A Question for Economic guru's

[BlueJazz]

I was talking to my son on the phone last night (he & ex-wife live in another state).

He proposed an economic scenario and asked me questions as to whether it would work or not.
I'm ashamed to say, I said probably not but would have to consult people (fellow DU's) as to the EXACT reasons why it wouldn't work.

His scenario is this: The U.S. mint prints a lot of money....maybe a trillion dollars?
The Government distributes the money to to populace.
The poorest get the most.
As you move up the scale (people earning more) the "windfall" becomes less until at the 1 million dollar level it ends.

Naturally the value of the dollar would fall but the people earning under a million would be WAY more than compensated for the lose.
Folks earning more than a million would (of course) feel the pain of the dollars devaluation but could well afford it.
In a sense it would redistribute the wealth in an easy manner....before you slam me, it's his words not mine.

I explained a few reasons why it might not work but as I said before my knowledge of economic stuff is not up to par.

Tell me why it's a bad idea....I truly want to know why (on a deeper level)......

[DemocratSinceBirth]

1. You

would undermine the currency and since most trade is tied to the dollar the results would be catastrosphic....

Even the defecit if left unchecked can become catastrophic...

[Oberst Klink]

2. Suddenly, the value of everything would skyrocket over night.

Those already holding hard goods and real property would make a killing. The poor, being what they are, would be the consumers of these inflated goods.

[JHB]

4. Wealth redistibution...

...occurs with every transaction, so why is it "wrong" when it flows down, rather than up, the economic scale?

I agree this "print money and hand it out" scheme has plenty of drawbacks, but your second part does not follow from the first.

[ModerateMiddle]

8. It does though

because if the poor, by definition, have fewer of these "hard goods" whose "real" value would remain the same, their economic position would worsen, because they are the ones who live "paycheck to paycheck" and spend everything that they make. Everything that they buy would cost more. I guess it would depend on just how much $$ they would get with this redistribution thing - how long it would last considering the increased prices of everything.

[newyawker99]

10. Hi Oberst Klink!!

Welcome to DU!! :toast:

[TreasonousBastard]

3. Well, that's been tried, sort of, but...

you can't just print money and give it away. Currency is really only a small part of the actual "money" around. Most of it is in bank accounts and is being recycled that way. Too much cash actually could constrict the economy, although that's not very probable. All sorts of technical stuff about the money supply and multiplier effect is involved.

There are other ways to get money into people's hands, though.

the Keynesian "pump priming" under FDR was an attempt to get cash into the economy. Massive public works got people working and spending.

The "reverse income tax" has also been proposed, and tried in a few forms. If you're working poor, you don't pay taxes, but you get a "refund" anyway.

The tax system in general has been accused of being a method of redisributing wealth, which in some cases it is. Rather than just give the poor some money, there are services set up to take the load off of them. Rent subsidies, food stamps, free day care, etc., are all ways to assist lower income people without just giving them cash.

And, of course, there's already welfare, disability, unemployment, and even Social Security, which were all plans envisaged as giving pooor people money.

Curiously, though, everything I mentioned here seems to be on the cutting block as it is. Handing out bundles of sawbucks just isn't in the cards.

[JHB]

5. ...if you're working poor...

...you don't pay income taxes, but you do pay taxes (payroll, sales, property, etc.).

Never gloss over that.

[ModerateMiddle]

6. Increasing the money supply

You are correct that the value of the dollar would be seriously undermined if suddenly there were so many extra dollars "chasing" the same amount of goods. Inflation (which is what this would be - each existing dollar, not just the influx of new money, would be worth and subsequently *buy* considerably less) is one of the big bugaboos of modern economies. It has consequences well beyond what anyone can really imagine, and the economists can imagine quite a bit. Interest rates have to rise dramatically, because investors need to cover not only their "real" return (in non-inflationary dollars), but the rate of inflation as well. Remember when interest rates hovered around 20 percent? Imagine it again. Then remember all of these low interest loans that folks have recently signed up for. How many of them are tied to prime which is tied to federal funds rates, etc.? Those folks who planned on a 5% (approx) interest rate are going to get stuck with double digit interest rates. For the fixed rate loans, the banks or investors get screwed.

Yes, under your son's scenario, the rich would get soaked the worst, because of the existing funds they have which would suddenly be worth considerably less. But if we're going to soak the rich, why not do it with taxes? At least with taxes, the consequences are fairly well known.

Governments around the world take great care not to undermine their own currencies, if at all possible, because of the horrible effect high inflation rates have on their economies - both locally and globally.

[Spider Jerusalem]

7. Hyperinflation...

such as what happened in Germany in 1923. This would just mean you'd have to pay ten thousand dollars for a pound of potatoes, five thousand for a gallon of gasoline...it would be effectively devaluing the currency. The more money in circulation, the greater the inflation rate...which is whence comes the conventional wisdom that unemployment should be kept at an "optimum" level of 5-7%, since if everyone had a job and was earning money, the greater amount of money in circulation would lead to a higher rate of inflation.

[ModerateMiddle]

9. That "optimum" level of unemployment

assumes still that everyone who wants a job can find a job within a reasonable period of "searching". It also assumes that there is a "natural" unemployment rate that tracks "transitions" - folks coming out of the military or graduating from college - they are "unemployed" for a period of time while they find what they are looking for - folks leaving an area, etc.

We are still in your 5-7% range, now, with 6 something percent, but that 6% is not real. It doesn't include the long term unemployed anymore.

[leftyandproud]

11. now that you mention that...

saw a program a few months ago that said the inflation was MANUFACTURED in Germany...Their enemies ran a counterfeit operation, printing millions of german marks...then air dropped them over the cities. Theory being...you destroy the currency...you destroy the country...and it worked.

[BlueJazz]

12. Thanks so much....Fellow DU's

As usual, your posts are informative!

[ProfessorGAC]

13. Others Here Are On The Right Track

The simplest explanation is that the economy is simple tautology. Productivity times price, equals the pool of money times the velocity of that money. (p*q = m*v)

If you increase "m" by a statistically significant degree, then either "q" or "p" ,ust rise proportionally. If productivity can't instantaneously increase to meet the flow of new dollars, the prices have to rise by an amount proportional to the change in dollar volume.

Also, as this occurs, and there is more spendable cash in the system, the velocity of money suddenly increases. Now, the right side of the equation goes up exponentially. In order to balance the equation, prices rise exponentially, too!

This is exactly what Brazil tried to do in the 80's. Print money, devalue the currency, and distribute the cash. They had almost 9 months of hyperinflation. When it all shook out, people had 8 times more money, but only 1/9th the buying power. It was a net negative.

There is a saying in systems optimization, that one can attempt to improve the system or one can distort the system and make it look good for a while. Printing money without the goods, productivity, or exportation routes to support it is a perfect economic example of the latter.
The Professor