Wasn’t sure whether to put this here or in GD. I don’t intend to start a debate but if that’s where it ends up I don’t mind.
A lot of people have been saying that unemployment benefits help stimulate the economy. Mark Zandi, Chief Economist of Moody’s, has gone on record as saying that $1.00 spent on unemployment benefits actually adds $1.73 to GDP.
My question is where does that extra wealth come from? How does government spending, targeted toward the unemployed, actually create this extra $0.73?
Before answering, I would request that knowledgeable posters bear just one thing in mind when composing their replies: I am a complete economic dunce. A cretin. A man with absolutely no grasp of how the economy works whatsoever and I need this stuff explained to me like I’m a six year old. I’m trying to fix this but I’ve only just started and really haven’t got the first clue about any of this. Even the articles on Wikipedia just go w-a-a-a-a-y over my head
I don’t have any reason to believe I know more than you, but this is where I’m coming from.
I’m 60 years old, and those times I’ve drawn unemployment insurance, the money has gone back directly into the bank, utilities, and private companies that directly provide the basic neccessities of life. My government facilitated input is keeping important and neccessary service providers to everyone solvent.
When I’ve been flush, I’ve provided the rich with their luxuries through my relatively cheap time and labour (did so gratefully) and I’ve provided income to foreigners through my vaccation plans who lets face it are not likely to reciprocate for my country’s gdp.
Yet the fact is, if the government subsidized my business (sevice to yacht owners) , my employees and I might benefit, but does the country gain anything as a whole. does the fact that my yacht owner client with an extra 20,000 dollars cash do more for the countries gdp than a unemployed consumer with a basic 12 months of minimum income ?
Or, if the government allowed me to keep an extra $20,000, am I automatically going to invest it in grocery production to feed the unemployed who have no income ?
If there was a demand for my services that required an additional $20,000 investment to pursue, don’t you think a bank would help me out with a loan ?
I tell you, when I’m unemployed I’m not expecting a bank loan to tide me over .
the way I see it , unemployment insurance benefits are a way to smooth out and maintain the sevice infrastructure that we ALL depend on. We might not look upon them as a stimulus, but to decline a provision to maintain them might very well result in a further erosion of gdp and the basic economic health of the country.
You ask where the extra wealth comes from ?
To me it is the repository of all our efforts, long past and present and it resides in our minds, in our bank accounts, in our infrastructure both private and joint, and the wealth is only limited to the extent that we wish to limit the value of our vast heritage that was provided to us from those who have passed away long ago.
Thus we are all equal to assume the benefits of their labours.
Simply put, all money that is added to the economy has a multiplier effect.
You have money come in. Almost all that money goes right back out again. Food, gas, clothing, rent. Money for a plumber or a dentist or babysitter.
Each person or firm who gets that money also spends it. Stores spend on more goods to sell, and employee salaries, and fixtures, and electricity, and window cleaning. Individuals spend it on all the things they need to buy.
If an individual doesn’t have the money, then some things have to go unbought, or some people unpaid. If enough people can’t pay, then stores go out of business and companies fail.
Because each dollar of money that comes in moves around in the economy enabling other money, the value to the economy of each dollar added is more than a dollar. Economists create elaborate models to try to estimate just how much extra is created by the various ways money can enter the system. Apparently some set of economists estimated at one time that the multiplier effect for unemployment insurance is 1.73.
This is money created by the government for this purpose, which is why it can be called a government stimulus to the economy. Of course, money spent by the government either has to be collected as taxes or added to the deficit. I don’t know whether the particular calculation made to come out with the 1.73 figure adjusted for this or not.
I am not an economist, but from what I’ve read I understand that a dollar given to a poorer person will tend to have a greater “stimulus” effect than the same dollar given to a richer person (because the poorer person is more likely to spend it).
Now, leaving aside the morality of redistributing wealth, that would suggest that taking a dollar from a rich person and giving it to a poor person will boost the country’s economy. On the other hand, if you take away the dollars from someone who earns them, you reduce their incentive to earn more dollars by engaging in activities that add value to the economy.
Thanks guys. The thing I don’t understand is that if the dollar spent by the unemployed person was spent instead by the person from whom it was originally taxed it would surely do the same amount of good. Why does a dollar in unemployment benefits give a greater stimulative punch than a dollar rebated to the person from whom it was originally taxed?
