Quote Box ArchiveGo to Past Quote Boxes

Aug 30, 2008

Leading The People

If You Don't Agree Now, You Will Later

The University of Chicago was an intellectual school in 1967 (probably still is), and it had a diversity of students, I among them. Most students were liberal or very liberal; some were aspiring revolutionaries. I had read a little and liked limited government, freedom to start a business, and personal freedom. I doubted that a more powerful government was going to change the world in any good way. This made me a "conservative" in most discussions.

I have a clear memory of the end of one discussion. I was talking to one of the radical guys in my dormitory, call him Brad. He argued that only a radical change in government would bring about a better society. I disagreed. He said that I should join the demonstrations against the University to end the Vietnam war. I thought a sit-in demonstration against the University was misdirected. I suggested the he should demonstrate against the government; the University was not at war.

He said that his movement would become stronger, and eventually I would agree with him. I asked, what if I didn't agree with him, even later? He flashed anger and told me that if I didn't agree on my own, he would make me agree. I saw that as the end of the discussion.

I thought of this conversation when I saw Jonah Goldberg's post of 08/26/08 at National Review (via Instapundit) about the radical bombers Ayers & Dohrn. Goldberg wrote:

[edited]  I am amazed, simply amazed, at the amazement of many liberals that Ayers and Dohrn should matter to anyone. Well, it seems puzzlement over the inability of others to get over this stuff extended to Dohrn herself. Fast-forward to 1993. In a predictably sympathetic profile in the New York Times, Dohrn said: "I was shocked at the anger toward me."
People like Brad, Ayers, and Dohrn won't take No for an answer. Their self confidence and superior intellect (smile) tell them that they have the right answer for whatever problem they are interested in. They are better than the people who don't agree with them, and they don't mind using force when they can't get agreement.

Brad admitted that he would eventually force me to do things his way. Ayers and Dohrn knew that their cause justified blowing up their opponents. Dohrn does not understand what all the fuss is about; she only followed the path that she thought was right as a soldier for the good.

Jonah Goldberg referred to some liberals who sympathized with Ayers and Dohrn. Those liberals understand that a vision of change may require coercion. They sympathize that Ayers and Dohrn were admirable in their goals and their willingness to take risks. Bombing was just a bit enthusiastic.

People like Brad propose solutions with the same general theme:

  • They have a solution that will work if we would only stop arguing and agree with them.
  • They may need to omit some information about the new arrangements and what these will cost. They observe that ordinary people do not think well enough to make decisions in their own long-term best interest. Dissenters are either uninformed or selfish.
  • There is no need to argue about the specific meanings of words. The good of the society justifies telling some lies, if it comes to that.
  • They do not limit themselves to offering another possibility. They reorganize everything into a comprehensive new system, breaking the existing relationships between people and defining a new set of relationships described by charts, graphs, committees, and regulations. It is an awesome task that keeps many of them at work in the bureaucracy.
  • They are best qualified by superior education and intellect to implement the solution.
  • The solution requires that we all pitch in and not be greedy. The people with the most resources will put their extra income or property into the pot.
  • There must be complete cooperation. Alternate solutions go against the community spirit, and these are elitist and illegal.
  • There will be severe penalties for non-compliance. All good people will want to comply.
  • If there are not enough resources to pay people for their work according to the solution, then those people with the appropriate knowledge and experience will contribute some of their effort for free. Whatever it takes for success.
  • They will modify or replace the solution if it doesn't work. They will design a new solution the same way they designed the first solution, through thought, research, and discussion among themselves. Further solutions may require more resources.
  • Providers within the solution will be monitored, measured, and adjusted to achieve best practice and efficiency. Daily records and monthly reports will assure that providers are in compliance and are delivering the highest quality services. Payment will be based on written quality measures.
This may seem exaggerated, but it has happened in many areas of American life. It is halfway accomplished in healthcareBy board certified Emergency Medicine Physician 911DOC, with disastrous results.

Brad's Friends want to be elected, then use that power to make your life better, and you better, whether you agree or not. Brad's Friends are not motivated by respect for their fellow citizens or a regard for the truth. They want to produce a grand experiment to make a better world. Eventually, they will make you agree with them.

The Man of System

Adam SmithBiograph.com  (1723-1790) was a Scottish economist and philosopher. His book The Wealth of Nations details the first system of political economy and is considered the bible of capitalism.

Smith’s  The Theory of Moral SentimentsLibertarianism.org  includes this observation of two ways of seeing the world. Smith appreciated the natural and harmonious view of spontaneous order. But, the “man of system” sees society as something he can manipulate “easy as the hand arranges pieces upon a chess-board.”

