29 Aug 13
5 edits
Originally posted by wolfgang59b. Because of the multiplier effect, as other people continue to buy goods and services with the money you paid them.
A question for those smarter than me.
I have a billion dollars. I am going to
a. Burn it.
[b]or
b. Purchase goods to that value and burn them.
Which action is most beneficial to the economy?
I[/b]
EDIT: For example: You buy a car and torch it. But the person(s) you bought the car from will either spend or save the money received, depending on their marginal propensity to consume/save. Their expenditures will, in turn, provide income to others to spend/save. The expenditures add to consumer demand; the savings support investment demand. Under a., aggregate demand in the economy does not increase any further; under b., it does, as your purchases add to the income of the sellers.
EDIT 2: Better yet, c., you could give it all to me. I promise to use it to expand aggregate demand, without the drag of destroying the goods that I purchase (e.g., maintaining my new Gulfstream will add income to the local flight mechanics, the pilot, the airport where I keep it, etc.). 🙂
29 Aug 13
Originally posted by wolfgang59Lots left unsaid. If the goods purchased were fuel, burning them would be better economically.
A question for those smarter than me.
I have a billion dollars. I am going to
a. Burn it.
[b]or
b. Purchase goods to that value and burn them.
Which action is most beneficial to the economy?
I[/b]
If on the other hand you bought goods, and intentionally sent the ship carrying them to the bottom, no economic good resulted, except that if the goods were fairly rare, the loss would enhance the value of the goods left in the hands of others.
That would hold true of burning the currency. The missing Billion would make the rest more valuable. Supply and demand.
30 Aug 13
Originally posted by normbenignFor arguments sake lets say the goods burnt are ford motor cars and that
Lots left unsaid. If the goods purchased were fuel, burning them would be better economically.
If on the other hand you bought goods, and intentionally sent the ship carrying them to the bottom, no economic good resulted, except that if the goods were fairly rare, the loss would enhance the value of the goods left in the hands of others.
That would ...[text shortened]... urning the currency. The missing Billion would make the rest more valuable. Supply and demand.
there is no benefit to anyone from the heat!
a or b ???
30 Aug 13
Originally posted by wolfgang59It's obviously A since you waste fewer resources then (just the ones used to produce the money, if you have it in physical bills, or the administrative cost used to wipe it off computers otherwise). In principle this action should cause deflation, but a billion dollars is such a small amount it's probably not noticable.
For arguments sake lets say the goods burnt are ford motor cars and that
there is no benefit to anyone from the heat!
a or b ???
30 Aug 13
Originally posted by wolfgang59That an economy can benefit from actions that are of no benefit to the people who inhabit it underscores the disconnect between economic indicators and social well being. 99% of economics is a lie and its practitioners are complete charlatans.
A question for those smarter than me.
I have a billion dollars. I am going to
a. Burn it.
[b]or
b. Purchase goods to that value and burn them.
Which action is most beneficial to the economy?
I[/b]
30 Aug 13
3 edits
Originally posted by KazetNagorraYes, a reduction in the money supply will have a deflationary effect. It would be trivial except in a small enough economy, but I have assumed the thought-experiment is to prompt a discussion of principles.
It's obviously A since you waste fewer resources then (just the ones used to produce the money, if you have it in physical bills, or the administrative cost used to wipe it off computers otherwise). In principle this action should cause deflation, but a billion dollars is such a small amount it's probably not noticable.
But I don’t see the wasted resource argument for a., at least unless you’re more specific. Not that there aren’t wasted resources under b., but a reduction in aggregate demand results in wasted resources through their unemployment—e.g., workers laid off, capital lines shut down, investment plans tabled. Anticipated demand is the prime factor when firms make capital investment decisions. Now again, except in a very small economy, I am exaggerating the effects of a billion dollars taken out of circulation (even with the multiplier effect).
The reduction in aggregate demand under a. would be coupled with the deflationary money-supply effect: as interest rates rise, capital investments with a lower marginal return are shelved. The rise in interest rates would dampen demand for interest-sensitive consumer expenditures, such as residential housing , autos, etc. Whether this is good for the economy on a macro level would depend on what the inflation/deflation situation was prior to money being removed from circulation.
I just don’t see how the wasted resources under scenario b. overcome all the effects of a. I could well be missing something, though, and I know that you are economically astute, KN.
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There are some assumptions I am making that are not in the OP: 1. a closed economy 2. a long enough run for multiplier effects to have an impact (without this, e.g., restricting the discussion to the current market period or something close to it, I think KN is right). 3. that the amounts we're talking about are sufficient to have some measurable effect on the economy (perhaps an unrealistic assumption, but necessary, I think, to really discuss the principles). 4. treating the money supply as essentially endogenous, which ignores government monetary policy. 5. ignoring any government fiscal policies, including automatic stabilizers such as unemployment insurance, which could ameliorate the effects I outlined.
