Biggest Bang for the Buck

"It is the biggest bang for the buck when you do food stamps and unemployment insurance. The biggest bang for the buck," -Nancy Pelosi

At a press conference in her home town of San Francisco, Pelosi explained that the program's multiplier effect –the amount of money generated in the local economy as the result of the subsidy– far exceeds the nearly $60 billion spent this year by the federal government and is a sure-fire way to stimulate the economy. For every dollar a person receives in food stamps, Pelosi said that $1.79 is put back into the economy.
http://politicalticker.blogs.cnn.com/2010/10/06/pelosi-fires-back-at-gingrich-over-food-stamps/


To me this makes no sense. I admit not being an economist but some here claim to be. Someone pleases explain the math for me on this.
It seems to me if every body got on food stamps and and more people were collecting unemployment insurance all of our problems w/the economy would be solved according to her.

I have never really understood the US's economic policy of giving everyone money to spend in the hope of 'stimulating the economy'. Sure eveyone goes out and spends the money - thus 'creating jobs' etc, but really, why don't you all just sit at home and keep the money?

Basically the theory is like this, taxing people means that they will save less. Instead of the money being stashed away somewhere, the government (or in this case the ones receiving benefits from the government) spend it. The money being spent means someone makes a profit, tax income increases, etc. etc. Basically, money that would otherwise be saved gets spent instead, increasing economic activity.

Of course, there are a lot of sidenotes to be made for this multiplier effect, a couple of the more obvious ones.
1) Economic growth measures productivity, which isn't necessarily linked to utility. One dollar spent by the government or one dollar spent by an individual have the same effect on GDP, but not always on well-being. At some point less economic growth is preferable to giving a larger part of that growth to government.
2) Higher taxes also lead to a decrease in economic activity, which counteracts the multiplier-effect.

IANAE, either, but it seems like what Pelosi was saying was not all that unorthodox. Of course, one can find any number of economists saying any number of things, but my understanding is that this school of thought is supported by several bodies whose opinions ought not to be dismissed out of hand.

The nonpartisan Congressional Budget Office suggests that a policy that targets those whose consumption is limited by income (which could include reducing payroll taxes or refundable and non-refundable tax rebates, as well as increasing unemployment benefit and increasing food stamps) could have positive effects on output and employment per dollar:

http://www.cbo.gov/ftpdocs/108xx/doc10803/01-14-Employment.pdf

TL;DR? They produced a table which put 'increasing aid to the unemployed' as the sigle most effective means of doing so:

http://www.cbo.gov/ftpdocs/108xx/doc10803/01-14-Employment.pdf#page=26

The Economic Policy Institute produced a not dissimilar table, based on the testimony of Mark Zandi (Moody's Economy.com chief economist and a former adviser to John McCain):

http://www.epi.org/economic_snapshots/entry/webfeatures_snapshots_20081022/

They elaborated:

"As money is spent, it creates beneficial ripples through the entire economy. The evidence is that most of the money from the recent tax rebate was saved rather than spent, thus blunting its stimulative benefit.1 By comparison, other options—such as infrastructure spending, aid to states, food stamps, and unemployment insurance (UI) benefits—are much more cost-effective because they target the needs most likely to channel money back into the economy. Mark Zandi from Moody’s Economy.com estimates that each dollar of refundable tax rebates only boosts GDP by about $1.26, while each dollar of infrastructure spending could provide a $1.59 boost. Not only are many of these stimulus options more effective, but they also have the added benefit of assisting those hardest hit by the downturn and tackling long-standing infrastructure needs that would lower transportation costs, decrease traffic, and increase business productivity."

Ralph Martire, Executive Director of the Center for Tax and Budget Accountability agrees:

"most deficit concerns being raised are motivated far more by politics than any desire to pass good policy. So much so that facts are being intentionally distorted or ignored while fiscally immaterial, short-term initiatives are wrongly being castigated as creating material, long-term issues. Nothing illustrates this deficit folderol better than the debate over whether to extend the time period for claiming unemployment insurance benefits...

In May 2010, the private sector created only 41,000 jobs. That’s 72,000 less than what’s needed to keep up with the demand generated by natural work-force growth, much less creating the positions needed for the unemployed to find work. No one’s thumbing a nose at getting hired to live in luxury eating government cheese — there simply are no private sector jobs available.

Perhaps the hawks have forgotten that consumer spending accounts for more than two-thirds of the nation’s economy. The best consumers are low- and middle-income folks, who don’t earn enough to save, so they spend their paychecks. That is, when they have paychecks. See, if they’ve lost their jobs and the private sector isn’t creating jobs and the feds cut off unemployment benefits, their ability to spend drops to, well, nil. Which is why the amount of private sector economic activity stimulated by unemployment benefits is greater than any other fiscal action government can take. In fact, dollar-for-dollar, it’s five times more stimulative than the Bush tax cuts."

http://www.sj-r.com/opinions/x1876471793/Ralph-Martire-Deficit-hawks-wrong-to-nix-jobless-benefits-extension

I think the suggestion that everyone becoming unemployed and getting food stamps to drive stimulus is facetious nonsense: this is about what to do with those who are unemployed.

As I said, I am not an economist, but doing a bit of research (links provided) has given me something to think about in this regard.

Originally posted by Barts
Basically the theory is like this, taxing people means that they will save less. Instead of the money being stashed away somewhere, the government (or in this case the ones receiving benefits from the government) spend it. The money being spent means someone makes a profit, tax income increases, etc. etc. Basically, money that would otherwise be saved gets spe ...[text shortened]... er taxes also lead to a decrease in economic activity, which counteracts the multiplier-effect.

Originally posted by whodey
Personally, I think that since government knows what to spend and how much to spend that they should simply take all our money and do it for us. In the interim they can provide us food stamps and row houses to live in, fully subsidized of course.

Originally posted by whodey
Personally, I think that since government knows what to spend and how much to spend that they should simply take all our money and do it for us. In the interim they can provide us food stamps and row houses to live in, fully subsidized of course.

Originally posted by DrKF
IANAE, either, but it seems like what Pelosi was saying was not all that unorthodox. Of course, one can find any number of economists saying any number of things, but my understanding is that this school of thought is supported by several bodies whose opinions ought not to be dismissed out of hand.

The nonpartisan Congressional Budget Office suggests that a a bit of research (links provided) has given me something to think about in this regard.