[edited to modern usage]:  The man whose public spirit is prompted altogether by humanity and benevolence will respect the established powers and privileges of individuals. He will respect even more the great orders and societies into which the state is divided.

He may consider some of those privileges as partly abusive. But, he will be content to moderate what he cannot eliminate without great violence. When he cannot conquer the prejudices of the people by reason and persuasion, he will not attempt to subdue them by force. He will observe the advice of Plato never to use violence to his country no more than to his parents.

He will accommodate his public arrangements to the confirmed habits and prejudices of the people, as well as he can. When he cannot establish what is right, he will not disdain to reduce the wrong. When he cannot establish the best system of laws, he will work to establish the best that the people can bear.

The man of system, to the contrary, is apt to be very wise in his own conceit. He is often so in love with the supposed beauty of his plan that he cannot allow the smallest deviation. He establishes it completely and in detail without any regard to the interests and prejudices which may oppose it. He seems to imagine that he can arrange the members of a great society with as much ease as he could arrange pieces on a chess-board.

He does not consider that chess pieces have no will of their own. But, in the great game of human society, every piece has its own will, possibly opposed to what the legislature wants. If those two wills act in the same direction, the game of human society will go on harmoniously and is likely to be happy and successful. If those wills are opposite or different, the game will go on miserably and society will always be in disorder.


Lying is Moral When Your God is Electing Democrats
08/29/08 by Jon Sanders at TownHall.com

Conservatives believe lying is wrong. Numerous studies have shown that conservatives are far more honest than political "liberals" As author Bruce Walker pointed out, 60 percent of Americans consistently identify themselves as conservative; in short, "Conservatives are not just a majority of Americans, but an utterly overwhelming majority of all Americans."

So yes, leftists don't have the "luxury" of being able to tell voters, who believe lying is wrong, that they think it's OK to lie to get elected. You see, getting elected is the god of the Left from which all morality flows.

Democrats Offer Stealth Liberalism
08/29/08 Wall Street Journal - Potomac Watch by Kimberley A. Strassel

If today's liberal storyline were correct, a proud "progressive" candidate should win voter acclaim with promises of higher taxes, government regulation, an encompassing health-care entitlement, protectionism and corporate-bashing. We can't know if that's the case, since the "progressive" Mr. Obama is doing such an excellent job of hiding those policies behind the conservative rhetoric of "choice," "tax cuts," "free trade" and "freedom."

How to be Annoying and Useless:
An Introduction to JCAHO and Press-Ganey

04/06/08 by EtoTheIpi at DocsOnTheWeb
A doctor complains about bureaucracy imposed for no real improvement:

Now, Press-Ganey. This is a survey company that asks patients to respond to questions about the quality of care they received. Really it is the PERCEIVED quality of care measured, often from non-paying "customers", who demand perfection and know very little about medicine (a hospital, by the way, is not a hotel. Sorry.) A 'mean nurse' can [ruin] your Press-Ganey scores relative to other hospitals. A doc who will say "no, I know better" to the annoying patient will drop you to the bottom of the list.

Control has been handed to the paper pushers and taken away from the doers. I weep for our profession.

Councils Recruit Unpaid Volunteers To Spy On Their Neighbours
08/30/08 by ThisIsLondon.co.uk (via Instapundit)

Neighborhood Councils in Britain are recruiting 'citizen snoopers' to report litter louts, dog foulers, and even people who fail to sort out their rubbish properly.

The 'environment volunteers' will also be responsible for encouraging neighbours to cut down on waste.

The move comes as local authorities dish out £100 fines ($180) to householders who leave out too much rubbish or fail to follow recycling rules.

'With council tax so high, the last thing people want to pay for is an army of busybodies peering through their net curtains at their neighbours as they put out their rubbish.'

Obama and Ayers Pushed Radicalism On Schools
09/23/08 - WSJ.com by Stanley Kurtz

(edited) Bill Ayers founded the Weather Underground in the 1960's. Ayers and his cohorts bombed the Pentagon, and he has never expressed regret for his actions. Barack Obama's first run for the Illinois State Senate was launched at a 1995 gathering at Mr. Ayers's home.

Ayers founded the CAC in 1995, ostensibly to improve Chicago's public schools. The CAC's agenda flowed from Mr. Ayers's educational philosophy, to infuse students and parents with a radical political commitment, downplaying achievement tests in favor of activism. Mr. Ayers wrote in "City Kids, City Teachers" and "Teaching the Personal and the Political," that teachers should be community organizers dedicated to provoking resistance to American racism and oppression.

Obama and Ayers - 09/23/08 at JustOneMinute (via Instapundit)
Obama explains his relationship with Bill Ayers, in an interview with Chris Wallace of Fox News on 04/27/08.

