Someone Explain to Me the Multiplier Effect

justabubba said:

but let's distinguish
"free" trade agreements have turned over our market - the world's most lucrative - to vendors from nations that are not subject to our labor laws and environmental restrictions
that places our domestic companies at a competitive disadvantage
then when you recognize that the industrialized nations are paying for the health care costs of their citizens, NOT the employer as in the USA, vendors from those nations enjoy an even greater financial advantage over our own producers
so, instead of "free" trade, we need to negotiate "fair" trade agreements. it's time to level that playing field

Click to expand...

I don't support free trade.

Bob Blaylock said:

So, in your view, what this “multiplier effect” is about is not about “multiplying”*the actual wealth, in the hands of the people, but in “multiplying” the amount of it that government gets to take.

Click to expand...

Not at all.
You have not gotten the gist of what I was saying.

I laid out what the multiplier effect was in a post prior to the one you quote. Here.

You quoted the post where I discussed some of the differences between money which moves and money which sits in re tax revenue.

Simon W. Moon said:

Not at all.
You have not gotten the gist of what I was saying.

I laid out what the multiplier effect was in a post prior to the one you quote. Here.

You quoted the post where I discussed some of the differences between money which moves and money which sits in re tax revenue.

Click to expand...

The multiplier effect is true enough and it helps. The best analogy of an economy is a big balloon. How can you inflate a big balloon with the least amount of air (dollars) without fixing the holes in it first? You can blow hard and have a certain amount of air stay in the balloon, but you can't blow hard enough to make it firm, the way an economy ought to be. You have to fix the holes and then blow.

When our economy collapsed, imports collapsed because people didn't have the money to buy them. I'm not basing what I say on an opinion, but math. A country can't continue to outsource jobs without suffering cronic unemployment. Does it make sense to have an economy that only a percentage of Americans can benefit from, and do so by design? I don't think so and I don't want to pay for the results of that design.

Women's underwear can be made in America are just as fine as the underwear made in Colombia. I highly suggest checking the underwear first and rejecting any contents therein. "I was gonna have sex, but my underwear came from Colombia" would send a message.

Bob Blaylock said:

So, in your view, what this “multiplier effect” is about is not about “multiplying”*the actual wealth, in the hands of the people, but in “multiplying” the amount of it that government gets to take.

Click to expand...

I don't know about his view, but thats not my view.

The multiplier effect is based upon the fact that the same money circulates over and over again, and each time it circulates, it creates employment opportunities, and employment creates wealth. It's really not that hard to understand.

imagep said:

I don't know about his view, but thats not my view.

The multiplier effect is based upon the fact that the same money circulates over and over again, and each time it circulates, it creates employment opportunities, and employment creates wealth. It's really not that hard to understand.

Click to expand...

What I saw in the post to which I was replying was it each time it circulates, government gets to take more of it, leaving less of it in the hands of those who would do the most good with it.

Fisher said:

That is the rationale used by cities and states as part of the justification for their economic development schemes to payoff companies to move to their jurisdiction --"Oh it is not costing citizens anything because we will get it back in taxes so it is really all profit--trust us."

Click to expand...

In part. When a new company moves in, it directly creates employment, and employees purchase stuff and pay taxes. So yes, the taxes that the employees will pay partially pays for any subsidies. Then the money that the employees spend creates more jobs, which in turn results in more tax revenue, which also can go towards the subsidies. An the money that those employees spend creates even more jobs and more tax revenue, so on and so forth. It's really not that hard to understand.

That said, I don't think that the government should ever subsidise any private business. It's essentially unfair to the businesses that don't get subsidised, and all of the new jobs creates wage inflation which may be good for the workers, but its not so good for businesses. So for every businesses that moves in due to the subsidy, another business may get choked out of the market. Many years ago my county and state gave away huge subisidies to BMW, a month after BMW annouced that moving to my county was a done deal, a half dozen other large employers who were considering my county annouced that they were removing my county from their short list - due to their fear that the labor market would be to tight after BMW hires 3,000 workers for their new plant.

