The U.S. Department of Labor recently issued Summary: The Role of Unemployment as an Automatic Stabilizer During a Recession.
Among the points it made was this:
So the Zandi model quoted by the OP is not wrong. It’s probably just low!
Since this thread was intended to find a factual answer: where does the extra dollar come from?
Case 1: Guy earns a dollar, spends in on rent. Landlord takes that dollar spends it on booze. Is that two dollars of economic activity?
Case 2: Guy loses his job, so the government (or charity, or family) gives him $1. He spends it on rent, landlord spends it on hookers and blow. Two dollars of economic activity?
Is there a difference, economically speaking, from scenario 1 and scenario 2?
As has already been explained many times in the thread, the multiplier effect doesn’t come from the spending of a particular dollar but from the total average behavior of aggregate dollars. It’s the likelihood of dollars being immediately spent directly on goods and services compared to them being saved or invested and dispersed over a longer future that gives these dollars a higher stimulus effect. Looking at any particular dollar spent is meaningless.
My apologies, I tuned out when Susanann showed up with her pony and that one trick it does.
And I agree, looking at any particular dollar is meaningless, so use the example in the aggregate, not one guy but 100, each getting a set value of money.
If this statement is true, then I believe it is worth exploring. You mention likelihood, so for a multiplier to work, the money needs to be spent. You go on to say:
So what happens if there is debt, and the stimulus gets funneled into credit card payments? If there is a change with respect to the multiplier, then we need to go back and look at the term “likelihood.” If there is a high likelihood that stimulus money gets put towards debt, it’s no better than if that money was put towards savings.
All this together leads me to believe that the concept of the multiplier hinges on a variety of assumptions made about the recipients.
Yes, quite a bit. Scenario 1 is what happens normally. People earn money, spend it, and there is a multiplier.
Scenario 2 is an example of a stimulus if it is done by the govt. borrowing money from the future to inject money into the current economy. That dollar is incremental; i.e., if it was not paid then it would not exist. This is similar to how conservatives wage wars, except rather than spending borrowed money to blow shit up and kill people in a foreign country the money is being spent domestically. Both the war and unemployment are stimuluses if done with borrowed money, it’s just that war is a shitty stimulus because it has a lower multiplier. Borrowing money against the future is just a delayed tax, but it may be a net gain if the economy improves and future economic.
Cutting taxes for the wealthy while not making matching cuts in spending is also a stimulus, but a spectacularly bad one. To extend your emotionally loaded metaphor, it’s as if you took a dollar, threw 68 cents in the sewer, and spent the rest on blow.
But then you also left out scenario 3, where we do neither, the economy continues to go into the shitter, the poor revolt and grind up conservatives for dog food.
Why do you hate doggies?
This is the point that keeps being made. Money given to unemployed people is highly unlikely to be applied toward debt and highly likely to be applied toward daily essentials. The likelihood of UI being immediately spent on goods and services is exactly why the models show it to have a high multiplier.
There are many ways of providing stimulus dollars. If you check the link I gave in post #16, you’ll see that different methods of stimulus do have different multipliers.
And the sun rises in the east. Of course this is true. How could you think otherwise? That’s why models are called models, because they model behavior based on assumptions. You can always examine and question the assumptions - and you should because that’s the way they improve. It’s the fact that different models from widely different sources - like Moody’s Analytics and the Labor Department - return results that are very similar to one another that increases our confidence that the models properly reflect reality.
This thread on how much people save is interesting in that it is clear those of us in the higher income brackets save a lot more than people paid less. It seems to support the notion that giving people who already save a lot a tax break is not much use for stimulus.
Again, I don’t follow this line of reasoning.
Why is saving considered “bad” as far as stimulus goes?
And before you answer, consider what I’m trying to understand. My wife and I are savers, but that doesn’t mean we don’t spend. It means that our spending is based on what we have in savings. We’re about to go to Tanzania, costing about $12k, which will mean dipping into our savings. Both before and after that trip we’ll reduce our spending in response to that big ticket purchase.
The perception I get from your post is that “people who save” also don’t spend, so we shouldn’t get a stimulus. But that’s not the way I see it. Giving us a $1000 stimulus will initially go into savings because that’s the way we operate. When we see that our savings are up, we’ll spend.
When we saw the recession looming, we doubled up on our savings and cut way back on our spending. Something that if others are doing makes a recession worse. Giving us a stimulus–that we’ll put into savings–is the only thing that might get us to spend more.
Likewise, if there was a reduction in our tax withholdings, I’d see our savings grow faster, and then be more likely to make purchases now instead of waiting. If my tax withholdings go up, my savings will grow slower, and I’ll delay making purchases. And all of these means that we don’t carry any debt other than a mortgage that is sufficiently above water.
On the other side of the coin, you have people that aren’t savers. Tell me, in your opinion, are they more or less likely to carry credit card debt?
And when given a stimulus, is that more or less likely to get funneled to that debt?
The reason I bring this up is that I believe the current models for economic stimulus fail to consider how much debt the average low income American is carrying. If you’d got data on the subject I’d love to see it.
When money comes in you are either saving it or spending it. By definition you cannot do both.
If you save it to spend later, then you have not spent it now. Therefore, it does not count as a stimulus now. (The bank or financial institution does invest the money, but that money has low volatility.)
People may have debt. That is not directly relevant. Are you arguing that people with no income other than UI are spending the majority of that money paying down credit card debt? I hope you’re not, because there is certainly no evidence that it’s true.