(edited) OBAMA: Now, Mr. Ayres is a 60 plus year old individual who lives in my neighborhood, who did something that I deplore 40 years ago when I was six or seven years old. We served on a board together that had Republicans, bankers, lawyers, focused on education, who worked for Mayor Daley. The same Mayor Daley probably who when he was a state attorney prosecuted Mr. Ayres’s wife for those activities. I (inaudible) the point is that to somehow suggest that in any way I endorse his deplorable acts 40 years ago, because I serve on a board with him.

Obama, Ayers and the Annenberg Challenge
09/22/08 at GlobalLabor by Stephen F. Diamond

(edited) The Chicago Annenberg Challenge was far more than a chance for Ayers to engage in "radical" efforts to raise the political consciousness of young students. It was a front in a battle for control of the Chicago Public School system. The Challenge represented an authoritarian and bureaucratic agenda - a desperate attempt to foist upon troubled classrooms a "politically correct" curriculum, and to use parents as canon fodder to control teachers and administrators.

The Authoritarian Radicals - Diamond's complete paper is at The Social Science Research Network.

Stephen F. Diamond, Santa Clara University - School of Law (09/1/08)

Abstract: The Chicago Annenberg Challenge was a $160 million dollar reform effort in the Chicago public school system led by Barack Obama and Bill Ayers among others. An analysis of the Challenge suggests that an authoritarian form of politics shared by Ayers and Obama was a critical part of the reform effort. This form of authoritarian radicalism has its roots in the American New Left and Black Power movements. The paper contrasts the authoritarian and anti-union approach of the Challenge with a democratic alternative.

Ayers-Dohrn-Obama Tie Shouldn’t Be Dismissed
10/06/08 - PajamasMedia by Bob Owens

[edited] Obama's campaign manager David Axelrod tried to explain Obama’s involvement with Ayers, “Bill Ayers lives in his neighborhood. Their kids attend the same school. They’re certainly friendly, they know each other, as anyone whose kids go to school together.” This is obvious fiction. Obama's children are in elementary school; Ayers’ children are adults.

Ayers’ wife Bernardine Dohrn has largely escaped recent scrutiny. She was either a leader or the leader of the Weathermen, with ties now to both Barack and Michelle Obama.

Dohrn was a principal signatory of a Declaration of War against “AmeriKKKa”, now a standard spelling among radicals. Dohrn participated in multiple bombings and was accused of planting a bomb at a San Francisco police station that killed an officer and maimed others, according to an FBI informant.

Ayers and Dohrn infamously played host and hostess to Barack Obama’s political “coming out” with a meeting at their home, where outgoing State Senator Alice Palmer tapped Barack Obama to be her handpicked successor.

Other direct connections between the Obamas and the Ayers are much harder to discern and have never been thoroughly investigated.

Daley reins in radicals the Chicago Way
10/11/08 - Chicago Tribune by John Kass

[edited] Obama and Ayers are neighbors and they worked together on school issues with the same foundation. Obama's political coming-out party was held in Ayers' living room when Obama was running for his first political office. The boss of Chicago is Mayor Richard Daley. Mayor Shortshanks has thrown his protective embrace around both men. These are facts.

The reason Ayers is not a big deal in Chicago has to do with the Chicago Way, and the left fork of that road that has been bought and paid for by the Daley machine, subsidized by taxpayers who foot the bill for public relations contracts from City Hall.

University-educated consultants get city contracts to spin the news, shape symbolism, and tell out-of-town reporters that Ayers is no big deal. They won't bite the hand that feeds them. For an examination of the Daley spin machine—and its cost to taxpayers—please see Tribune reporter Dan Mihalopoulos' story in the Sunday editions.

NYT Won't Run Op-Ed Criticising Bill Ayers
12/23/08 - PajamasMedia by Bob Owens

The New York Times published an Op-Ed article by Bill Ayers on 12/5/08. They declined to publish a rebuttal by Larry Grathwohl. Grathwohl is the only informant to penetrate the Weather Underground for the FBI, and lived the history Ayers wants to rewrite. Here is an excerpt of Grathwohl's reply.

[edited] Billy goes on about how the Weather Underground came into existence because “peaceful protests had failed” and “after an accidental explosion killed three comrades.”

The explosion of the townhouse in Greenwich Village was the result of a bomb factory which was preparing bombs containing roofing nails for use at a Fort Dix enlisted club. The inclusion of roofing nails can have but one purpose and that’s to injure or kill people.

Prior to this event Bill’s wife, Bernardine Dorhn, placed a bomb of the same design at the Park Police Station in San Francisco and killed Officer McDonnell. Additionally, I was still inside the Weather Underground when the townhouse blew up and the commitment to sabotage and terrorism had already been established and the purpose was the overthrow of the United States government.