It's odd, you would think that subsidising private companies would be a liberal idea, but it's not. Without exception, everytime the issue comes up in my state, it is always republicans pushing for it. Just recently our republican governor, Nicki Hailey, pushed our state government to make Amazon.com sales tax exempt in order to lure them in. I contacted my local state representative (a republican) and asked her why they would do such a thing, she said that the supported it because it would bring in jobs and tax revenue. She went on to explain that we are better off with lower taxes. I asked her if she supported the fair tax, she said "yes" and went on to explain it's virtues. So I then asked her why, if sales tax is preferable to other types of taxes, would you support eliminating the sales tax requirement inorder to collect more from other types of taxes, and if it was good for one company needed to be sales tax exempt, then why wouldn't we want all companies in our state tax exempt. She asked me if I was recording her, I told her that I wasn't, she then said "Good day" and hung up.

Gary said:

I don't support free trade.

Click to expand...

I very much support free trade, but only when it is fair trade. If it is not fair, then it is not free.

Bob Blaylock said:

What I saw in the post to which I was replying was it each time it circulates, government gets to take more of it, leaving less of it in the hands of those who would do the most good with it.

Click to expand...

Less of something is better than more of nothing.

And when the gov taxes, the money doesn't disappear. It reenters our private sector economy fairly quickly when the gov spends it.

My problem with it is that there are companies who specialize in floating centers around. As soon as whatever length of time they had to stay to get free rent, no local taxes, etc is up, they fire everybody and move somewhere else that will give them free rent, no local taxes, etc. It also steals jobs from other places moreso than it creates real new jobs so the overall economy of the nation gains nothing, and maybe loses some in the process.

imagep said:

I very much support free trade, but only when it is fair trade. If it is not fair, then it is not free.

Click to expand...

Find something called a free trade agreement and read it! Let's see if you can stay awake while reading page after page of why this isn't a free trade agreement!

Bob Blaylock said:

What I saw in the post to which I was replying was it each time it circulates, government gets to take more of it, leaving less of it in the hands of those who would do the most good with it.

Click to expand...

I was not describing the multiplier effect in that post. The post doesn't say that the govt gets to take more and more of that hundred dollars. If it worked the way you're describing, there would be no "multiplier effect." I don't think you're getting it.
Go back and read the post about the multiplier effect as being about the multiplier effect (as opposed to the post about how money moving through the economy generates tax revenue.) Then read the post about how money moving in the economy generates tax revenue as a post about how money moving generates tax revenue.
idk :shrug:

The taxes come from a cut of the productivity/profit/benefit allowed or accrued by the money changing hands. Taxes don't come from the capital which allowed the change to happen. [Assuming that there're two or more parties making a mutually beneficial transaction in each case of the money changing hands--eg me buying groceries or a new computer.] To work the way you're implying everyone would have to be making their trade at a net loss AND paying taxes. And sometimes, that happens. Undoubtedly. But, more often than not transactions occur which are mutually beneficial to the parties involved--kinda the main reason why we make the transactions.

Two or more parties make a transaction, benefits accrue to each of the sides, govt gets a cut out of the benefits which moving the money creates. If there are no accrued benefits, the transaction is not as likely to take place as one where there're are benefits to the actors involved. If the transaction doesn't take place, the money doesn't move, there is no taxation occurring.
In order for the $100 to be depleted, the transactions would have to take place w/o the accrual of benefits to the parties involved.

Spending money in and of itself does not increase capotal, savings does. The wealthy save a lot of money, this funds our credit card loans, provides jobs (factories), and finances deals.

I think the focus on tax revenue is misguided. Government spending, were it to return to 2005 levels would balance the budget. The problem is the natural inclination of every politician (save a precious few) to increase taxes during every part of an economic cycle.

The model we have now is one which government acts to redistribute wealth and those who are on the receiving end form special interest groups at the expense of everyone else.

Free trade is by definition, fair. Both parties only agree to trade if it is to their mutual benefit.

imagep said:

In part. When a new company moves in, it directly creates employment, and employees purchase stuff and pay taxes. So yes, the taxes that the employees will pay partially pays for any subsidies. Then the money that the employees spend creates more jobs, which in turn results in more tax revenue, which also can go towards the subsidies. An the money that those employees spend creates even more jobs and more tax revenue, so on and so forth. It's really not that hard to understand.