Studies have been done of the entire pattern of savings and spending that various groups do. In some groups the percentage of spending is much higher than in other groups. It does not matter whether these people have debt or not. It is the ratio of money that immediately goes out to the money that doesn’t that affects the economy. Secondarily, the overall pattern of distribution of money that is spent is studied. Is that money going to recipients who will quickly turn it over? If so, that money has a high multiplier. Is that money going to recipients who will spread it out over time? If so, that money has a low multiplier.
Again, please read the study in post #16.
None of your personal actions are of any relevance, remember. Only the total aggregate behavior of the entire group is.
Any chance you could answer my question in a slightly less provocative manner?
If the government is simply borrowing money and giving it to people, why not just let people borrow their own money?
It also seem a bit disingenuous to say there is a multiplier in year 1, but then neglect the debt repayment in year 5 (assuming we ever bother to repay it).
There are two types of savers. (Both virtuous). There are savers who save by forgoing spending, and there are savers who save because their net income is greater than their desire to spend. Most of the people who saved a lot in that thread are of the latter category. That is why stimulus should be targeted on income, not amount of savings. With a relatively lower income level, one who forgoes spending and saves an adequate amount is more likely to spend at least some of it. On the other hand my tax refund went right into savings, because there really wasn’t anything I wanted.
Some savings is long term, and some is short term. We’re using some of the money we saved from what used to be tuition payments for house renovations, but that was just redirecting money previously spent. When we are done with them, we’ll really save it. Not that we’re spending all of it - it is amazing how far a few tuition payments go for this.
More, I’d expect, since savers are usually clever enough to compare returns on savings and paying down debt, and do the latter.
It depends. My daughter is doing research on what types of debts you pay off first, and on savings behavior depending on where the money comes from. The results are not intuitive. For instance say you get paid $200 to do some painting over the weekend. How you treat that money is different if you are a painter, and see it as work related, or not a painter.
In any case, at the least paying off debt reduces interest charges and does eventually free up money for consumption - though perhaps not as effectively as if there was no debt
Let me see if my daughter has some. I know the withholding reduction in the stimulus bill was done because people’s behavior when getting a slightly bigger check was different from getting a lump sum payment, and I think the behavior was to spend relatively more than to pay off debt. So there must be some studies somewhere.
None of this is 100%. There are some people who make a ton of money (like my step-sister and her husband) who are still in debt for being stupid. They’d probably spend stimulus immediately. But on the average giving money to people like me isn’t going to help much.
That’s what the last decade was all about. Borrowing on real estate was a real stimulus, but an unsustainable one.
Now, because of that, people who want to borrow are having a hard time. People, that is, who want to borrow to increase spending. We had no trouble refinancing last year, and when I bought a car they really, really wanted to give me a fairly low interest loan.
It is the old joke come true - banks only want to lend money to people who don’t need it.
Sure, when you stop talking about people spending money on hookers and blow.
I have no idea what you mean here.
Who is neglecting it? From an economics standpoint, paying back the loan later by having revenue higher than current spending, will slow the economy. I don’t think any economist would disagree.
What one hopes, is that by borrowing money now to “invest”, then the economy will recover faster and there will be a potential for higher govt revenue in the future so that the loans can be paid off.
As I said, none of this is particularly controversial. The question of whether we should pursue a particular policy at a particular time is open for debate.
I think you misunderstand his point. Any money that leaves the country reduces the multiplier effect. For example, if someone gets a $100 unemployment check and uses it to buy Canadian maple syrup, it stops the multiplier effect dead in its tracks.
If you spend most of your money on food and rent, then most of your money is likely staying within the US economy. Its not just marginal propensity to consume that causes higher multiplier effects for the poor. Its what they spend their money on. If we imported all of our food and baby formula, food stamps would not have as high a multiplier effect as it does because there would be much more leakage out of OUR system and into other systems.
This may be true but the poor tend to buy more domestically produced goods than the affluent.
The vast majority of food consumed in the USA is produced in the USA.
Most rental income goes to US entities (heck most income associated with real estate goes to US entities).
Most energy costs are produced in the USA (oil represents a very small part of home heating or electricity production).
When you are on unemployment, you don’t buy a lot of new clothes (which have largely been imported for at least 40 years) for yourself, you only buy them for your kids.
With all this said, I agree the multiplier effect is in fact muted by our trade deficit.
We admit about 1 million immigrants each year. The majority of them are the result of things like marriage, engineering jobs.
Illegal immigration from Mexico is about 500,000/year (lower these days).
I’m not sure how this affects the unemployment insurance = better economic stimulus than most other methods of stimulus issue.
I can agree with this part of your statement. After exhausting regular unemployment benefits aren’t you really collecting a form of welfare?
Are we simply trying to preserve their ego because extending tax cuts for the rich and giving the ultra uber rich the estate tax reform they wanted but couldn’t get with a George W. Bush as president and a Republican majority in both houses seems to be a lot to give a way so that you can say that unemployment past the 99th week != welfare.
The new trend in Silicon Valley is to put a large proportion of new jobs into India. I wonder if Susanann thinks this solution, which involved no new immigration, is better for our country than having that engineer come here, get a large salary, and spend it locally.
As a foreigner living in the US, I need to ask: does UI have any relation to your previous salary? And are there conditions to get it based on how much you worked?
In Canada they changed the system and called it EI (employment insurance). It’s something you pay into, like insurance, and then collect on if laid off. What you pay in and what you collect is in proportion to your salary.
Personally, I love this concept. It costs the government little because it’s acting like an insurance provider (collecting premiums and providing payments). And the money you collect is technically yours, you paid into it. The overall concept is very similar to disability or life insurance, that is meant to pay out if disaster strikes. The difference being that in Canada it’s mandatory. Imagine that, the government forcing people to buy insurance. Crazy socialists.