Monday, July 14, 2014
My favorite economic fallacy, which the Reason article doesn’t discuss, is the use of multipliers to falsely exaggerate the effect of government spending. Universities tend to do this a lot: “Every taxpayer dollar spent at Enormous State University results in a $50 gain to the state economy.” To justify claims like this, you simply trace the dollars spent through multiple levels. If the university spends $100 to repair a window, that’s $100 of additional business for a local company. That company, in turn, uses the $100 to pay an employee. The employee uses the $100 to buy groceries at a local grocery store. The store then pays the $100 to a local farmer for her produce. The farmer then spends the $100 to buy supplies, etc. We’re already up to a $500 effect, and there’s no need to stop there. If you trace it through a sufficient number of transactions, the effect is enormous, even though it’s still only $100.
Using that same reasoning, it’s obvious that the key to economic recovery is to significantly increase my salary. Each dollar I receive has an enormous effect on the national economy. I use some of the money to buy groceries, gas, books, and a number of other consumer goods, helping to sustain a variety of retailers and service providers. They in turn, use my money to hire employees and buy products from producers, who in turn hire additional employees and buy additional goods and services. The money I don’t spend is put into accounts at banks and mutual funds, which use the money to invest in new and existing businesses, promoting economic growth and facilitating the hiring of additional employees.
Given the enormous multiplier effect paying me has on the economy, the solution to our current economic stagnation is obvious: pay me more.