier is negative, it means that $1 in government spending shrinks the economy.

As I understand it, the Multiplier effect is basically the craftsman fashions a walking cane out of fallen lumber in the forest. The dollar he makes out of selling those canes goes to pay the baker. The baker then pays the butcher and so on. The craftsman created value to the local economy in the form of goods (the canes).

Of course, like all things, the multiplier effect comes to an end. Taxes take away from that circulating dollar bit by bit and eventually, someone will end up saving it or using it to pay off a bill. I should note by now that I'm completely winging it here and if I'm completely off base, I'm hoping someone would say so in a comment.

Being how it was the government supplying the cash for the 'stimulus', certain economists whose name sounds like Kaul Prugman where arguing that there would be a multiplier effect of about 1.4. For ever dollar of the stimulus that was spent, it would generate $1.40 in added value. But that's completely disregarding what needs to happen in order for the government obtain the funds for the stimulus.

There are a few ways for the federal government to get their hands on the cash to do a stimulus.

Borrowing.

Sign Uncle Sam's name to a note and borrow the money from a bank or other lender. In that case, the multiplier effect would really need to outpace the interest rate in order for it to break even.

Also, in the case of borrowing money, it's a finite object. And if customer A (the federal government) borrows all that the back can loan, where does that leave customer B (small business owner looking to expand)?

Should I point out that it's an especially bad idea to borrow even more when heavily in debt? It's compounding stupidity upon stupidity.

And what would be the payment plan? How would the bank want to get back their money and interest?

Printing.

Not to go all Ayn Rand about how money is a merely a tool, an unspoken social contract between men when exchanging goods and services but it is just that. It's a tool used to measure the value of an object. When printed money is dumped straight into the cash flow of the economy of a nation, the value of the money drops while the value of the goods or services stays the same. It may look like the goods and services are going higher-- and from the relative standpoint from the dollar's viewpoint, it is-- but the buying power from the money goes down. Keep in mind that value doesn't mean the same as cost for this example.

To cart out the craftsman again. He takes time and energy to make the walking sticks to sell. And is rewarded monetarily for his effort. If walking sticks magically appeared on every street corner, it wouldn't be worth his time and effort to make anymore. And the value for the walking sticks goes down because there is a flood of them on the market. Same thing with printing money.

Taxation.

Yes, take away portions of people's paychecks in order to give it back to them. Wait, let me refine that. Take away large portions of the wealthier, producing people's paychecks in order to give a portion of that back to everyone else. Then this begs the question, if government spending supposedly has a multiplier effect of 1.4%, then what is the multiplier effect of the private consumer?

Again, most of this is from what I've been reading about how the economy works these past few years. Much of this is dramatically over simplified, I'll cop to that.

I did figured out the concept of the multiplier but never knew the name of it until a few months ago. I wish I would have tackled an economics class back in college back in the day. Mainly, I studied electronics. Anyhoo. . .

The stimulus should have been regarded a failure. It was claimed by many in the Congress and the President that it was needed to be passed right away! In order to keep the unemployment below 8%. By that measure alone, it was a miserable failure.

Please don't ask me what a 'Diller' is. I only remember it from the opening nursery rhyme. I was taking a cue from Bob Belvedere and some of the names he gives his posts. He's really quite clever about some of them.

1 comment:

  1. I am, aren't I now that I think of it.

    Thanks for the tribute.

    ReplyDelete