First off… the person who is getting the money taxed away from him would be more likely to save the money and invest it. Investing has a diferrent impact but I have no idea exactly what.
Additionaly, I would think that the studies factor in how the money is spent… groceries and clothing vs entertainment type stuff.
As others have mentioned, people who are barely getting by use money differently from those who can afford to tuck it away. This is the basic idea behind the progressive tax system. A person making even $100,000 a year can afford to lop off 50% of that in tax without cutting into necessities, while a person making $20,000 a year can’t afford any tax at all. (Fake numbers for simplicity.) A real number is that more than 40% of the work force doesn’t pay any federal income tax at all. (Other taxes, including Social Security, certainly.) That’s why we’re having this current argument about bumping up income over $250,000 by three percentage points. Some people argue that it will cut into investment; others say that it would have no appreciable difference on spending.
That doesn’t mean that a saved or invested dollar doesn’t have a multiplier. It just means that it has a different multiplier. Most economists agree that the multiplier at the low end that goes for basic necessities is greater than it is at the high end, where it has a more dilute effect for say, a share of stock.
Economists have a term called “marginal propensity to consume”. “Marginal” refers to each incremental dollar that you receive either as wages or other earnings, or as govt aid.
On average, people with less money have a higher marginal propensity to consume than people with more money. For example, if you make $10,000 a year and get an extra $100 you are likely to spend it all on rent, food, clothes, a movie, etc. On the other hand, people who make a $1,000,000 a year are, on average, less likely to spend an incremental $100. They may instead put some of it in the bank, invest in stocks, put in in an IRA, etc.
This is not the sort of thing you can have an opinion on, it’s measurable and well established. Now what people do disagree on is when (and if) it makes sense for governments to choose particular policies over others.
In our current situation we have excess capacity (factories are not running at full capability and we have people out of work) and insufficient demand by consumers. Critics of additional/extending tax cuts for higher income tax payers say that although there will be a stimulus to the economy from more money being available to the rich, it will have much less of a stimulus than an equivalent amount of money being paid in unemployment benefits.
A person who needs an unemployment check is not going to spend that extra money purchasing foreign goods and a vacation which simply has no further value whatsover to the national economy.
Besides basic groceries and transportation, he’s going to pay his rent, or mortgage and city taxes, and utility bills and basic groceries etc.
His payments support the local economy. His UI money forestalls increases on utility bills and local taxes on the shoulders of others. It forestalls spending money by others to help him such as welfare and food banks.
So not only does UI money support local business by providing a market, support communities by sharing the burdens of providing utilities, support communities by taking on the financial burden of supporting children, it allows business and communities to redirect their savings into the local economy.
I’d like someone to make a case for the taxpayer who uses his tax savings to purchase a yacht and spend 20 gallons an hour of gasoline refined from Saudi oil.
That has little to do with the multiplier. The facts by themselves are what we need to look at. Emotional reactions from liberals are just as annoying and counterproductive as they are from conservatives.
Exapno Mapcase & Sh1bu1 - Great posts guys! They really helped clear it up for me. Thanks to everyone else as well, of course. This has been a really illuminating thread.
Unemployment benfits do not stimulate, and they actually hinder or hurt the economy by misallocating resources. Nobody can get any unemployment benefit check unless that money is first taken away, taxed, and/or borrowed. The total pie is not any bigger, you are just taking money away from one person and giving it to another, to be spent/invested much less efficiently.
“If” unemployment benefits were so great,then we should double, triple, quadruple the amounts, and give unemployment benefits to EVERYONE who is not working, including children, elderly retired people, illegal immigrants, and self employed people who no longer have a job.
The reason why we dont give out unemployment checks 10X bigger than they currently are, the reason why we dont give out lifetime unemployement checks with no end, the reason why we dont give unemployemnt checks to children, elderly, and out of work former self-employed people , is because they HURT!!! the economy in their total/net effects.
IF wealth could be “created” from unemployment benefits, then Haiti should give everyone in the country a weekly large unemployment check forever to make the country of Haiti a wealthy nation.
The fact of the matter, is that the “government” can NOT create wealth out of nothing.
It works better if you stamp your feet while you say it.
Here is a list of things that created no wealth:
The Hoover dam,
The Bonneville dam,
Rural Electrification,
The interstate highway system,
The Bourne canal,
Public education,
The internet (that was a big loser),
The County Extension Agency (sure we have the most productive farms in the world, but if Ayn Rand had been in charge we’d be even better).
And while we are at it, let’s look at the history of two of the largest companies in the world. IBM used to have a near monopoly on business computers. Customers could not buy the software separately from the hardware, so once they had invested in creating lots of custom programs they were essentially locked in for life. This made IBM less interested in innovation and gave consumers fewer choices. Gene Amdahl created a new model of plug compatible mainframes that used new technology to make them faster and cheaper than IBM’s model. However without the ability to have access to IBM’s operating system they could not break into the market. The govt stepped in and forced IBM “un-bundle”; i.e., to buy the software separately from the hardware. Now consumers had more choice and computing technology advanced more rapidly with competition. [Paul Harvey]Now for the rest of the story[/Paul Harvey] When IBM released the PC they also had to offer the software un-bundled. They allowed Microsoft to sell the OS that IBM contracted them to make, and then clone makers appeared that offered PC compatible machines that could run DOS and the programs written for the IBM PC. Microsoft then turned into one of the most profitable companies in the world and a whole new industry was born from the intense competition among PC makers.
Now how about Google? A shorter story. They benefited first from the development of ARPAnet (which turned into the internet) by what is now DARPA, and then more directly when the algorithms used by Google were developed as the result of a research grant from the federal govt aimed at improving searches of electronic media.
So yes Virginia, the govt, in partnership with private industry, does create wealth, and it does it very well. Unfortunately despite the investment in education they can’t force people to learn history.
Good heavens, I should have looked closer at your source. The Chief Financial Officer for Moody’s Analytics? How could you find anyone closer to the heart of the socialist conspiracy to doom the country by picking the pockets of the hard-working wealthy who already pay, to paraphrase Warren Buffet, almost as high a percentage of their income in taxes as their secretaries?
Yes, that’s sarcasm. Moody’s is so right-wing that they have only half-turkeys on Thanksgiving. The company’s job is to cater to the wealthiest corporations by, of all things, properly understanding how the economy works.
You need to click over to see Table 1, (on p. 8) but it’s important. (Mostly because it says just what I’ve been saying.) As it turns out, George Kaplin, you got it slightly wrong. It’s food stamps that has the 1.73 multiplier while UI has a 1.63 multiplier. Still, those are much better than any other stimuli.
Those against government stimulus might note that permanent tax cuts have multipliers of less than one. That’s for all the reasons we’ve been stating in this thread.
Remember, Moody’s is a credit rating agency. It is so inextricably tied into the world of corporate finance that it is responsible for much of the blame for the recent meltdown, since its patently phony credit ratings allowed the illusion of risk-free investing. Not even the most active conspiracy theorist can put Moody’s in bed with tax and spend liberals or whatever the talking point of the day is. If Moody’s says that UI and food stamps are better stimulus mechanisms than lowering corporate taxes, you have to accept that even the most conservative economists are accepting this as reality.
Emotional reactions? Fuck, I’ve been accused of being a conservative way more often than a liberal. Labels don’t impress me. They are simplyy allocated when the accuser is bereft of a sensible argument on any particular issue that superficially benefits rich vs poor.
May I assume you are a liberal who believes that unemployment insurance doesn’t do much for the economy and that given we terminate the program, the ecomomy would be better served ?
I’m not interested in altruism.
I’m very much interested in an economy that will engage the maximum number of citizens to provide wealth generation to the benefit of the greatest number of citizens.
I see unemplyment insurance as a method to smooth out an economy that without central control (which no one wants) is subject to ups and downs. Fair enough, but we need to make sure that the downs do not irrevocably bankrupt an economic infrastructure that we all benefit from.
Remember, when the economy hums UI is cheap. At that point, you can look else where to explain a rising depression/recession.
You completely misunderstood my post. UI has a higher multiplier than tax breaks for the wealthy, but not because the wealthy will buy yachts and take vacations in Europe. It’s because the rich have a lower marginal propensity to consume than poor people do. Making baseless claims does not help your cause. The “science” behind extending UI in the current situation is about as airtight as you can get in economics.
