Re: Reject the Welfare/Warfare State

On Wed, Nov 10, 2010 at 3:11 PM, Karl <[email protected]> wrote:
> > Generally speaking, if you give $1,000,000 to 100 families ($10K each)
> > below the poverty line, they're going to spend all or nearly all of
> > that money relatively quickly (i.e. put it back into the economy,
> > generating demand for more goods and services, creating new jobs).
>
> **until the money is gone. At that point most of the 100 families are still
> poor, they just have more stuff.

First, "until the money is gone" is basically irrelevant.  For this
thought experiment, both the poor and the wealthy do *something* with
the money, and then it's "gone".  Except it's only really gone if that
something were to burn it or throw it into a money pit.  Yes,
inflation will effectively remove the value from the money.  But in
that case, it's better to spend it or invest it sooner, while it still
retains its value.

Second, just as poor but with more stuff: a.k.a. not as poor.  Yes,
they would probably buy fewer durable goods than the wealthy would.
But they will pay people who will pay people who will pay people who
will ... buy durable goods or invest the money.

Third, the whole point, if you are trying to get more jobs sooner, is
to *circulate* the money.  The amount of total dollars in the economy
isn't important if no one is circulating it.  A tiny stream can power
more watermills than an enormous but stagnant lake.  The money doesn't
go away.  It gets spent on someone else who hopefully spends it on
someone else and so on, hopefully in a virtuous cycle, generating
value along the way.  This happens whether the person spending the
money is poor or wealthy.  But the poor are more likely to inject it
straight back into the market in a way that will keep the current
moving for a little longer.

> The demand for goods and the new jobs are not
> sustainable unless you continue to give them the 10k regularly.

Is this a relevant difference between the poor and the wealthy scenarios?

> Some percentage of them will even have some entrepreneurial spirit and
> invest it in themselves; e.g. to kick-start a small business that was
> previously beyond their means.
>
> **maybe one out of that 100.  Maybe another 10 or so will spend half and bank
> the pother half.

You are more cynical than I, perhaps because a few of my best
co-workers and bosses have themselves risen out of poverty to work in
tech start ups (and deservedly make considerably more than I do).
But, even with that cynical 1%: aren't you more likely to cross a
threshold than with wealthy, and if not, why not?  My experience with
entrepreneurs tells me that if they aren't entrepreneurial by 150K,
then they are unlikely to be entrepreneurial at 250K.  And if they are
entrepreneurial at 70K, then they are probably also entrepreneurial at
40K... although their opportunities will be far more limited.

> **but most will spend it and do a fast short lived burst of stimulus.  The
> Federal car program is a good example of why that kind of program is a failure.

The car program was a bad idea for so many reasons that I find it hard
to pin the blame on just one thing and thus use it as serious evidence
against that one thing ever being a good idea.

> **but see here for a second.  To the rich people in this second scenario, you
> are not giving them anything, you are just not taking it away. To the low
> income, you are not taking less from the, you are actually providing them more.
> There is afundamental difference there.

No, I don't think there is; not for the scenario and question I'm
posing.  The question is: what's the marginal benefit to 10K at the
poverty line versus 10K at the top-2% line.  It makes little
difference to this question whether you're talking about going down
from $260K to $250K or up from $250K to $260K (or 35K to 25K vs 25K to
35K).  *Obviously* the marginal benefit to the individuals receiving
the money is far more for those in poverty.  I'm arguing that in some
circumstances the marginal benefit to the economy/society as a whole
might also be better.

I posed the scenario as if they were both receiving money, but I could
just as easily reverse the scenario so they are both losing the money,
and it would play out the same way.  The poor would be more likely to
become utterly destitute, losing whatever housing and income they
have, thus becoming completely unable to contribute to the economy.
The wealthy would be more likely to just tighten their belts a little
bit and lean back on their savings.

> **not that those are the only options.  And in your scenario, if we rise the
> taxes on the wealthy are we not also paying some back to the poor?  So is it a
> zero sum gain or not?

There are very few zero-sum games in economics.  The whole reason any
economy works is by *creating* more value than we consume.  But
there's lots of benefit to be gained in politics by painting most
economic discussions as zero-sum games.

But for my scenarios, I was just looking at the marginal benefit of
10K.  Give it, take it, bail out some Wall Street fat cats, pay down
the deficit, whatever.  That's all good and important, but not
entirely relevant to the question of marginal benefit.

-- 
Nick

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