Good points, Lawry. The Keynesian multiplier, based on the marginal propensity
to consume, may have made sense during the 1930s when people stuffed money they
didn't spend immediately under their mattreses, but it makes far less sense
now. Money now "saved" in a bank account is either loaned out by the bank or
used as the reserve against which loans are made. Perhaps a more appropriate
concept now would be based on how fast, on average, money moves. In a full
employment expanding economy it might move very quickly. Any money that is put
into a bank account moves out as loans very quickly and at high interest costs.
In a sluggish economy, it may stay in the bank for quite some time, and if it
is loaned out, it will be at very low interest rates. Perhaps, instead of
multiplier rates we should now be thinking of turnover rates.
Ed
----- Original Message -----
From: Lawrence de Bivort
To: RE-DESIGNING WORK, INCOME DISTRIBUTION,EDUCATION
Sent: Tuesday, August 03, 2010 9:36 AM
Subject: Re: [Futurework] As spending by wealthy weakens,so does economy --
Multiplier effect
Good morning, everyone.
Wonderful discussion!
Thanks for all the comments and thoughts on economic multipliers, Arthur,
Mike, Ray, Ed, and Keith.
From your comments, I can see how the thinking on multipliers covers several
bases:
1. The 'number of times' that a chunk of money is passed defines its
multiplier, its circulation.
2. Circulation that leaves one's home economic base (goes 'overseas') after
having been spent 'locally'
3. Circulation that is diminished as people 'save' a fraction of it before
passing on the rest (marginal rate of spending, perhaps varying with economic
demographics)
4. There may be a difference in the multiplier based on whether that 'first
dollar' comes from the government (as to the Arts) or not.
Based on this, I would like to offer several comments about the multiplier
effect. Essentially, the multiplier idea is making less and less sense to me.
A. The best distinction about multipliers seems to me to be the idea that
money at some point may leave the boundaries of one own group, whether it goes
'overseas' or out of ones sector of the economy, such as the Arts. But as
someone who views himself as a member of our species first and as an American
or a management consultant or foreign policy advisor last, this notion of money
'leaving' seems strangely limited to me. The notion of local economies and
differential well-being of communities is of immense interest to me, but I do
not take a 'my-group-first' position. I think that genie is out of the bottle
and it is better for us as individuals and as members of homo sapiens to
embrace the larger identity and definition of self-interest that that implies.
B. Saving a portion of an incoming dollar before passing on the rest: I can
see how 'in the old days' this idea had validity. If one took a fraction of
ones income and stuffed it in the mattress for a rainy day, then in effect that
fraction was now unavailable for participation in the daily economy of a
people. But I don't know if this distinction is a useful one any longer.
Today's equivalent to stuffing money in a mattress is getting a CD (certificate
of deposit) or buying a Treasury bill. More tricky forms involve real estate
purchases, stock purchases, etc. All of these activities are considered
investment because they specifically involve circulating that 'savings'
fraction on into the economy, there to earn a ROI for the investor, and equally
importantly, to provide capital for someone in that economy who can use it. So
there is no mattress stuffing going on, nowadays. Perhaps those who buy gold
now are the remnants of the mattress stuffers? They are gambling on an
increase of gold prices for their profits, while sinking their savings into a
passive accumulation of gold does stop the multiplier effect for the duration
of the holding. But without this kind of exception, my guess is that there is
no savings going on in the sense that I gather Keynes and Kahn might have been
envisaging.
C. It seems to me, therefore, that that any dollar spent in any locale and in
any sector is essentially going to have the same economic effect as any dollar,
and that no dollar ever stops being moved on. In other words the multiplier is
essentially infinite, starting in any industry and any sector.
D. I would like to introduce an idea that may be somewhat akin to what Keynes
and Kahn (as I understand it from the comments posted here): Not all dollar
expenditures have an equal value to society. In the same way that mattress
stuffing had little value to an economy, some expenditures have little or no
social value. I would offer the following activities as candidates for low or
no social value; gambling, commercial sporting events; ego- and status-driven
expenditures (e.g. MacMansions); consumer item fads ('pet rocks' being my
favorite examples); prestige tourism; foods rich in sugars, salt, and fat; etc.
What do you think?
I am still hoping that someone might find a citation to a multiplier case
study so that we can see what definitions, questions, assumptions, and
methodology were used.
Cheers,
Lawry
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