That said, I don't think that the government should ever subsidise any private business. It's essentially unfair to the businesses that don't get subsidised, and all of the new jobs creates wage inflation which may be good for the workers, but its not so good for businesses. So for every businesses that moves in due to the subsidy, another business may get choked out of the market. Many years ago my county and state gave away huge subisidies to BMW, a month after BMW annouced that moving to my county was a done deal, a half dozen other large employers who were considering my county annouced that they were removing my county from their short list - due to their fear that the labor market would be to tight after BMW hires 3,000 workers for their new plant.

It's odd, you would think that subsidising private companies would be a liberal idea, but it's not. Without exception, everytime the issue comes up in my state, it is always republicans pushing for it. Just recently our republican governor, Nicki Hailey, pushed our state government to make Amazon.com sales tax exempt in order to lure them in. I contacted my local state representative (a republican) and asked her why they would do such a thing, she said that the supported it because it would bring in jobs and tax revenue. She went on to explain that we are better off with lower taxes. I asked her if she supported the fair tax, she said "yes" and went on to explain it's virtues. So I then asked her why, if sales tax is preferable to other types of taxes, would you support eliminating the sales tax requirement inorder to collect more from other types of taxes, and if it was good for one company needed to be sales tax exempt, then why wouldn't we want all companies in our state tax exempt. She asked me if I was recording her, I told her that I wasn't, she then said "Good day" and hung up.

Click to expand...

It is wrong to define a subsidy as allowing someone to keep the fruit of their own labor.

Insofar as tax cuts are concerned I see no contradiction here, Nikki Haley is in favor of limited government and under the principle should avail herself of any opportunity to reduce the tax burden on citizens and corporations.

Frank650 said:

It is wrong to define a subsidy as allowing someone to keep the fruit of their own labor.

Click to expand...

What if you allow someone to partake of the fruits of others labors at no cost? Is that a subsidy?

If I let a corporation take advantage of the populace's education which was funded by taxpayers and take advantage of the pgysical infrastructure which was funded by taxpayers and I tell this corporation that it does not have to chip in its fair share to partake of the fruits of the labors of the residents of my city, is it still not the same thing as subsidizing? I mean I would be giving them access to resources for free. Or is it only "subsidizing" when the resources are cash money?

Frank650 said:

One of the cures frequently touted for our economic ills is government spending which presumably creates wealth through the multiplier effect. The government creates a job, that person spends money, business grows, they hire new people, etc.

My first question is with regards to what creates wealth in a country. I had always understood it to be production, not consumption. If it were consumption all one would have to do is print 20 trillion dollars and have the people spend it.

Second question is related to my topic header. When governments spends money it takes the funds out of the private economy where it is most efficiently allocated according to the supply/demand curve. This is a negative multiplier. The money then goes through government (where some is retained for the bureaucracy) and then is spent on what the intelligentsia conceives is worthwhile (which assumes they have perfect market knowledge) or is allocated according to their patronage system. Seems to me that this would be at best a zero gain and is most likely a negative.

Click to expand...

Many people believe that that the govt can "create" jobs. The reality is.... it cannot. While the govt can certainly move money around from the hands of the many, and place it into the hands of a few, and call that a "salary". It is not really a created job. That is because no matter what the govt chooses to do with collected tax money, it still came originally from the private sector in the first place.

Govt is always.. and will always be a consumer of tax money. They do not generate any revenue on their own. There are no govt owned businesses that produce goods. And even if their were... the money to start them STILL comes from private sector money. Govt is a monopoly by it's nature... it needs to be. But because it is a monopoly there is no competition with it. That means that govt has no real need or reason to innovate, or find ways of making things cheaper. The govt can never go "out of business" like a private industry company can. Even things like the military and the space program are not really done by the govt. They merely take tax money... and re-direct it to private agencies that then go off and produce these goods and services.

