Hmm, and you like the sound of eyeballs rattling in skulls? I don’t blame you, I hate Keynes too.
Yes? I think what people are getting at is that once an item has been consumed, it needs to be replaced, providing employment all through the supply chain. Which also is pretty obvious to everyone, correct? When you run out of gas, you buy more gas… it’s not exactly like there’s just one tankful of gas in the world. And the more you use it, the more need there is for gas, hence more need for people in the oil industry. Right?
And? You seem to be implying production is a zero-sum game if I read it correctly.
Savings… like my bowling ball? Cool, I’m a forward thinking pioneer then to take that step at this economy. Now, you’re saying that growth comes from increased consumption, right? New things to sell people? Riddle me this, why do you think individual people do the investing? It would seem FAR more likely that a company would invest (especially in R&D) than a person. The easiest way to do it would be to give money to people who consume a product the company makes.
I.e, you’re the kind of person that holds on to your money, instead of… giving it to others… you know, investing. In fact, the really rich people don’t NEED to invest. Would you? Let’s say you came by a couple of hundred million. Honestly, would you buy a yacht, or invest? Would you work your ass off to find THE best investment, or just accept something that will make you 10 million a year spending money? You know, like a regular savings account.
You really think that money “invested” in a learjet is MORE likely to aid the economy than the same amount paid to an aggressively growing grocery chain by a bunch of average income people? Like grownup really?
And another disclaimer: I’m just being a dick… but that sounds like the thinking of someone who just knows they’re destined to be rich… just as soon as the next get-rich-quick scheme comes through so they can quit that Mba program and start making REAL money.
The problem with saying “rich are better stewards of money than poor people” is that you’re putting the cart before the horse.
You’re only showing, by hand-waving away all of the contrary cases of rich people, those who got rich by being good stewards of money.
Your economic status says nothing about your ability or capacity to steward money if your model is discounting the 4/5ths of wealthy people who didn’t get wealthy by demonstrating an ability to steward/shepherd money.
What would you invest it in? Expanding a factory which is already at only 50% utilization? Dumping it in the stock market where all the new money will drive up prices without changing the fundamentals? Adding it to the stack of money the banks are afraid to loan out?
If you buy your TV, perhaps that will cause the TV maker to hire someone now unemployed, who can now afford to buy a new TV, and so on. If we get to the point where we are short on capacity, then we can invest.
And there is nothing wrong with that.
In an economy with a surplus of capacity, it is stupid to invest in more capacity. Why do you people think business leaders are so stupid that they would use investment to increase production when there isn’t enough demand to tax the production they already have? They don’t hire people on a wish and a hope, they hire people when they see consumption increasing, and feel they can make more money by making more goods.
Of course rich people invest more than they spend on consumption - exactly the reason why giving money to the less well off is more effective. I have no debts except a small mortgage, and I can buy anything I want. A stimulus check to me goes into the bank. A stimulus check to my daughter goes into furniture or a restaurant or a gadget. Giving the money to her helps the economy more than giving it to me.
If there is a shortfall in production capacity (which I seem to remember from the '80s) a tax cut for the rich will increase investment and be just the thing. The Bush tax cuts were so ineffective because we had a glut of capacity from over-investment during the Bubble, so giving money to the rich to invest more didn’t do a lot of good.
One thing I don’t understand is the concept of “wasting” money or “consumption spending”. Short of setting a pile of currency on fire, I can’t see where money is “wasted”.
So, I use a hundred dollar bill to snort cocaine off of a hooker and then tip her with it. Surely that is wasteful, right? So the hooker buys more coke with it. Well, eventually the drug dealer will take that hundred bucks and buy hot dogs, beer, and chips with it after getting the munchies. Then that money goes to pay the salary of the hard workers who make these products, who use that money to buy homes, cars, etc.
I can see where people might say that I, personally, wasted the money, but on a macro scale, it is still there. Where does this “waste” come in with regards to money?
