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Politics : Foreign Affairs Discussion Group -- Ignore unavailable to you. Want to Upgrade?

To: neolib who wrote (215891)	2/1/2007 9:33:17 PM
From: Sun Tzu	Read Replies (1) \| Respond to of 281500

Re: Economic Multiplier I am afraid I don't have the time to visit the site you've posted _now_. And in any event I don't like to debate someone else's understanding and postulations. So I am going to explain my understanding as clearly as I can and you are welcome to raise issues anywhere you have a problem with: (a) What PERCENTAGE of your income you spend/save, depends on how well off you are. So for example if you are starving and can hardly afford your rent, and I give you $1000, then it is likely that you pretty much spend all of it because you have to. On the other hand, if you already have 5 residences and two Jets and so and so forth, then if I were to give you the same $1000 that I gave to the poor fellow, there is little of it you'd spend because frankly it makes little difference to you and there is little that you need to spend it on. (b) GDP/GNP can be thought of as the sum of all the money that changes hands. So if your goal is to increase GDP, then you should make sure that the money traverses the longest path as within the economy. This means that you should give it to the guy who is likely to save nothing (i.e. the poorer fellow) who will spend it say in the corner store and bar in his neighborhood who are likely not really rich people and are therefore likely to spend most of what they get, and so on and so forth. If you were to give it to the guy who already has everything (or almost everything) then you are not creating much circulation and therefore GDP growth. This is the gist of the foundation of theory. The multiplier and the progressive tax system are natural off-shoots of above. The theory works well...Or I should say it fully worked before and now only partially works. The supply-siders however will tell you that the "rich guy" who does not spend the money, will save it in the bank or otherwise invests it expanding his business which in turn creates jobs. In other words, they are not really disputing the above mechanism. Rather they are saying that the "spending" by the wealthy is a better allocation of resources than if the government was to take it from him and allocate it...you know, the invisible hand and all. The important thing (for our discussion) to realize is that both sides are pretty close in their view on the inner workings of the economy. The main difference is over who can improve the economy best, the rich guy who "earned" it or the government. Note that this is not a discussion about the morality of taxation. It is just about who can deliver the best impact on economy. Here are the problems with both sides: On one side, the government often has motives beyond pure economics. As a result the government may (a) give too much pork (b) spend even when the economy does not need it (ie. pork) (c) did I say pork? None of this however invalidates Keynesian economics. It just means we need better government. On the other side, I can sort of buy into the argument that private sector may have a better handle on where to allocate the money. BUT, there are a few issues with this: (a) our rich guy may not spend as much as government could tax him and spend it. i.e. the quality of his contribution may be better but the quantity may be substantially less. (b) He may not spend it within the country. The "best" use of his money may be spending it in India or China which will do little for US. (c) He may not spend it on some parts of the society, eg. inner cities, where for reasons beyond pure economy we need it. This is the flip side of saying government spends it where it is not needed (waste/pork); here we say private sector may not spend it where it IS needed. I hope that I have answered your questions. But feel free to ask away. ST