Aug 25, 2008

1 President + 1 Vice President = 1 President

The Vice President Doesn't Matter Much

John Nance Garner IV nicknamed "Cactus Jack" was the 44th Speaker of the US House of Representatives (1931-33) and the 32nd Vice President of the United States (1933-41). He served as Representative from Texas between 1902 and 1933. He was an experienced and successful politician.

He is famous for his evaluation of the Vice Presidency as "not worth a bucket of warm piss."

US Senator Barack Obama has chosen US Senator Joseph Biden to run for election as his Vice President. There is much discussion about how this will help or hurt Obama's chances for election.

The theme is that Biden brings much needed experience in Senate politics and in foreign policy. Sen. Biden has served in the Senate and on the Judiciary and Foreign Relations committees since 1973, has been chairman of both committees at times, and is the current Chairman of the Foreign Relations committee.

The VP should be able to be President in his own right, and a person who we would trust. We should care about the political positions and character of the VP because the choice reflects Obama's judgment. It doesn't matter a bit what experience he brings to the Obama presidency.

The President doesn't need the VP to agree with him, and usually doesn't ask, for fear that he will seem weak, ignorant, or indecisive. The President has access to the best intelligence and advice in the country, anyone he wants. The VP does not provide a special resource. The VP serves in the President's cabinet only to the extent that the President directs or allows him.

The VP seems to matter because the public thinks that he matters. The public likes the idea of a "team" running the country. It is natural to consider two people in agreement as more stable than one person. In fact, the President jealously runs the show.

The VP is most useful during the election because he gets more publicity than other supporting politicians. He can attack the opposition without making his candidate President look mean. He can advertise the President's policy after election.

A VP can build support for his own run for President, and he can give his supporters more influence.

Albert Gore was VP for eight years under President Bill Clinton. He has acquired $100 million by being chief lobbyist for green causes while in office, and an investor and partner in green companies enabled by public policy and legislation that he influenced.

The VP does not add to the skills of the President or provide balance in governing. He becomes President in Waiting, Lobbyist in Chief, gives aid to his factional political supporters, and can use his influence to become rich.

The VP is a distraction from the central question of the election, which is what worldview and judgment does the candidate for President bring to the job?

08/31/08 - Governor of Alaska, Sarah Palin is McCain's choice for Vice President.

This supports Palin's political career by pleasing Palin's political supporters, and some people will support or oppose McCain because he has picked her. She has the political identity of a strong, independent, religious, pro-life, woman and mother.

There is debate about her political experience. Weak because she was mayor of a small town, and is governor of a small state. Strong because she has been a successful reformer, removing corruption and negotiating for lower taxes and efficient government.

McCain reveals his judgment by choosing her as a person who could be president. Actuarial tables tell us that McCain's chance of dying within 4 years is 16%, 1 in 6. Obama's chance of dying within four years is 2%, 1 in 50.

From the Social Security Period Life Table, Expectations for life as of 2004. Of 67,016 males age 72 in 2004, 57,395 are expected to be alive 4 years later. That is a 14.4% expectation of death. I simplify that to 1 chance in 6 that Palin will need to serve as President, including some chance that McCain could be disabled.
The question remains. Is McCain or Obama the better choice for President as an individual, regardless of VP? How is the judgment of McCain or Obama revealed by his choice of person he believes would be a good President in his place?

Aug 2, 2008

Econ 201: The Myth of the Economic Multiplier

$1000 Business Sales x 4 Economic Multiplier = $4000 Economic Benefit. No.

PBO's (politicians and business owners) often want to develop businesses using taxpayer money. The politicians may subsidize loans, give tax breaks, sell public land cheaply, buy private land for the project, build utility services and roads, and provide subsidies. The PBO's need justification for the public expense. A claimed economic multiplier helps them get the money.

I usually suspect the motivations of the PBO's. The politicians or their family members may own part of the business, be its suppliers, or sell the land used. The politicians may get contributions from the business owners and/or the unions that supply workers to the business. The business may receive contracts from the town at favored prices.

PBO's gain public support by giving an inflated "Economic Value" or "impact" for the project. This sounds good but has no meaning. Call the project X-Corp. The Economic Value of X-Corp is supposed to be its spending increased by an Economic Multiplier of about 4. If X-Corp spends $1 million per year, it is supposed to have an Economic Value of $4 million to the people of its town and state.

The Economic Multiplier comes from counting transactions. X-Corp pays dollars to its employees and to other businesses. Then these people and businesses re-spend the dollars to more employees and businesses, and so on, in a spreading wave of re-spending that makes everyone happier. The Economic Multiplier is supposed to estimate how much additional value is generated from this re-spending.