This is true only during periods where there is a decrease in demand due to a recession. It’s not true in the general case. In the general case, an efficient economy is one in which there is a good mix of supply, demand, and investment in future production.
As for multiplier effects, we don’t even know if they happen in the real world. Robert Barro of Harvard has done a lot of work on multipliers, and he doesn’t believe they typically go over 1.0 (ie in the real world, there is no multiplier). His study of economic shocks due to stimulus has found multipliers of .8.
And if demand is down because the loss of assets due to a bubble collapse has destroyed balance sheets and biased behavior towards savings in order to repair those balance sheets, then borrowing money and giving it to people to spend isn’t going to fix the problem. You’re just transferring debt from consumers to the government. Overall indebtedness doesn’t go down, and your economy continues to flounder.
There is a real debate going on right now about what’s actually happening in this economy. If it’s a ‘balance sheet’ recession, and if people are as worried about government debt as they are about personal and business debt, then this is a real problem for Keynesian policy (or for any other attempt to ‘fix’ the economy without addressing the underlying debt issue). If that’s the real problem, then there is no easy fix, and the best course of action we could take is to allow markets to find a new equilibrium, even if in the short term that results in a retrenchment of GDP. That may just be reality.
I would add, “And to have enough savings to finance future production and research.” Very few companies can pay for expansion and R&D out of cash. Most borrow money to do it.
Seems to me the rich guys running the show at banks and investment houses were captaining the ship when the global economy went belly up. Trillions of dollars of value were wiped out almost overnight.
Now, those captains seemed to manage to stay rich and even walk away with staggering paydays despite bankrupting the world so perhaps they are good stewards of their own money but they sure as hell were not good stewards of anyone else’s money.
Also note with $100 million in a bank account I can earn $1 million/year from some simple savings accounts. That $1 million/year puts me squarely in the top levels of wage earners in the US and I just have to sit on my ass and collect a check. Does that make me a good steward?
Since banks are reluctant to lend now, it is easy to see why job growth has halted. The government has tried to shake money loose from the banks to generate a stronger economy, but they resist.
The banks are getting money for practically free. They are guaranteed profits at taxpayer expense. They do not have to risk lending money. They are adding fees to bank accounts, jacking up credit card rates, weaseling money out of their customers with no risk at all. They are making sure and easy money.
Obama has made the case that the banks should kick start the economy. They see no reason to do so. If Elizabeth Warren gets put in charge of the Consumer Protection Bureau ,the banks might have more trouble fleecing their customers and actually have to do banking again.
Its been a while since my economics graduate education, but I seem to recall that in fact that money given to the middle class was the most productive. If I recall the problem was the at the really poor do not save enough and the real rich do not spend enough. Or I could be completely wrong.
I put it aside because it’s not a very large factor. I know the left doesn’t like to believe this, but it’s true. There have been numerous surveys and models done to look at inherited wealth. Obviously the estimates vary based on how you define it. If I inherit a million dollars, invest it in a business, and it becomes worth 20 million, how much of that 20 million is due to inherited wealth? Some would say all of it, because the person couldn’t have invested at all without an inheritance. Others would say only 5% of it, because the rest was still tied to a personal decision that created wealth. For our purposes, the latter choice would be the appropriate one (we’re talking efficiency, and not social justice).
Given that measure, it looks to me like inherited money only accounts for somewhere between 1% and 10% of wealth held by the rich. The rest is earned money. Some studies have found that inheritances account for as much as 30% of held wealth, but it really depends on how you define it. In any event, inherited wealth is not the main driver of economic activity of the rich. In any event, for the purposes of determining wealth due to better decision-making, the numbers on the smaller end of the scale are probably the more accurate ones.
I would also defend my assertion by pointing out that the richest households have a disproportionate number of entrepreneurs and business owners, and that the data clearly shows higher savings rates in wealthier families, and that the savings of the rich are biased more towards stocks, corporate bonds, and personal investments in business activities.
Many of the jobs in the US come from small businesses, who are definately not rich people.
And a good deal of economic growth comes from advances in science and technology. The majority of those advances have roots in public education systems, which are funded via taxes, some of which are progressive.
