Thanks, Ed.
I'm sure this is a dumb notion, but if we all went out and earned and spent our
money twice as fast, would this not double the GDP? There must be something
wrong with this idea!
Cheers,
Lawry
On Aug 3, 2010, at 10:17 AM, Ed Weick wrote:
> 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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