The hope is... that if the govt spends enough money... that suddenly there is enough buying and selling going on, that at some point the govt can either stop, or seriously ramp down the spending it does... yet the system is self sustaining at that time. In my opinion.... this is a loosing proposition. By doing what they are doing with unending "stimulus" packages.... it is like a drug addict waiting for his next fix. And over time the addict (the anology to our economy) needs ever more drugs (stimulus) to continue. Eventually... it just does not work anymore. And the second that the stimulus is taken away... or lessened even slightly... the markey starts to crash again.

Good points. I'd just like to add to that one other thought.

Creating jobs through government is a highly arbitrary, often political process that operates completely outside market realities. The same principle applies to pricing goods, suppose the government decides to intervene in the markets and set the price of sugar. It cannot determine the correct price because this would require absolute knowledge at every instant. A price that isn't reflective of supply/demand considerations creates massive distortions, inefficiencies and malinvestment.

The multiplier effect is progressive propaganda used to support crony capitalism. The real effect is negative.

http://www.google.com/search?hl=en&...p,a=1,b=1000,n=5,t=2..0.0...1ac.1.22FhWVyBLl8

The multiplier effect is a term used to describe the transmission of new income (in some form or another) entering the macro economy and then dispersing through a multitude of economic agents. As a rule of thumb, the degree of a multiplier depends upon the level of new consumption that results from new income. For example, if new income is introduced into the economy (in some form or another) and all of it is spent by all agents who first receive it, and then spent again by all the agents who just received it, and so on and so on, the multiplier becomes infinite and continues to recirculate in the economy forever and ever. This does not occur on a macro level, but serves as a necessary axiom.

In reality, not every agent that receives new income spends 100% of it. To further the concept, assume that a new source of income is introduced into the economy, however this time all agents who receive it spend 0%, or save 100%. In this scenario, the multiplier is zero. But why? Somebody has more money than they had prior, and surely they will hide it in their mattress. In this scenario, a different multiplier effect can be observed, known as the money multiplier. Since this is not the topic of discussion, and it differs from the income multiplier on a microeconomic level, i'll save that for another thread.

So now we have two sort of axioms; and therefore i can begin to construct a piecewise defined function.

We can say the function that is representative of the multiplier, f(x), is equal to infinity (∞) when x = 1. Similarly, we can also say that f(x) is equal 0 when x = 0.

Now what happens if for example if 50% is spent, or 50% saved by all economic agents who receive the new source of income, from one agent to the next?

Consider the example of $1 introduced into the economy (by some form or another), at which 50% is spent by the first and all subsequent agents.

$1*(1/2) + (1/2)*(1/2) + (1/2)*(1/2)*(1/2) + .... + (1/2)^n is equal to f(x) = (1/(1-1/2)), where f(x) = 2 or $2. Astute students of math will see this an infinite geometric series, and allows us to define the final (and most important) part of the piece wise function.

f(x) = {∞ , if x = t; 1/(1 - x) if 0 < x < 1; 0 if x = 0} where x is equal to the marginal propensity of consumption given a respective introduction of income.

Now there is a problem. What if what is consumed is not produced in the economy in which the income was introduced? This is commonly referred to as leakage, and does degenerate the multiplier. So we must properly define x as the marginal propensity of domestic goods consumption, or the marginal propensity to consume domestic goods.

Throughout this explanation, i have been referring to the phrase "in some way or another" and i do this for a very good reason. Income multipliers exist every single day as someone earns income, receive money from a relative, or receives some form of monetary assistance from public or private entities. When people discuss the fiscal multiplier, they are talking about the amount of economic activity created from an initial bout of government spending, in terms of a percentage by multiplying the multiplier (yikes!) by 100%.

In the example above, both the multiplier and the total economic activity created were 2 due to the initial condition of $1.

What if government decided to spend $800 billion, and the marginal propensity to consume domestic goods was 33%?

$800 billion * (1/(1-.33)) = $800 billion * 1.2987 = $1,038.96 billion, or a multiplier of about 1.3.

Hope this clears things up!¡!

Kushinator said:

$1*(1/2) + (1/2)*(1/2) + (1/2)*(1/2)*(1/2) + .... + (1/2)^n

Click to expand...

This should actually be 1 + 1*(1/2) + (1/2)*(1/2) + (1/2)*(1/2)*(1/2) + .... + (1/2)^n

:3oops: