Paring Unemployment Insurance Benefits / Food Stamps Is Bad for the Economy

I often hear this from some of the cable news hosts and their guests. You see, according to these “economic theorists”, when the unemployed and/or lower-income populace receive various types of funds from the government, they spend these funds, thus increasing nominal aggregate spending in the economy. What could be wrong with that in an economy that is operating below its potential? Although I am all in favor of stimulating aggregate demand if it is demonstrably below potential aggregate supply, it is not entirely clear to me how increasing government transfer payments will accomplish this. The fundamental question I would ask those who make the claim that it is so is from where does the government get the funds to make these transfers?

If the funds are obtained by cutting other government expenditures, then some entities’ spending will be decreased by the amount that the recipients of the transfers spending increases. The result is no net increase in nominal aggregate spending.

If the funds are obtained by raising some entities’ taxes, then the spending of those paying the increased taxes will decrease, offsetting the increased spending of the recipients of the transfer payments. But, good Keynesians that the cable news economic theorists are, will say that those subject to the higher taxes (the RICH?) will not cut their spending fully by the increase in their tax bill, but rather will meet some of their increased tax bill by cutting back on their saving. And that won’t imply a cut back in some other entities’ spending? One man’s saving is another man’s borrowing. And most entities borrow in order to spend. If the taxpayer cuts back on his saving, this means that he is cutting back on his lending. And if he cuts back on his lending, then this means that a potential borrower/spender will remain just that, potential rather than actual. Only if the taxpayer chooses to run down his cash balances to pay some or all of his increased taxes will his or his borrower’s spending not decrease. More on this run down in cash balances will be discussed below.

If the funds are obtained through increased government borrowing, then the purchasers of this increased supply of government bonds will be curtailing their lending to other borrowers/spenders or will curtail their own spending in order to purchase the government bonds. Either way, someone else’s spending will decrease in order to fund the increased spending by the recipients of government transfer payments. The result is no net increase in nominal aggregate spending.

Now, it might be argued that the purchasers of the increased supply of government bonds used “idle” cash to pay for them. That is, it could be argued that the velocity of money increased in order to fund the government transfer payments. Perhaps. But can you be sure of this? With the elimination of Reg Q decades ago, bank deposit rates now tend to move up and down with open-market interest rates. So the interest sensitivity of the demand for deposits is not what it used to be because the interest differential is now more stable. MV ≡ PT. If PT, nominal transactions (the Price level times real Transactions), are to increase and M, the money supply, stays constant, you have to explain why V, velocity, increases.

Under another special circumstance (other than an increase in velocity of money) transfer payments can result in a net increase in nominal aggregate spending. That circumstance is when the increase in transfer payments is funded by a corresponding increase in the sum of Fed and depository institution credit, i.e., total thin-air credit. In this case, the recipients of the transfer payments will increase their spending and, by virtue of the fact that the funding of these payments is created, figuratively, out of thin air, no other entity need cut back on her/his current spending.

Why do you think unemployment insurance benefits and food stamps are called transfer payments? Because these government spending programs transfer income from certain segments of the population to other segments. If income is being transferred, it’s a good bet that spending also is being transferred. The nomenclature is a tip off that transfer payments do not, except under special circumstances, result in a net increase in nominal aggregate spending in the economy. Rather, transfer payments tend to redistribute a given amount of income and spending.
The above is not meant to be an argument against transfer payments. I believe that the arguments for or against transfer payments are largely moral and philosophical. My only problem with you people arguing in favor of transfer payments is when you try to justify it in terms of macroeconomics.

Congress Should not Oppose an Increase in the Minimum Wage as It Would not Involve an Increase in Government Spending or an Increase in Taxes

I heard this one on cable news, too. As far as it goes, it is true. But, in my opinion, it does not go far enough. As I tried to illustrate in the comments above, the government has to obtain the funds it spends from some source – the nonbank public through taxes or borrowing or from the Fed and depository institutions. You might think of the government as an intermediary in the collection and distribution of funds. But just as the funding from an increase in government transfer payments has to come from somewhere, so, too, does the funding from an increase in the minimum wage. Who will get the bill for McDonald’s increased wage bill? McDonald’s customers through increased menu-item prices? McDonald’s stockholders through decreased profits. McDonald’s suppliers through decreased orders for merchandise from them. So, no, an increase in the minimum wage would not directly involve an increase in government spending or an increase in taxes. But it would involve a redistribution in income and spending away from McDonald’s customers, away from McDonald’s stockholders, away from the stockholders and employees of McDonald’s suppliers and toward McDonald’s employees. So, just as transfer payments redistribute spending and income, so does an increase in the minimum wage.

I have also heard cable news economic theorists argue that an increase in the minimum wage would result in a net increase in nominal aggregate spending. Really? Explain to me how M goes up and/or V goes up in MV ≡ PT as a result of an increase in the minimum wage. Or does P go up and T goes down? If, in fact, an increase in the minimum wage were to result in a net increase in nominal aggregate spending, then we could eliminate any shortfall in aggregate demand relative to aggregate supply by merely boosting the minimum wage to whatever level necessary to eliminate the gap. If only.

Let’s assume that the argument for an increase in the minimum wage is a moral one, not an economic one. Let’s further assume that we as a society believe that people who work are entitled to some minimum income. If their wages do not yield this minimum income, then we as a society feel honor bound to, one way or another, boost their income to the minimum. If so, as a matter of equity, why should the customers of McDonald’s, the stockholders of McDonald’s and the suppliers to McDonald’s bear the biggest burden in boosting McDonald’s employees’ income to the minimum via an increase in the minimum wage? If we as a society believe that McDonald’s employees are entitled to a minimum income, then should not we as a society be willing to have our taxes increased in order to “top off” McDonald’s employees’ market-based wages either through a wage subsidy or an increase in the earned-income tax credit?

I don’t even want to get into the economic argument as to whether an increase in the minimum wage results in someone’s loss of employment. To paraphrase an old joke, if you ask an econometrician what is the effect of an increase in the minimum wage on employment, he will answer, “What do you want it to be?”

On the Wednesday Preceding Employment Friday, It Was Reported that Private Employment Increased by X Thousand

This is not what I hear on cable “current events” news channels but on the cable financial news channels, whose producers should know better. On the Wednesday preceding Employment Friday, ADP/Moody’s releases its estimate of what it perceives the BLS is going to report as the change in private nonfarm payrolls for the prior month. The media might mention parenthetically, if at all, that this is an estimate of an estimate. Although the median absolute difference between the revised ADP/Moody’s estimate and the revised BLS estimate is only 44,000 between April 2001 and October 2013, there were 22 occasions in this timespan in which the monthly absolute difference between the two revised series was 100,000 or more. If the ADP/Moody’s estimate is that nonfarm private employment increased by 100,000 in a given month and two days later the BLS estimate is of a 200,000 increase, which estimate do you think will have the largest impact on the financial markets? If you answered as I, the BLS estimate, why does anyone care what about the estimate by ADP/Moody’s?

The (Fill in the Blank) Economic Report Showed a Change Greater than / Less than What Economists Expected

Ask an economist for a number and he will give you a number. To illustrate, some economists actually provide estimates of the ADP/Moody’s monthly employment report. Why? Because someone from the media asked. But if the media wanted to serve a useful function, they would ask two follow-up questions when requesting a forecast from an economist. How has that economist’s past estimates of a particular economic statistic compared with the actual reported statistics? And, how did the economist arrive at his estimate? That is, what’s his model – explicit or implicit? If these follow-up questions were asked and answers obtained, I wonder if anyone would really care what economists “expected”.

Then there’s the post-release interview. Economist A’s forecast of the number was plus 100,000, but the actual number turned out to be minus 100,000. In the post-release interview, in which Economist A’s errant forecast is rarely mentioned, Economist A with great confidence can fully explain after the fact why the number turned out to be plus 100,000 and will tell you that next month’s number also will likely be near the same magnitude (it’s the chameleon method of forecasting) without missing a beat or exhibiting a hint of shame.

Along the same lines, economists shy away from giving a definitive forecast of a binary event. Rather, they like to hedge their forecast “bets” by giving a probability of a binary outcome. For example, Economist B thinks that there is a 50% probability that the Fed will announce today a tapering in the amount of securities it will purchase. Either the Fed will or will not make such an announcement today. It is not going to make a 25% announcement, a 50% announcement or a 75% announcement. It’s all or nothing!

It’s Another Festivus Miracle!

Festivus (celebrated on the evening of December 23, i.e., erev Christmas Eve, how’s that for ecumenicism?) is not only a time for the airing of grievances, but also a time of miracles. And as Festivus 2013 approaches, the Kasriel household has observed two miracles. The first miracle is that our daughter, who has one more semester of law school left, has actually received an employment offer from a well-respected law firm. What is miraculous about this is unrelated to our daughter’s qualifications – they are excellent (thanks to her mother’s genes) – but is related to the depressed nature of the employment market in the legal profession. The other miracle is the recovery in one of our kitties’ health. After bi-weekly hydrations for kidney failure over a nine-year period (again, thanks to my miraculous wife), our otherwise healthy little Dee took a sudden turn for the worse last week. Now, miraculously (and with stepped up hydration) she seems to have rallied back to her lovable, quirky, independent self.

Happy Festivus everyone,
Paul L. Kasriel
Econtrarian, LLC
econtrarian -at- gmail.com
the-econtrarian.blogspot.com

Sturgeon Bay, WI 54235

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

12 Responses to “2013 Festivus Airing of Grievances – I’ve Got a Lot of Problems with You People!”

  1. ByteMe says:

    Who will get the bill for McDonald’s increased wage bill?

    And who gets the bill for making sure that McDonalds’ workers are brought up to the poverty line with subsidized/free health care from the government, food stamps, etc.? Oh, right, the rest of us… instead of McDonalds’ customers. I’d rather McDonalds raised their prices to pay their workers more so that we don’t have to subsidize the working poor. I could care less about their shareholders not getting that extra special dividend in their stockings this year.

    • Right now, the subsidy for low wages comes from you the taxpayer. The government supports the subsidized wages/health care.

      Raise it to poverty level and the costs shift to the buyers of McD’s burgers.

      Seems pretty reasonable

  2. MidlifeNocrisis says:

    I think the article leaves out a significant fact, and that is that the US has it’s own sovereign fiat dollar currency and this is a significant source of funds not mentioned. Not all spendable funds come from “borrowing” or “taxation” that reduces aggregate spending. I would argue that if Congress approves funding there is another way to pay – with an increase in the money supply. Let’s face it, the money supply increases over time whether we like it or not. Inflation being the primary constraint.

    Not all payments are “transfer” payments. This creates a hole in his argument, in my opinion, with regards to aggregate spending.

    • RW says:

      Exactly correct and that hole in his argument is big enough to drive a few percent larger GDP through (a trillion bucks or so, give or take a bit).

  3. RW says:

    I would have thought Kasriel too good an economist (or at least too practical) to mistake an accounting identity for an equilibrium condition but some very smart people have made the same mistake so I suppose it’s forgivable.

    Fama’s Fallacy, Take I: Eugene Fama Rederives the “Treasury View”

    Back in the 1920s and 1930s–in the days that overly-clever bisexual academic dilettante John Maynard Keynes was trying to persuade us that if only we got the government to spend more money the unemployment rate might go down–by far the silliest argument against his position was the one put forward by the staff of the Chancellor of the Exchequer: the so-called “Treasury View.”

    The Treasury View was that nothing could boost employment: not government spending, not tax cuts, not private business decisions to expand their capacity, not irrational exuberance on the part of entrepreneurs–for the level of output was what it was and the unemployment rate was what it was and no fiscal policies or private investment decisions could change it, for all they could do was move resources from one use to another without affecting the total flow of economic activity.

  4. fastEddie says:

    First – “Transfer payments” to the poor are spent. Money sitting with the rich is idle – or even offshore. The poor are not blowing the unemployment checks on trips to Paris. It is being spent on food, clothing, fuel, etc. There most certainly is a multiplier. Which is why it IS justified when talking about economics.

    http://www.cepr.net/documents/publications/2009-01-Spending-Vs-Tax-Cuts.pdf

    Second – “transfer payments” are a form of crime prevention. If you want to cut payments and deal with an angry mob of hungry folks – I certainly don’t.

    Third – we live in a SOCIETY, not just an economy. What is good for our SOCIETY ( like education ) is good for each of us, what is bad for our SOCIETY ( like hunger or crime ) is bad for each of us.

    Lastly – I have found arguments for this “libertarianism” and “moral hazard” to usually only be thinly wrapped racism. People don’t wish to support society because it means better things for brown people. People who are willing to move into “gated” communities and private schools do so in large part because of racism ( perhaps subconsciously – I do not mean to suggest that these folks dress up in white robes on weekends ). The withdrawal of the right-wing in particular from SOCIETY is very troubling. Before the civil-rights movement, brown people were effectively excluded from society, and we saw strong civic engagement on all sides. But since then, we have seen the “privatization” of so many things – especially higher education, but lower education as well.

  5. jbay says:

    “My only problem with you people arguing in favor of transfer payments is when you try to justify it in terms of macroeconomics.”

    ~ Hi Barry, I’d like to hear your macroeconomic summary of what happened in parts of Cincinnati where not only did the home owner walk away but so did the bank forcing the government to spend money tarring down houses?

    I get why they were torn down. They were abandoned do to an oversupply. Restrict the supply to stabilize prices right? But wouldn’t it have been better to make transfer payments such that the people didn’t flee the homes in the first place?

  6. Anton C. says:

    Kasriel omits (intentionally?) the implicit subsidies that McDonald’s and other lowest-wage employers get via insurance and food stamps to their crew – now there is a transfer payment if I’ve ever seen one – and sees aggregate spending as a single-vector closed pool economy.

    Thank god he announced his daughter got a job as a lawyer and his ailing cat is improving.

  7. 873450 says:

    Lots of holes in the author’s argument big enough to drive lots of trucks through …

    “So, no, an increase in the minimum wage would not directly involve an increase in government spending or an increase in taxes.”

    Virtually every dollar pay increase earned by virtually every minimum wage earner in the U.S. will be subject to payroll taxes significantly boosting funding to Social Security and Medicare. How will Paul Ryan kill these programs if they aren’t broke and the next generation can have them too?

  8. Lord says:

    So nice to see how growth is an illusion since increased spending on one company can only come from reduced spending on another.