The PBO's might say that a 5% sales tax on the $1 million in X-Corp's sales, plus a 5% income tax on the $4 million in increased Economic Value, produces $.25 million ($250,000) in additional tax revenue, each year.

This looks like a big win for the public. The tax revenue over 10 years is worth up to $1,755,000 in public expense up front to get X-Corp going and produce that $4 million in economic benefit each year.

That would justify the public investment, if it were true.

Note that a single payment of $1,755,000 today is worth 10 yearly payments of $250,000, if similar investments earn 7% interest.
Two nagging thoughts.
  • When X-Corp sells $1 million in goods, does it really produce $4 million in benefits to the community? X-Corp collects the first million; who is getting the other $3 million? (They aren't)
  • If Bob pays his neighbor's son Jim $10 to mow his lawn, does this send $40 in value into the community? (No) Is Bob's situation different from X-Corp? (It isn't)

Transactions Overcount Benefits

Economic Value and the Economic Multiplier count transactions, which overcounts value.

Passing dinner rolls around a table shows what is going on. Don't laugh. The first person accepts 6 rolls from the waiter. He takes one roll and passes five to the next person, who passes 4 to the next, and so on.

The appearance of 6 rolls at the table is new value appearing in the dinner table economy. The wave of spending and re-spending sends value around the table. The Economic Value approach sees 6 rolls of spending, followed by a wave of 5+4+3+2+1 of re-spending, for a total of 21 rolls of Economic Value, and a 3.5 Economic Multiplier (3.5 x 6 = 21). But there are only 6 rolls. The re-spending distributes the rolls; it doesn't create more rolls. The real value of 6 rolls is overcounted by looking at the roll-passing transactions.

In the same way, X-Corp pays its employees and suppliers for the value they provide to X-Corp. The X-Corp employees and suppliers pay others for goods and services. The others pay still others for the goods and services received from them. And so on. The money, like the dinner rolls, distributes the value created by X-Corp to all of the people who are directly or indirectly providing goods and services to X-Corp and its employees. Money moves away from X-Corp in exchange for the resources (value) moving to X-Corp and finally to X-Corp's customers.

Many layers of suppliers do not increase the value created by X-Corp. That value is set by X-Corp's sales. That value does not increase as it is distributed among all of the people who somehow contribute to X-Corp's products. The Economic Multiplier is 1. In other words, there is no Economic Multiplier when we look at value rather than the many transactions that distribute value.

The True Value of X-Corp

Say X-Corp sells $1 million in goods each year. A 5% sales tax on the $1 million in sales, plus a 5% income tax on the $1 million in value that X-Corp distributes to its employees, suppliers, and owners (however indirectly) produces $.10 million ($100,000) in additional tax revenue, each year.
Note that $100,000 tax revenue per year for 10 years is worth $702,000 in public expense up front to get X-Corp going, and $1 million in benefit is distributed to X-Corp's workers and suppliers each year.
It sounds great when a PBO says: "Spending $1 million in public funds today to support X-Corp will generate $250,000 per year in increased tax revenues over the next 10 years (worth $1,755,000 today). There may be some continuing subsidies, which are well worth giving to X-Corp for the $4 million in economic benefits (4X multiplier) generated each year by the $1 million yearly sales by X-Corp."

The reality is not so good: "Spending $1 million in public funds today will generate $100,000 per year in increased tax revenues over the next 10 years (worth $702,000 today). There may be some continuing public subsidies, which we hope are worth the $1 million in income produced each year by the $1 million yearly sales of X-Corp."

More bad news. Any spending by X-Corp for supplies and services produced out of town does not give income to people in the town and it is not taxed by the town government. Any sales by X-Corp out of town do not contribute sales taxes to the town. This reduces the benefits coming back to the town from starting X-Corp, and reduces the amount of investment by the town that makes sense.

The Government is a Bad Investor

It is probably not good for the community when a government spends taxes to start up and subsidize X-Corp, regardless of the amount.
  • The PBO's are happy to overstate the economic value by 4 or 5 times to get the deal done. The PBO's must expect benefits for themselves that don't depend on any widely distributed public ones. Why should the PBO's look too deeply into the math? Why trust PBO's who are willing to fool us?
  • The town usually invests more into X-Corp than the increased tax receipts are worth. It is not an investment in the usual sense; the town does not own any part of X-Corp, although the town is providing resources to start it up and maybe keep it going.
  • There is no guarantee that X-Corp will last 10 years, but the town provides its support up-front. The PBO's may receive enough value that they don't suffer if the business fails in a few years.
  • Businesses started or operated with a government subsidy are not likely to be the most efficient. So, they are more likely to be driven out of business by competition, making the return in taxes worth less than expected.