All in all I find these arguments unpersuasive.
“You are rich if you make good decisions. You are poor if you make bad decisions”
Sounds like it is lifted directly from the strict father model of politics that George Lakoff talked about.
I have to argue with this claim. First, if you buy a yacht, you still probably have lots of money to invest - unless you are Michael Jackson, and blow all your money on toys. Second, if you are rich, you don’t need to spend a lot of time investing, unless you do it for fun. You hire a professional money manager and they invest for you, and probably do a better job unless you made your money from investing. Mrs. Heinz-Kerry puts her money in municipal bonds - slightly better than a bank account - but that is almost a charitable thing, not primarily as an investment. No rich person would put money in a savings account. You have too much for it to be insured, and you won’t be able to discuss your investments at the club.
This is putting the cart before the horse. People with discretionary income save and invest more? Color me shocked.
It’s a huge factor.
In any case, if the point of the exercise is to put money into the hands of those who are best able to steward it, surely it’s obvious that inherited wealth, regardless of how much of it there is, doesn’t help?
I’m not an accountant, but I worked for some one summer, and I’m unaware that success on the CPA exam is a factor of how fast you can add. Hell, I have a high resolution display and a super-duper graphics chip, but it still doesn’t mean I can draw worth a damn.
Precisely why the Obama stimulus, focused on giving money to states for job creation or retention projects, is better than sending checks to people. I’d have preferred more money for this, but politics is politics. Surely people who are unemployed cut back on consumption more than frightened yet employed people, and will thus spend relatively more on consumption rather than savings if they get jobs.
The flood of money into US government securities, and their low interest rates, seem to indicate that anti-stimulus people are more worried about debt right now than investors. The Clinton surplus, after all, did not come from cutting spending or raising taxes, but from a hyper-robust economy which generated tons of revenue.
The Fed is practically giving money away. The banks are making a fortune charging a lot for this free money. If people cannot make a business case for R&D, it is because they don’t see a market. It doesn’t take a giant breakthrough to beat the rate of return people are getting today.
Compare this to the late '70s, early '80s. With inflation so high, it was hard to justify investment in anything but a CD. That was a case where investment incentives were needed. Not now.
You’ve just re-stated Bastiat’s broken windows fallacy. If I smash your window out, I’ve just created a job for the window repairman. He uses the income earned to buy other stuff, and everyone wins! Let’s all run out and start smashing windows.
The essence of the fallacy is to ignore opportunity cost. Money spent on smokes and booze is money not spent building a new power station or investing in research that makes our goods better and cheaper.
Current consumption is just that - consumption. It’s us spending the spoils of our our productivity. But before you can spend it, you have to actually have that productivity. And the only way to get more productivity is to invest in things that make you more productive. The only way to invest in things that make you more productive is to save some of your resources and not just blow it all on current desires.
It is if we did it by stimulating consumption. If half the economy makes stuff for the other to consume, then economic growth stops. Economic growth depends on us improving our productive capacity. That requires capital investment, which requires savings, which requires that some people defer current consumption for the promise of even greater future consumption. Encouraging everyone to spend everything they have on whatever they want is a really crappy way to run an economy.
Companies need to borrow money to invest. Very few companies can finance all R&D and new capital projects through current sales. And much of our productive innovation comes from new companies. Entrepreneurship. New companies by definition have no current sales they can use to finance their startup. They need to borrow money. In some cases, it might be a loan from a rich uncle. In others, it might be venture capital. In some cases, it might be self-provided money from a partnership or a wealthy entrepreneur financing his own idea. Usually, it’s not coming from a bank. Unless the person has other assets to provide for collateral (assets built up through savings or good decision-making), the bank won’t be interested.
The upshot of this is that a large percentage of our innovation and dynamism comes from the funding of rich people.
Of course they do, and of course I would. And the data clearly shows that the rich invest far more, both in total amount and in terms of percentage of income, than do the poor. This is really not debatable.
