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Source link: http://archive.mises.org/10006/multiplying-by-zero/

Multiplying by Zero

May 23, 2009 by

It appears the consensus is “every $1 spent on the national food-stamp program pumps $1.73 into local economies.” It’s that resilient Keynesian multiplier again.

In our distant past, the $1 came from taxation. Today, however, the $1 comes from a combination of taxation and thin air.

One thing we know for certain: Every $1 in taxation removes something more than $1 of value from the locally-taxed economy, as desired consumption is replaced by government waste. And, assuming the Keynesian multiplier, that $1 in taxation is subject to a negative multiplier, as it’s removal from the economy has a repeated, but necessarily lessening, effect.

Create the $1 through a notation on the books at the Fed, and the effect, though better hidden, is the same.

The tacit claim that the $1 nets $1.73 is pure nonsense — it applies Keynesian balderdash to one side of the equation. It’s a good sound bite, but nonsense all the same.

{ 14 comments }

Bruce Koerber May 23, 2009 at 12:00 pm

Where is the scientific proof, outside of the Keynesian model which has the built-in assumption of ‘animal spirits’ so that the ego-driven interpreters have no restraint on the absurdity of their quackery?

There is no scientific proof!

Dick Fox May 23, 2009 at 12:15 pm

This is one of my frustrations with Christina Romer in the Obama administration. She and her husband David have done work that demonstrates that when looking at both sides of the equation this multiplier effect is bunk, but she keeps her mouth shut when such stupid statements are made by men like Bernanke.

I had high hopes that Romer would bring a sense of reasonableness to the Obama economic team but early on Romer exposed herself as being enchanted with Prince Obama at the exclusion of good economic analysis.

She wrote in her February 27, 2009 report, The Case for Fiscal Stimulus: The Likely Effects of the American Recovery and Reinvestment Act:

Before I dive in, I want to apologize in advance for occasionally sounding like an Administration cheerleader. Like any normal parent, I am sure I find the baby I helped raise just a tad more perfect than it actually is. But, at the same time, I will strive to do my CEA best to give a balanced, dispassionate assessment.

bob May 23, 2009 at 12:21 pm

they should just put the whole nation on food stamps. then we’d have 1.73x more wealth…

i like Bob Murphy’s observation that a lot of these equations make no sense in scale. Like how the government can somehow create more private jobs than the number of actual workers that exist to fill them.

newmaths May 23, 2009 at 1:25 pm

It works like this:

2 + 2 = 5.

Add 3 to both sides of the equation.

2 + 2 + 3 = 8

7 = 8

Divide both sides of the equation by 8.

7 / 8 = 1.

Then, multiply 7 / 8 by the Orwellian Constant.

7 / 8 (1.984) = 1

1.736 = 1

It works!

Remember, all numbers are equal, but some are more equal than others.

Andras May 23, 2009 at 1:42 pm

And apply this to the whole economy. The more money (credit) you create and use for stimulus the less value you will have. Just servicing the outstanding debt is too much, let alone the new one.
Ta-daaah: deflation explained! [while you destroy money by (hyper)inflation].

Andrew_M_Garland May 23, 2009 at 2:19 pm

Obama’s economic team says that if you give people $1,000 they will spend it and “create” $1,500, a multiplier of 1.5 on real wealth. I say, just give me the thousand or million, and I don’t care what other people do with it. Isn’t that closer to the spending (I mean fiscal) policies of the government?

Unfortunately, economics is confused by what I call the “color TV” effect. People couldn’t adjust their color TV’s in the beginning, because each adjustment of color, brightness, and contrast affected the other two. The industry was saved by the automatic adjustment circuit.

In economics, there are usually a few parameters, like a color TV, and people can’t wrap their minds around the problem. They may be suspicious of a claim, but they are not sure, and it would certainly be GREAT if the claim were true.

So here is my argument that I hope will convince more people that the Obama administration and all Keynesians are harming us.

When an idea leads directly to a crazy result, what should we think about that idea? Maybe laugh at it until the proponent explains in detail how it works. If you believe Obama, Keynes, and their proclaimed wealth multiplier of 1.5 on government spending, then it would be valuable to counterfeit as much money as possible, of course under government regulation. You don’t have to borrow counterfeit money, or pay it back. It is ideal for Keynesian government projects.

Let’s Counterfeit Our Way to Wealth

Magnus May 23, 2009 at 3:25 pm

they should just put the whole nation on food stamps. then we’d have 1.73x more wealth…

You joke, but I suspect that something like this is the plan they have in store for us.