Worse, subsidized and favored X-Corp may compete successfully with other unsubsidized businesses. The inefficient, tax supported X-Corp can replace another efficient, completely private, tax-paying company. This makes everyone worse off, other than the X-Corp PBO's.

New businesses should pay for the infrastructure improvements they need. This assures that the business is beneficial to the town. It rewards businessmen who organize all costs into their business plan without draining resources from the government. Government only has the money contributed by its citizens. Tax revenue shouldn't be distributed to businesses in the hope of making "everyone" wealthier.

Not Priming the Pump

An economy that uses money is vast, complicated, and wonderful. It is easy to think of it as magical, as if we can "tweak" the system to get more stuff from somewhere. In fact, work produces things of value, and the economy is a system for organizing work and distributing those things, using money as a placeholder in transactions.

That is all. No magic and no multipliers. The rules of the system are simple. People exchange goods and services as they wish. The complexity comes from the number of people involved, and the detailed organization of work that they create.

People use analogies to understand complex systems. False analogies are "Priming the pump" and "Jump-starting the economy." The idea is to add some money to an economy to get the transactions flowing and increase wealth more than the amount of money added. These are both closely related to the false idea of the Economic Multiplier.

Some water pumps cannot pump air when starting up if their valves are dry. They need a wet internal seal to pull the air out of the supply hose. Pouring in some water to "prime the pump" solves the problem. The pump moves the air, then moves the water it was designed for. The priming water is a stimulus that helps the pump to start up when there is air in the line.

A car battery can be too weak to start a car, but the car can run and recharge the battery (using its electric generator) if the car can somehow be started. The power from a good second battery "jump-starts" the car for driving, and provides a power stimulus only needed briefly at the start.

These are weird and false analogies when applied to an economy. An economy is a group of people exchanging goods and organizing work. There is no central pump. People don't forget how to transact business or spend money. They do not get out of the habit of working or become sluggish. Money does not create wealth by "flowing around". Money is a placeholder in transactions for the exchange of goods and services between people. A transaction recognizes something of value but does not create that value.

A PBO relies on the Multiplier when he talks about "stimulus" or such. He says that taxpayers will benefit when the government gives people public money, because the long term improvement in the economy will repay any expense. As usual, this is very convenient for the PBO, and wrong. The economy is not like a pump, engine, or thick syrup that needs to start flowing. There is no long-term improvement in the economy from the "priming", only a one time increase in work to create the goods in exchange for the new money.

Taxing Peter to Pay Paul

Government is supposed to collect and spend taxes for public goods, such as roads, police, education, and parks, that have some relation to benefiting the general public. PBO's use the Multiplier and glib analogies to ask for government subsidies as a public good. We would all now be rich from government spending if this were true.

Government "investments" and subsidies are actually transfers of money from taxpayers to PBO's. It makes taxpayers poorer to the same extent that it transfers goods to the PBO's and the public. This does not create wealth overall, and usually destroys wealth as bad deals and failed projects eat the real value of collected taxes or government borrowing.

Personal Experience Of Transactions

People like receiving money, and they usually like spending money. Transactions produce pleasure on both sides. These feelings make it seem like the Economic Multiplier should be true. It is hard to argue against feelings, and it may take more than the above analysis to convince you that the Economic Multiplier is hot air.

Jim is an employee. He keeps almost all of his pay for his benefit. This supports Jim's feeling that transactions create value. Transactions deliver opportunities to him when he is paid, and he receives value personally when he pays others.

Jim has some expenses that support his job and cannot be avoided, such as for commuting, more expensive lunches, and office clothing. He enjoys these, except for the small expense of commuting.

Bob sells office supplies to X-Corp. He buys the supplies from manufacturers, then packages and delivers them. When X-Corp pays Bob $1000, he keeps about $80 as his pay (8% profit), and transfers $920 to others. Bob divides the money among the people who produced $1000 of value: he, his employees, and his suppliers. Almost all of the money and goods that Bob receives and spends is distributed to others.

Bob pays income tax on the $80 that he earns, and the others pay income tax on the portion of the $920 that each one earns. So, the total tax paid to the government is based on $1000, once.

Economic Benefit/Impact and the Multiplier counts transactions as being value. This is almost correct for Jim, who collects almost all of the value of his transactions. It is wildly incorrect for Bob, who organizes the work of others. Most people are like Jim, so they tend to believe the Multiplier without thinking much about it.

Looking For The Multiplier

The presentation above gives a direct explanation. But, you might think that I missed something or used bad logic. We can examine the Multiplier in other ways.

The Spending Goes On And On

PBO's claim that when X-Corp spends $1000 it produces $4000 of Economic Benefit/Impact. If true, then this good effect is not limited to X-Corp. There is nothing that distinguishes between corporate and personal spending. Every amount spent would have the Multiplier effect.

So, when Bob's employer gives him $1000 it goes on to create $4000 in Economic Benefit. When Bob spends the $1000 for rent, it creates $4000 in Economic Benefit. Also, when his landlord re-spends the $1000 on mortgage and heat. You would have to believe that every dollar in circulation is going to produce $4 in Economic Benefit, every time it is spent. This is a dreamworld.

In the real world, Bob receives money in exchange for his work (the value he creates), and he spends that money to acquire goods (value that others create). Once. No Multiplier. There are no additional Economic Benefits lying around.

Trading Vegetables

Some examples at a small scale show the details of what happens in transactions, the use and effect of money, and how value is created and distributed. The complexity of an economy is produced by linking together millions of such chains of transactions.

1. Barter

Bob grows beans in his spare time. Tom grows tomatoes. They tire of eating just their own produce, so they meet to exchange 5 pounds of beans for 5 pounds of tomatoes. The Multiplier cannot apply here. The magic of money is not involved. Only Bob and Tom are affected by this trade. They are happier because of the trade, but no one else is happier. Bob and Tom get the benefit of this trade once, not 4 times.

2. Olive Oil

Bob's beans are not ready; he brings a bottle of olive oil. Tom gives tomatoes to Bob and takes the oil. Bob will come back in a few days with the beans in exchange for the oil. Tom can keep the oil if Bob doesn't deliver the beans. Bob brings the beans two days later and takes back the oil. The oil gave Tom some value to hold so that the exchange could be done in two parts. The value of the oil assured Tom that he wouldn't lose value on the trade.

3. Money

Bob's beans are not ready; he brings $10 instead of olive oil. We can say that Tom sells tomatoes to Bob for $10. Later, Bob sells beans to Tom for $10. Money is changing hands. Still, there is no Multiplier.

4. Three People

Pam joins the group, selling peppers.
                      Tom     Bob    Pam       
Bob buys tomatoes    $ 10    $-10   $
Tom buys peppers      - 5              5
Tom buys beans        - 5       5
Pam buys beans                  5    - 5
                     ----    ----   ----
                     $  0    $  0   $  0
Three people exchange vegetables. Money provides value for trades that are separated by time and divided into smaller amounts. It is confusing to describe these exchanges entirely in words. The table shows where the money went in exchange for the vegetables traded.

For example, Bob buys tomatoes from Tom for $10. The table shows that Bob spent $10 and Tom received $10.

The money balances each trade, so the people are even in value at each moment. Olive oil might be used instead of money, but it is less convenient, and not everyone would agree to holding olive oil in exchange.

Three people sell their vegetables, buy what they want, and end with the same cash they started with. This would be impractical without money as a way of completing individual transactions. They have a more interesting dinner as a result.

These exchanges traded $25 worth of vegetables. That value was created by growing the vegetables. The money revealed value, and helped to exchange value, but it did not create value. There is clearly no multiplier in this closed system.

5. Economy

Mike appears and buys vegetables for sale in town. He buys $60 of vegetables and sells them in town for $100.

Mike produces $100 of value for his customers, the value of his sales. The vegetables were worth $60 in the country; Mike added $40 in value by transporting them to willing customers.

Customers provided $100 in value (money) to Mike. Here is where the value went or is going to go:

1 Mike       34   Mike's profit (his pay)
2 ABC Gas     5   Mike's Delayed expense 
                   for gas, 25 mile trip
3 ABC Garage  1   Mike's Delayed expense
                   for tune-ups
4 Tom        20   Tomatoes
5 Bob        20   Beans
6 Pam        20   Peppers
           $100   Mike's sales to customers
The $100 in sales to customers is the total value available. The other transactions distribute it to all of the people who support Mike's efforts. Mike receives $40 and Tom, Bob, and Pam receive $60. Soon, Mike pays $5 for gas used on his trip. Later, this trip costs another $1 in related car maintenance.

A PBO talking about Economic Benefit would count $100 paid to Mike, plus $60 paid to the growers as $160 in economic benefit. This counts the $60 transfer payment twice. In a typical Economic Benefit analysis, transfer payments are counted many times to get the Multiplier of 4. This overcounts value and gives an inflated result.

This shows some of the complexity in an economy. The ABC Garage contributes a little value to Mike's business without knowing it. The growers know that Mike is selling their vegetables, but don't know or care much about the details. Mike saw that he could make some money when he compared the price for vegetables in the country to the sale price he expected in the city.