EDIT: In response to rwingett's comments, I should perhaps add that I have been assuming a capitalist market economy.
30 Aug 13
To give a more nuanced response, your question is similar to the Keynesian dilemma: is it useful, in situations of high unemployment, to have people just digging useless holes? Keynes' answer was "yes, but only sometimes, and it's never the optimal solution", which is probably correct. Of course, it's better to have people digging useful holes. To transpose that to your dilemma: A may not necessarily give the best long-term outcome, although it is always better to do something useful with those Ford vehicles rather than destroy them.
30 Aug 13
Originally posted by KazetNagorraAgreed. My argument is just that the base expenditure will have a positive multiplier effect (one could probably turn the argument around, and cast it in terms of a "reverse multiplier effect" under a.). One of the sub-optimal effects of destroying the goods (in addition to the raw waste) is that it will reduce the potential multiplier effect.
To give a more nuanced response, your question is similar to the Keynesian dilemma: is it useful, in situations of high unemployment, to have people just digging useless holes? Keynes' answer was "yes, but only sometimes, and it's never the optimal solution", which is probably correct. Of course, it's better to have people digging useful holes. To trans ...[text shortened]... is always better to do something useful with those Ford vehicles rather than destroy them.
All that’s theoretical of course, and there is controversy over the size of various multipliers, based on empirical studies. Most of the argument centers on the Keynesian-type fiscal multiplier (though there are also monetary and tax multipliers, for example). Robert Barro and his colleagues think it is zero or near-zero; Christina Romer thinks it can be as high 1.6—here is a discussion of various influencing factors on a site that Palynka turned me onto a couple of years ago: http://www.voxeu.org/article/determining-size-fiscal-multiplier. One thing that I noticed relative to my closed-economy assumption is that the multiplier effect tends to be greater than for an open economy.
In the thought-experiment here, if the multiplier effect of keeping the billion dollars in the economic flow is sufficiently small (it doesn’t have to go to zero), then a. would become the preferred (suboptimal) option. I did not specify a sufficient size for the multiplier under my assumptions—my bad. 😳
30 Aug 13
1 edit
Originally posted by EladarYes. Greg Mankiw argues here (based on research also done by Romer) that the tax multiplier might be as high as 3—roughly double Romer’s estimate of the fiscal multiplier—
So the answer is that it depends.
According to my economics teacher, taxes are supposed to be viewed in the same manner.
http://gregmankiw.blogspot.com/2008/12/spending-and-tax-multipliers.html
I really haven’t surveyed the empirical literature, though. If telerion or Palynka were around, they could probably shed more light on the range of empirical data without further research.
30 Aug 13
Originally posted by vistesdYou'll learn more about economics by reading Wendell Berry than you will by talking to any professional economists.
Yes. Greg Mankiw argues here (based on research also done by Romer) that the tax multiplier might be as high as 3—roughly double Romer’s estimate of the fiscal multiplier—
http://gregmankiw.blogspot.com/2008/12/spending-and-tax-multipliers.html
I really haven’t surveyed the empirical literature, though. If telerion or Palynka were around, they could probably shed more light on the range of empirical data without further research.
30 Aug 13
Originally posted by KazetNagorraWith a fiat currency burning cash isn't going to have much effect. The number of notes in circulation would be down, but I make most transactions electronically now, and I don't think I'm unusual in that. If someone did that it would just annoy the central bank who would simply make another print run, prosecute them and hand the cash to clearing banks to lend to people.
To give a more nuanced response, your question is similar to the Keynesian dilemma: is it useful, in situations of high unemployment, to have people just digging useless holes? Keynes' answer was "yes, but only sometimes, and it's never the optimal solution", which is probably correct. Of course, it's better to have people digging useful holes. To trans ...[text shortened]... is always better to do something useful with those Ford vehicles rather than destroy them.
$1E9 worth of cars burning is going to generate a certain amount of ecological legacy. Which led me to think that if a private individual wanted to destroy resources without producing anything fungible, a more sane approach with less risk of prosecution for environmental damage would be thinking of spending the money on some ecological clean up or health campaign or some other project with a temporary scope that doesn't contribute to infrastructure or net productive resources in any direct way. You could generate the positive economic effects without making a total mess, the main danger is creating an over-sized ecological clean-up or health industry.
Is this a private individual or a government acting? If it's a central bank or finance minister they actually can destroy money and finding ways of spending extra is never a problem for a government, this is what the military is for.