Gee, I’d probably hire a professional accountant or money manager and have my money invested professionally by someone who really knows what he’s doing. Or, I’d use the money to start a business. Or, I’d look for some guy with a great idea and a shortage of capital, and invest in him. This is what rich people actually do. Your scenario is your negative stereotype of what you think rich people do.
No, but I thnk the startup money invested in Apple and Microsoft did a lot more for the economy than the equivalent amount of money spent on lotto tickets, smokes and booze. I think the venture capital that helped start up eBay and Federal Express did a lot more for us than we’d get by spending money smashing windows and replacing them. And I think those large, aggressively priced grocery chains wouldn’t even exist if rich people hadn’t invested the money to start them up in the first place.
You’re right. You’re being a dick. My personal feelings and desires are irrelevant to the discussion.
For the record, I grew up in relative poverty (I had a single mother, worked minimum wage to put myself through school from age 14 up), and I’ve felt this way my entire life. Believe it or not, there are still some of us who believe in personal freedom and small government and making our own way in life without the benevolent smothering care of the nanny state - even if that’s against our personal financial interest. To me, I’ve always thought that the true greedy people were those who demand the wealth of others so they can be protected from the consequences of their own actions. But then, I’m just being a dick.
I actually support extending unemployment benefits - both as stimulus and because if it’s not extended the government is just going to wind up paying the money anyway - as food stamps and welfare.
I’ve never disagreed with the theoretical case for a fiscal stimulus, or with the theoretical existence of multipliers. My disagreement has more to do with real-world conditions and the existence of other conditions that make the simple models break down.
The flood of money into U.S. securities could also be an example of crowding out effects, a flight to relative safety, or the fact that there are no other investments available right now because businesses aren’t investing due to uncertainty.
You assume it’s because they don’t see a market. It looks more likely to me that it’s a combination of demand being down and an uncertain cost of investment due to fear of the debt, the explosion of entitlement costs, and a government that seems to cough up two thousand page regulatory bills like hairballs.
Businesses are spooked right now. If you ask them why, most of them will tell you that it’s because of the uncertainty driven primarily by government policy. The business Roundtable of CEOs has completely flipped on Obama. They were totally on board with him at first, and one by one they’ve eventually come out in opposition. They liked the stimulus (of course they did - they’re rent-seekers, and it was free money). They do not like the financial reform bill. They don’t like the deficit. They don’t like cap and trade. They don’t like card check. They see this government as being generally anti-business in outlook, and they have lost faith that they will be able to operate in a stable environment that allows them to plan and calculate costs.
No, the 70’s were a case where the government let the money supply get out of hand for political reasons, then tried to stop the inevitable inflation by imposing wage and price controls. The 70’s stagflation was mostly the fault of government stupidity. The only thing that fixed it was a tight monetary policy that resulted in high interest rates and a sharp, but short recession. In other words, a willingness to accept that an imbalance had occurred and the willingness to suffer the pain to correct it. Short of that kind of fix, there was no amount of ‘stimulus’, either supply side or demand side, that was going to do anything other than cause the problem to drag on forever. It’s a lesson we seem to have forgotten.
If our current problem is due to an underlying structural imbalance rather than just a temporary loss of demand due to Keynes’ ‘animal spirits’, then we’re doomed to follow Japan’s example of throwing stimulus after stimulus at a fundamentally sick economy until we’re broke.
You’re telling me I’m putting the cart before the horse? I’m not the one who thinks the path to wealth is followed by consuming everything you have.
No, it’s not. For one thing, even inherited wealth winds up in the hands of people who were raised by the person who generated the wealth. The kid who inherits a lot of wealth more likely than not went to good schools and got a good education. He probably also learned the habits of wealth generation from his parents to some extent.
But even so, the fact is that those who inherit wealth and squander it don’t have anything left to give their own children. And if you inherit a LOT of wealth, you probably still leave it in the hands of professional money managers. And even outside of all of these effects, the fact is that inherited wealth only accounts for a small percentage of the total wealth held by, say, the top 10% of American households.