Discounted Value (optional reading)

Discounted Value is the value today of payments to be received in the future. I said above that 10 yearly payments of $100,000 is worth $702,000 today, at a 7% interest rate. The exact math is complicated, but the idea is easier.

What amount would you loan X-Corp in order to get back 10 payments of $100,000 over 10 years? $1 million is too much. You would just get back your money over time, without earning anything from the loan.

This is like calculating a home loan, except we want to know the loan amount that produces a payment of $100,000, rather than starting with a loan amount and calculating the payment.

We will start by being generous and then correct ourselves. Say we loan the full $1 million, and want to earn 7% interest. X-Corp has roughly one-half of the money on average during the 10 years of the loan. X-Corp starts with $1 million during the first year. In the last year, after making 9 payments, X-Corp has about $100,000 in loan outstanding. We can estimate the total interest at 7% x 10 years x $500,000 (half the loan) = $350,000. Our rough estimate of principal plus interest is $1,350,000, so the rough payment is $135,000 for 10 years.

The detailed calculation (not shown) gives a payment of $142,400. So, a $1 million loan at 7% yearly interest is paid back by $142,400 per year for 10 years.

We need to loan less money if the repayment is only $100,000 per year. $100,000 is 70.2% of $142,400. A loan of (70.2% x $1 million) = $702,000 is repaid by $100,000 per year.

So, the government can spend up to $702,000 to get X-Corp started, if it wants at least a 7% return on this investment, and if it expects $100,000 per year in increased taxes in repayment.


The Multiplier from The Concise Guide To Economics, by Jim Cox, 1997.

He sees the Multiplier as "theory run amok" and notes other mistakes in analyzing an economy. The description is direct and somewhat technical, but you can get the idea without understanding the mathematics.

-- --
With multiplier, poultry has $8-billion economic impact
from BNet, from The Mississippi Business Journal, by Becky Gillette, July 2, 2007,

It never hurts to puff up the importance of a business by using the Multiplier. Notice the word "impact" because no one is quite sure what the effect really is.

The farm gate value of poultry in Mississippi in round numbers is $2 billion," said Mississippi Farm Bureau president David Waide. "That is huge." Waide said the multiplier impact of the industry as dollars get turned over in the economy is approximately four times the farm gate value. That would give poultry an $8-billion impact on the state's economy.

-- --
Economic Multipliers and Local Economic Impact Analysis
by David Kay, Cornell Local Government Program, December 2002

This talks about the Multiplier with a scholarly tone. It says that the "direct effects" should be estimated carefully. Then, just Multiply to get the overall economic impact. That is it for explaining the Multiplier. Notice the use of "impact" again, because people don't know what the effect really is.

Headlines like these recent real-life examples are prized by project promoters and business boosters. They often appear when advocates for private sector projects are seeking public support. The dollar figures featured in the stories are large, even "huge". They signal to readers both economic importance and political significance.

An economic multiplier lies behind nearly all [dramatic development] headlines. Multipliers are typically used to turn large dollar impacts into even larger ones. They do this because they translate project-specific effects into economy-wide impacts.

The local spending impacts associated directly with a specific project or economic activity are the starting point of any impact analysis. Known or planned facility construction and operating expenditures are a typical example. Called "direct effects", they are nearly always the most important data to estimate well in any impact analysis. To estimate economy-wide impacts, numbers known as multipliers are literally multiplied by the direct effects.

-- --
The Tax Rebate Was a Flop.   Obama's Stimulus Plan Won't Work Either
August 6, 2008 - By Martin Feldstein
Mr. Feldstein is former chairman of the Council of Economic Advisers under President Reagan, a professor at Harvard, and contributor to The Wall Street Journal.

My analysis of the Multiplier conflicts with Mr. Feldstein. The US Government recently distributed $100 Billion dollars to stimulate the economy by increasing spending (transactions). It failed miserably. Partly because people were not inclined to spend it all. Partly because there is no Multiplier. The Government believes that "confidence", and "impact" are somehow the same as value. The government relies on a Multiplier to create more benefit than the dollars spent.

"Those of us who supported this fiscal package reasoned that the program would boost consumer confidence as well as available cash. We hoped the combination would cause households to spend a substantial fraction of the rebate dollars, leading to more production and employment.

An optimistic and influential study by economists at the Brookings Institution projected that each dollar of revenue loss would increase real GDP by more than a dollar if households spent at least 50 cents of every rebate dollar."

-- --
Keynesian Economics Is Wrong
04/10/09 by Daniel Mitchel (video 7:29)

Politicians claim that more government spending can stimulate an economy, an economic theory by Keynes in 1935. The Center for Freedom and Prosperity Foundation produced this video which examines both the theory and evidence. Allowing politicians to spend more money does not produce better economic performance.