Don't know quite what to make of it, Lawry. If the value of our dollar (or
whatever) remained constant, it could mean a doubling of GDP. However, if the
value of the dollar were rapidly falling, we could be going to the store twice
as often just to keep ahead of rising prices. With a falling dollar, nominal
GDP could double but its real value might actually fall.
Things could go completely whacky as they did in Weimar Germany after WW1. My
dad, who was a teenager at the time, recalls people taking wheelbarrows full of
money to the store. He may have been exadgerating, but the value of the mark
underwent a huge decline at the time. Then there's the current case of
Zimbabwe where inflation has been so high that about the only guy who could buy
anything was Mugabe, who initiated it. Inflation rhymes with negation, which
it often is.
When I first went to work as a civil servant here in Ottawa in the late 1950s,
my boss was a WOW and OM'GOD!!! $10,000 a year man, a pretty good salary then.
Now, to be at the same income level, he would have to earn about $75,000, which
is not too bad but somehow doesn't sound as high and mighty as $10,000 did in
the late '50s.
Ed
----- Original Message -----
From: Lawrence de Bivort
To: RE-DESIGNING WORK, INCOME DISTRIBUTION,EDUCATION
Sent: Tuesday, August 03, 2010 11:41 AM
Subject: Re: [Futurework] As spending by wealthy weakens,so does economy --
Multiplier effect
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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