[kenberg]

My Econ course was 56 years ago. I took the version that was more mathematical than the other offered Econ course. . I understood all of the math and none of the economics. We went through most of the text of Paul Samuelson.


I recall being particularly puzzled by how the Fed could cure recession by moving money around. It seemed like a shell game.


But I really mean it when I say I didn't get it. i didn't disagree, I was 18, I didn't much care, and I just didn't understand. So I also will be interested in any plausible explanation.

[WellSpyder]

billw55, on 2013-November-07, 11:05, said:

I have no training in economics. Can anyone explain in non-technical terms why this should be so?

I have never seen a factor anything like 5, but I think what Art is referring to may be what economists call the "balanced budget multiplier". This is the potential multiplier effect of government spending even when matched by the same sized tax increases. Although the latter take spending power away from the economy, they typically don't take away as much spending as the government expenditure adds, because some of the money taken in taxes would have been saved rather than spent.

It might be worth adding two further points about this. First, the effect described above does not imply that gov't spending has a higher multiplier than private sector spending - rather, it says it has a higher multiplier than private sector income. If all the income would have been spent, there is no prima facie balanced budget multiplier.

Second, it is possible to add a further wrinkle if you like. Multipliers depend on the circular flow of income, with spending generating incomes for workers in the industries whose products you are buying, who then in turn spend some of this money, and so on. But there are leakages from this circular flow, that tend to reduce the size of the impact at each iteration. One leakage is the tendency to save part of one's income, as already discussed above. But another linkage arises when income is spent on imports, since then some of the income that generates in the next round accrues to foreign workers rather than domestic ones. So if you think that a smaller proportion of governments spending will go on imports than for private sector spending, then that could also be a reason for a higher multiplier for government spending.

[Zelandakh]

I thought he was referring to this, which seems to be a write-up that can be followed by almost anyone. Note also that Art did not write a multiplier of 5 but rather 5 times. Presumably that is based on a multiplier of 1.5 being 5 times 1.1 rather than 5 times 0.3. And it should be clear that if spending is targeted to produce a high multiplier that the results will be at least as high as spending targeted for profit or political purposes. Only governments do that kind of targeting, although it obviously depends on your government.

[mike777]

ArtK78, on 2013-November-07, 09:27, said:

Many years ago, I graduated from Princeton University with a major in Economics. I have never used my economics training directly in my professional career, given that I am a tax lawyer. But I still remember some of the most basic ideas from Econ 101. One of these is that government spending stimulates the economy to a much greater extent than private spending. This is due to the multiplier effect of government spending. I am sure that there are other Forum members who can explain this better than I can, given that it has been 39 years (!) since I took Econ 101. But, if I remember correctly, the effect of government spending was on the order of 5x the effect of private spending.

In any event, even if 10% of the money government takes in in the form of taxes vanishes mysteriously somewhere into the bowels of the machinery of government bureaucracy (and I question that premise), the 90% that comes out in the form of government spending does far more to stimulate the economy than if 100% of the money were retained by individuals and businesses.

If you want to question economic theory, please address your responses to Paul Samuelson and not to me. But that will be difficult, as he died in 2009.

I think Art hit the nail on the head to the main point. If you believe that government is better at capital allocation or more efficient running the economy or the effect of govt spending is roughly 5x better than private spending those are powerful arguments for the central govt to exert much greater control over the economy.

[mike777]

Winstonm, on 2013-November-07, 08:04, said:

Yes, but taking corn that is hoarded in a silo and redistributing that to small farmers who plant it does yield a gain, even if 10% is lost in the transaction.
The big fallacy of supply-side is that savings stimulate. Ask any business person what spurs the decision to expand - it is the belief that there is a market that will return more (demand) than the cost of production (supply).

When the more wealthy are given tax breaks, that money does not go into circulation as capital spending unless there is demand for services. When there is no demand, the money is hoarded as treasury bonds - so the government loses twice - less tax revenue plus accrued interest on the bonds.

I think Winston presents the same argument as Art just perhaps phrased a bit from a different direction but with the same big point. It is much better for the central govt to take this money and use it than the private sector. The govt does a better job of capital allocation than the private sector.

If there was some way we could measure this that may move the discussion forward.

[hrothgar]

mike777, on 2013-November-07, 12:09, said:

I think Winston presents the same argument as Art just perhaps phrased a bit from a different direction but with the same big point. It is much better for the central govt to take this money and use it than the private sector. The govt does a better job of capital allocation than the private sector.

If there was some way we could measure this that may move the discussion forward.

Given that you repeatedly fail reading comprehension 101, I see little chance of moving the conversation forward.

No one has made any global claims regarding the efficiency of capital allocation.
Several people have stated a belief that there are situations in which government spending can have a beneficial impact on the economy.

Put your copy of "Road to Serfdom" away, pull your head out of your ass, and start paying attention to what people are actually saying.

[mike777]

Vampyr, on 2013-November-06, 09:56, said:

I don't understand what you are trying to say about the NHS. We should get rid of it in the name of innovation, but we are resistant since it is popular?

You sort of understand, again my only point is the concern that NHS and its supporters inhibit innovation. My concern is that the wide popularity that Zel mentions makes it political death to question NHS, its policies, its management, etc and the overall health care system in the UK. Innovation, real innovation destroys the old way of things. The status quo resists that. to put it another way the culture you describe inhibits the free and open competition of ideas in your health care system. Again Zel points out it is political death. If you disagree ok....that is fine.

One simple example, Sony invented flat screen technology but never fully used it because it hurt, In fact it destroyed, the sales of the best, most popular tv in the world, Trinitron. The culture inhibited innovation that destroys.

Again Vamp if you disagree that innovation is inhibited, ok, you live there and would know best.

[ArtK78]

WellSpyder, on 2013-November-07, 11:21, said:

I have never seen a factor anything like 5, but I think what Art is referring to may be what economists call the "balanced budget multiplier". This is the potential multiplier effect of government spending even when matched by the same sized tax increases. Although the latter take spending power away from the economy, they typically don't take away as much spending as the government expenditure adds, because some of the money taken in taxes would have been saved rather than spent.

It might be worth adding two further points about this. First, the effect described above does not imply that gov't spending has a higher multiplier than private sector spending - rather, it says it has a higher multiplier than private sector income. If all the income would have been spent, there is no prima facie balanced budget multiplier.

Second, it is possible to add a further wrinkle if you like. Multipliers depend on the circular flow of income, with spending generating incomes for workers in the industries whose products you are buying, who then in turn spend some of this money, and so on. But there are leakages from this circular flow, that tend to reduce the size of the impact at each iteration. One leakage is the tendency to save part of one's income, as already discussed above. But another linkage arises when income is spent on imports, since then some of the income that generates in the next round accrues to foreign workers rather than domestic ones. So if you think that a smaller proportion of governments spending will go on imports than for private sector spending, then that could also be a reason for a higher multiplier for government spending.

Actually, I believe it is the "Fiscal Multiplier" - the effect on GDP of a $1 of additional government spending. It is caused by the recipient of such spending in turn spending part of that income and then that recipient spending part of that income, etc. The 5x effect that I referred to assumes a 20% savings rate by the populace at large. If the recipient of $1 of government spending spends 80% of it ($0.80), and then the recipient of the second round of spending spends 80% of that ($0.64), the overall result will be an increase in GDP of $5, or 5x the amount of the initial government spending.

[billw55]

ArtK78, on 2013-November-07, 12:34, said:

Actually, I believe it is the "Fiscal Multiplier" - the effect on GDP of a $1 of additional government spending. It is caused by the recipient of such spending in turn spending part of that income and then that recipient spending part of that income, etc. The 5x effect that I referred to assumes a 20% savings rate by the populace at large. If the recipient of $1 of government spending spends 80% of it ($0.80), and then the recipient of the second round of spending spends 80% of that ($0.64), the overall result will be an increase in GDP of $5, or 5x the amount of the initial government spending.

So $1 government spending increase yields $5 GDP increase? Sounds fishy to me, but again, I am no economist.

[HighLow21]

Here's an excellent article on the policy cancellations now that Obamacare/ACA is rolling out.

In essence -- the plans are going away because they are terrible.

http://m.motherjones...ealth-insurance

[HighLow21]

FM75, on 2013-November-05, 23:38, said:

When you buy liability insurance for the privilege of operating an automobile, you may be charged based upon your actuarial risk factors in all 50 states and DC.

When you must buy health insurance for the privilege of living in the United States, ...

ok, if you are high risk, you can transfer that risk to someone who has low actuarial risk.

This does not seem like insurance at all. It should seem "fair" only to high risk buyers.

The difference here is that driving is a privilege (you can avoid driving) but health is not a privilege. You cannot avoid health matters if you want to stay alive and/or havea decent quality of life.

That and the fact that anyone lucky enough to have avoided pre-existing conditions up to this point can thank their lucky stars--for now. You can't do anything about diabetes, for example, but you CAN do something about poor driving. And you could wake up tomorrow with a new health problem that changes things.

Besides--the ACA has a separate, high-risk pool as part of the whole package.

[HighLow21]

Zelandakh, on 2013-November-06, 04:36, said:

Sounds a little like Communism, Mike. History is against you on this though. For example, destruction of the "old system" of the Roman Empire led to a reverse in innovation and advancement in Europe for 500 years or so. Perhaps you should suggest that the system used to elect US governments should be different every time, perhaps pulled out of a hat. Or have a new President/Senate/HoR/SC every month at random. Perhaps the ancient Athenians were onto something there - shame the system had to be overthrown.

What Mike is referring to has nothing to do with Communism specifically. Systems get overthrown all the time. It doesn't have to mean overthrowing the government entirely.

Take for example:
(1) The abolition of slavery
(2) The Glass-Steagall Act (very unfortunately reversed with dire consequences)
(3) The Civil Rights Act
(4) National Labor Relations Act and Fair Labor Standards Act

All of these are destructions of old systems. All of these happened within our democracy. There are countless additional examples.

[HighLow21]

kenrexford, on 2013-November-06, 16:04, said:

Few willingly choose poverty. Many choose subsidized housing, food, school, medical care, telephone, child care, and the whole package available, which is not exactly poverty, over working and having about the exact same thing.

Ken,

I value your posts here, and I think you're one of the most astute contributors to the BBO Forums. However, I have to protest to this line of thinking. I've heard this for decades now--I have a degree from Wharton and have worked in Corporate America/Wall St for 15 years now. I've heard this all before and I wholeheartedly think the premise is overblown if not false, even though you can find a dozen professors at my alma mater who would say something very similar.

To be sure, taxation of the well-to-do and offering subsidization to individuals have limits and create problems if overdone. If we offer everyone enough services, courtesy of Uncle Sam, then the incentive to work declines substantially. I can offer several excellent examples off-hand of subsidization that created much worse problems than the ones it attempted to fix. Similarly, if we overtax profits and income, the incentive to generate those drops substantially.

But wait. We had top marginal tax rates of over 90% in the 1950s thru 1970s, and overall the country did incredibly well then. And then we sharply dropped top tax rates and deregulated the hell out of industry... and we found financial prosperity for a while before all hell broke loose. And meanwhile, the Gini coefficient started soaring again around 30 years ago. This is no coincidence.

So what gives? Where's the right balance?

I honestly don't know a single person who chooses to take the subsidizes we currently over having a decent job with a decent wage and at least some degree of self-sufficiency. I am sure there are a few out there--Reagan used the term "Welfare Queens" to conjure the image of an indolent woman who simply takes welfare checks from the government and has more children so she can receive more welfare. (He was also race-baiting, successfully, with this comment.) Somehow, this has turned into the idea that ANY form of government assistance or subsidization is bad.

The problem is, Welfare Queens virtually do not exist. There many be some microscopic percentage of people like this out there, but it's exactly that--microscopic. Meanwhile, we have tens of millions of children in this country living in poverty in the US, and we are cutting programs like SNAP and fighting against the ACA because of subsidization. What??? We're trying to save money by taking away, or threatening to take away, basic programs that give people a modicum of food and health care coverage? While the top 20% are making gangbusters lately? (Look at a time series of Corporate Profits as a percentage of GDP and you'll see what I'm talking about.)

And meanwhile, we are subsidizing tons of companies out there. (Corn subsidies are one glaring example--another is how many companies receive tax-preferred treatment. The list is huge and the sum is in the hundreds of billions of dollars every year.) And we are spending more hundreds of billions of dollars every year on defense programs we don't need and that the people and even the armed services do not want. This is so that the defense industry lobby can be satisfied.

And we have Scalia and others voting in favor of the wealthy in Citizens United--rich people can now give as much as they want to political campaigns. Meanwhile, key components of the Voting Rights Act were overturned. And with the current attitude of the Supreme Court, it's likely to get worse in the voting and political sphere.

What we have is a CORPORATE welfare state.

No, the problem in this country is income inequality. It is severe and only getting worse. Our middle class is evaporating and we are doing little to nothing to curb the momentum of this problem. And trust me, it is a huge, huge problem. Probably the biggest we currently face politically.

If you don't think that subsidization is the answer to the problem (it probably isn't, long-term) then I respect that point. But in the short-term, people are suffering. Health care-related costs are the number one cause of bankruptcy in the US. As many people die from lack of access to health care in the US as die in car accidents. And yet fighting to get the national minimum wage up to $9 per hour is meeting SERIOUS blowback, just as the ACA is. (I understand the economic arguments against a minimum wage, but those arguments make assumptions about information and power symmetry that are laughable in real life. I also understand many of the criticisms of ACA, but to me the best criticism of it is that IT IS NOT single-payer.)

What we need in the short term is some basic help for people so that they can have an at least somewhat-improved lifestyle while we sort through this income inequality issue. In the long run, I do not believe the collapse of the US middle class is sustainable, and at the present moment, corporations are in bed with BOTH parties to a very high degree. My view is that in the short-term, we need to do SOMETHING to help the tens of millions of Americans who are just exhausted financially, while we work out improvements to our capitalist economic system to make it more prosperous for the 99%.

[HighLow21]

billw55, on 2013-November-07, 11:05, said:

I have no training in economics. Can anyone explain in non-technical terms why this should be so?

I don't know the exact numbers, but the gist is this -- government spending, if done properly, goes into projects where most of the money that is spent gets spent AGAIN by the receiver of the money. That spent money gets spent AGAIN, and so on.

Simple example. Say the government spends $1. The recipient spends $0.80 and keeps $0.20. THAT recipient also spents 80% of it, $0.64, and saves $0.16. And so on.

That $1 of spending generates $1 + $0.80 + $0.64 + .... = $5 of economic activity n this hypothetical example. This is the expenditure "multiplier." Different types of spending have different multipliers at different ties due to economic conditions at the time.

Is the multiplier 5x? No, I am almost positive it's not nearly that high. But in the current situation, we have corporate profits that are VERY high while corporations tend to be hoarding cash due to uncertainty. Thus, the multiplier of $1 additional corporate profit right now is low. But people need eggs and butter and tires, and other basics. So government spending will likely stimulate a lot more spending than generating $1 of additional corporate profit, because the $1 spent by the government is more likely to be re-spent by the recipient.

[blackshoe]

kenrexford, on 2013-November-07, 09:07, said:

There is a moral question about taking, but it is not an economic question.

Why not? Economics is about how people exchange things, using money as a medium for that purpose. If you take away some of someone's (or everyone's) money, surely you have affected what exchanges they can make.

In reply to Winston: Empirical sciences depend in part on the idea that the things studied all behave in the same way. If you study the way billiard balls move on a table, you expect them to always behave in the same way. And the red one behaves the same way as the white one. But people are not billiard balls — they can choose to change the way they behave economically. One day you might prefer chocolate ice cream to vanilla. Another day the other way 'round. Empiricism cannot help with that, at least not at our current level of understanding.

[Winstonm]

mike777, on 2013-November-07, 12:18, said:

You sort of understand, again my only point is the concern that NHS and its supporters inhibit innovation. My concern is that the wide popularity that Zel mentions makes it political death to question NHS, its policies, its management, etc and the overall health care system in the UK. Innovation, real innovation destroys the old way of things. The status quo resists that. to put it another way the culture you describe inhibits the free and open competition of ideas in your health care system. Again Zel points out it is political death. If you disagree ok....that is fine.

One simple example, Sony invented flat screen technology but never fully used it because it hurt, In fact it destroyed, the sales of the best, most popular tv in the world, Trinitron. The culture inhibited innovation that destroys.

Again Vamp if you disagree that innovation is inhibited, ok, you live there and would know best.

I have always found this argument odd - that nationalizing an industry inhibits innovation. I suppose we should all return the inventions made possible through Bell Labs while Ma Bell was granted the privilege of monopolizing the telephone industry - after all, they couldn't possibly have had a motivation to invent anything.

[HighLow21]

blackshoe, on 2013-November-07, 14:34, said:

Why not? Economics is about how people exchange things, using money as a medium for that purpose. If you take away some of someone's (or everyone's) money, surely you have affected what exchanges they can make.

In reply to Winston: Empirical sciences depend in part on the idea that the things studied all behave in the same way. If you study the way billiard balls move on a table, you expect them to always behave in the same way. And the red one behaves the same way as the white one. But people are not billiard balls — they can choose to change the way they behave economically. One day you might prefer chocolate ice cream to vanilla. Another day the other way 'round. Empiricism cannot help with that, at least not at our current level of understanding.

To augment blackshoe's point -- economics is the study of scarcity. It is the study of how scarce goods are allocated in a society. Since nearly all the goods we consume are scarce, decisions have to be made about who gets what goods, why, and how.

If that doesn't lend itself to a HOST of moral issues, I don't know what does.

[HighLow21]

Winstonm, on 2013-November-07, 15:14, said:

I have always found this argument odd - that nationalizing an industry inhibits innovation. I suppose we should all return the inventions made possible through Bell Labs while Ma Bell was granted the privilege of monopolizing the telephone industry - after all, they couldn't possibly have had a motivation to invent anything.

EXACTLY. Specifically the decision was given to grant them common carrier status--meaning they have to supply EVERYONE with a phone line. Similar agreements where made between wireless carriers and governments in Asian and Europeans nations, explaining why the overall development of wireless technology in those countries was much more effective and efficient than it was in the US.

The same thing goes with universal systems such as the post office. If private corporations were to make the decisions, many homes in remote parts of the country wouldn't get basic access to these systems.

Every time we have the government intervening WITH THE COOPERATION of profit-motive corporations--if the system is done right, so that the company can make a handsome profit while all consumers are treated fairly--we end up with a beautiful balance between capitalism and social welfare.

[mike777]

Winstonm, on 2013-November-07, 15:14, said:

I have always found this argument odd - that nationalizing an industry inhibits innovation. I suppose we should all return the inventions made possible through Bell Labs while Ma Bell was granted the privilege of monopolizing the telephone industry - after all, they couldn't possibly have had a motivation to invent anything.

Winston an excellent example. Old Ma Bell was the best phone company in the world. It was very popular. Old Ma Bell was the stock for widows and orphans and why overthrow and destroy widows and orphans! It was the poster child for stability and the status quo. It is an excellent example of a culture that inhibited innovation. It's overriding goal became to protect its copper hardlines and the dividend. It thought the mass market for mobile phones was something closer to zero than billions. It actually sold off its mobile business. It created one noble prize winner after another in computers, physics, etc and then failed to exploit the innovation. It loved the invention of the microchip so it could make its land line phones better, period.

Bell labs would invent one thing after another but it took outside competition and the deregulation, the overthrow of old Ma Bell to release that innovation. It allowed for free and open competition of ideas, of risk taking and of course many failures that are a by product of the process of innovation. I remember all the complaints of why in the world did the govt break up old MA Bell, our phone works just fine!

The Old Ma Bell is an excellent example of an institution that just was not able to gain or thrive on volatility and uncertainty. It was built for stability.

[HighLow21]

Mike,

You're talking about what happened to Ma Bell 50+ years after the fact. If you rewind to the time Winston is talking about, it was indeed the leader and the envy of the world. It ran its course over the long arc of time, and eventually was broken up for a host of other profitable companies like Verizon and Lucent.