Multiplier

By | Thursday, January 20, 2011 Leave a Comment
[Postscript: My concept about encouraging people to donate their tax breaks did not catch on.  The site I created is gone. Sigh.]

Last night I had dinner at a fantastic restaurant with two wonderful friends, whom I will call Dick and Jane. The launching of my new website, DonateYourTaxBreak, was very much on my mind, so of course I brought it up. Dick is a very smart guy, so I wanted his feedback. But he is also an anti-tax libertarian, going so far as to say that he has more in common with the Tea Party than with Democrats. When I told him about the website and my ideas for it, he said, "During a recession is exactly the wrong time to increase taxes on the people who create jobs in this country." He waved his hand, taking in the entire restaurant, saying, "look at all the people we are employing: everyone in the kitchen, the wait staff, the farmers who grow the food, the truckers who ship it here, and on and on." The point of the evening was to have a terrific meal and enjoy each other's company, so we agreed to drop the subject and move on to other things.

He's right of course. Wealthy people do create jobs. But he's only correct to a point. Yes, we spent money hand over fist at that restaurant, which no doubt benefited the local economy. But later in the conversation, Dick and Jane regaled me with their plans for a vacation they will take later in the year - traveling through Europe, Russia, and Asia. Do I believe that Dick and Jane deserve the wealth they have accumulated? Absolutely! Do I believe that they have worked hard, risked much, invested wisely, scrimped and saved, and benefited the economy throughout their lives by their actions and their taxpaying? Without a doubt! Do I believe that they deserve the right to spend that money on a fine dinner, or a vacation spent in far-flung parts of the world? Again, I say yes, and yes.

But did Dick and Jane need to have the Bush tax cuts extended in order to eat at that restaurant? No. Were they waiting to plan their trip until they knew the fate of the tax bill? No, they've been planning this trip for months. Did the passage of the tax bill impact their travel plans in anyway? None that I'm aware of. Without the tax cut, would they have needed to choose between a fine dinner and a vacation? Not at all. Will their trip through Europe, Russia, and Asia, benefit the American economy or American workers in any way? Almost not at all. Dick and Jane's favorite airline is British Airways. So the only benefit that will accrue to this nation from their travels are a few fees paid by British Airways to domestic airports for takeoff and landing privileges, a taxi ride to and from the airport, and perhaps a coffee or a doughnut while waiting for their flight to depart.

How will Dick and Jane use their tax savings? I don't know. But I can tell you what I would have done with my tax savings had I not pledged it to charity. I would have done the same thing in 2011 that I have done for the past ten years. I would've put it in my bank’s “high yield” savings account, currently earning a whopping 0.5%. What would my bank have done with it? I don't know. Maybe they would have lent it to people wanting to purchase homes. Maybe they would have lent it to small businesses wanting to expand. Or maybe they would have used it to purchase larger and larger holdings in Chinese banks, as Bank of America did with a healthy chunk of the billions it received from the TARP program.

My money wouldn't have sat at the bank earning a measly 0.5% forever. When time allowed I would have surveyed the world of investments available to me and moved a portion of my cash into something with better prospects. I can't say what exactly, but I keep my money in a highly diversified portfolio. Since I'm being so honest, possibly more honest than I should, I will tell you that my money is invested in a combination of domestic stocks and bonds, foreign stocks and bonds, precious metals (held both here and abroad), and foreign currencies. Money saved from paying my taxes would no doubt have been split among those various groups of investments, though the advisers I listen to most often are currently bearish on the US dollar, so it's likely that I would overweight the placement of that money into foreign stocks, bonds and currencies, benefiting the United States not at all. Therein lays the problem.

You may be surprised to know that it is a problem that economists have studied, analyzed, debated, written about, and taught to students for a long, long, time. It's nothing new. It's not remarkable. Yet our politicians and our media act as though this whole body of economic theory doesn't exist. Economists speak of "the multiplier process,” and the “velocity of money." There are some rather technical discussions of these subjects on Wikipedia. You can also read about it on a variety of other websites, and in virtually any book on introductory macroeconomics. [OK, all you economists out there – please don’t jump all over me. I am intentionally oversimplifying to get a point across. I am not teaching freshman Macro 101.] The basic idea is this: if you give one dollar to a man who has no money, he will immediately run out and spend it. He will buy food, he will buy clothing, he will buy shelter, and yes, he might buy alcohol, drugs, and cigarettes. Regardless, he will spend it ASAP. Economists would say that his “marginal propensity to consume” is high. Moreover, he will spend locally. In fact, he will spend it very, very, locally. The money will go to a local grocer, food purveyor, clothing store, landlord, etc. These local business are likely to turn around and spend that dollar very quickly and very locally too. They will buy provisions from their local suppliers; they will pay employees; and so forth. Those suppliers having been paid will purchase more supplies from their sources. The employees will spend their pay checks, quickly and locally, on, you guessed it, food, clothing, and shelter. On and on, the money will circulate at high velocity among those with a high marginal propensity to consume. Eventually the velocity will slow down. Bits and pieces of that dollar will go to pay foreign suppliers or investors, or will end up in the hands of those with a low marginal propensity to consume, amongst them banks and wealthy investors that own local businesses (directly or indirectly,) who won't rush to re-invest it or spend it.

It is this multiplier process that is such a problem in times of inflation. When there is inflation we want to decrease the money supply, so that there is less money "chasing" the same quantity of goods. When money is “multiplied” by circulating at high velocity, it has the same impact as increasing the money supply - it drives up prices, making inflationary conditions worse. But in a recession, you want people spending money. After 9/11, George W. Bush told us that it was our patriotic duty to go out and spend. We have all heard time and time again that it is the consumer that created the prosperity of the 90’s, and it is consumer spending that will lift us out of our current economic doldrums. So why is it that smart people like my friends Dick and Jane, and most of the Republicans in Congress [yes, though it may not always seem that way, most of them are in fact intelligent people,] are so hell-bent on giving money to those least likely to spend it, instead of people who will spend it as fast as possible and as locally as possible?

Of course I know the answer. Politics. Congressional Republicans’ constituents are wealthy. These Senators and Representatives believe that the only way to retain their jobs is to buy the votes and support of their constituents. Somehow it does not occur to them that we are not stupid, callous, and egocentric. They do not see that we are not motivated solely by greed. They do not understand that we value our brothers and sisters. They cannot conceive that we cherish a strong country - a country with a strong economy; a country with well-educated citizens; a country with healthy citizens; a country with happy citizens; a country united by common ideals and goals, rather than a country divided by mistrust and greed and hatred, need and desire and pain.

I have never met any Senator, Governor, or President of the United States, either past or current. I don't know how to get this message to them except by standing up, holding up my hand, and saying "Look! Look over here! Look at me! I don't want this! I don't want what you're doing! I don't want what you're doing in my name!" If I stand up, throwing my hands in the air, jumping up and down all alone, at best they will look at me and laugh. But what if we all stand up? What if we all raise our hands, and say, "No. This isn't acceptable. This isn't acceptable at all. This isn’t acceptable in my name. This isn’t acceptable in our names?" If we all stand up, if we all raise our hands, if we all demand to be counted, maybe we can return to caring, and kindness, and can sleep at night knowing that our good fortune is not someone else’s misfortune.

Amen.
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