Econ Guy May 23, 2009 at 5:00 pm

“I say, just give me the thousand or million”

Murray Rothbard makes a similar argument in “Man, Economy, and State”. See page 867-868, it’s a brilliant refutation of the Multiplier. (Hazlitt also presents Rothbard’s argument on page 151 of “The Failure of the New Economics”.)

A negative Multiplier is possible in the Keynesian system. The Multiplier will be negative if the MPC is greater than one. Keynes denied that the MPC could be greater than one, only because of the way he defined income (Y=C +I). However, the MPC can be greater than one if Income is defined as the change in society’s stock of capital. Thus, the MPC can be greater than one if the society engages in capital consumption. Se page 76-78 of “Dissent on Keynes”.

Of course a negative Multiplier leads to all sorts of contradictions within the Keynesian system. Keynes argued spending always leads to more prosperity. But if the Multiplier is negative, more spending will lead to impoverishment.

matth May 23, 2009 at 9:00 pm

Econ guy, thanks for the tip. It’s pages 757-758 in my (paperback) edition.

Zombiehero May 23, 2009 at 9:00 pm

The only reason why governments go with they Keynesian argument is because it gives them an excuse to spend. The Keynesian stimulus can be anything as long as the government spends and spends and spends…hell look at that asshat Krugman. He keeps on harping that the stimulus wasn’t big enough. I still haven’t heard from him, what number he has in mind? Why not $10 trillion?
Oh but where will that money come from?

The Keynesian system is built by elitist for elitists.

Walt D. May 24, 2009 at 12:33 am

Zombiehero wrote:
“The only reason why governments go with they Keynesian argument is because it gives them an excuse to spend.”
I think this correctly sums up what is going on in one sentence.

John Bracich May 24, 2009 at 1:03 am

New person who just discovered the wisdom of von Mises and free market though. Speaking as someone who was on food stamps, I can personally attest to how this multiplier is bunk. First and formost, the food stamp program here in Illinois is not exactly free cash. There are asset restrictions like having no more or no less than $2k in your account (unless you have children). Three times they cut off my stamps (at the time I was unemployed, still disabled, and unfortunately at the time a “progressive.”) because I had exceeded the asset cap. For me that was due to doing some cash work as a self-employed and decided for simplification sake to accept checks (wrong move). You have to submit paperwork every year, and trust me they do audit you behind your back.

Secondly, not every store takes food stamps. Here in Illinois, the stamps come under the guise of a smart card dubbed “Link.” Despite the claims that some major chains take the Link card, when you get to the register, suprise surprise it turns out they don’t. As for stores that do, often they are family-owned ethnic shops which may or may not have what you need.

Lastly, your are limited to as to what you’re allowed to buy. Obviously booze is not permitted. But so is certain foods. The black list actually changes, though they claim it doesn’t. One year (when I first started on the program) certain snacks were not allowed to be purchased while the following year you could buy say Doritos. Basic items, and here that could be nothing more than milk and bread and certain meats.

So how can this columnist at the Dispatch say it’s a multiplyer? Because you aren’t granted the freedom to buy what you will. Food that is often set aside may be discounted or generics. A dollar on the Link card buys exactly a dollar of food. The ultimate kicker, which these Keynsians conveniently forget to mention, is that often the amount you get decreases. How so? If you’re on social security and you get an inflation-adjusted increase, guess what gets deducted? The amounts you get are meager as it is on the Link card, so it really poses no economic benefit.

Indeed, when I had to apply for it (btw, I am off it, as I refuse to have my income capped!) is a complete hassle. Here in Illinois, the same office that handles Medicaid handles the Link system. And let me tell you it is a byzantine system that would make a beurocrat smile. My guess is that it probably costs more to implement the Link card and financial gestapo system than whatever economic positive impact it may have (if it even has one).

John Bracich May 24, 2009 at 1:30 am

One more thing. If one is to borrow the money to implement the food stamp program, then really you’ll have a negative multiplyer effect. As that money has to be repayed with interest, any net gain you get could be outweighed by the carry and interest costs incurred by the borrowing.

Yancey Ward May 24, 2009 at 11:17 am

A thief came one night into a small western town and stole all the gold out of the local bank. A couple of days later, he returned and rented a room at the local hotel and, during the next two months, spent all the gold he had stolen from the bank. He ate lavishly at the best restaraunts, bought several suitcases of new clothing, bought several Swiss watches from the local jeweler, bought a team of horses and a brand new luxury traveling wagon loaded with lots of other goods purchased at the local dry goods store. As the thief was leaving town, the merchants gathered round to thank him personally for reviving the economy of their town and for allowing them to recover all the wealth that some lowlife had stolen from them prior to the thief’s arrival.

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