What is the "real cost" of bail outs (and welfare in general) (1 Viewer)

[Mike375]

If the gov't gives someone $100 in welfare then that person buys food, petrol for the car etc. That will involve indirect tax being paid, income tax being paid by the suppliers of the goods or services and more indirect tax and income tax as the suppliers of the goods and services spend the money they received and on it goes until the $100 goes back to the gov't.

Ditto for the money for bail outs.

In the case of welfare, if someone ceased work and we will assume their work had a salary of $1000 per week, then if the gov't gives them a $1000 a week the only loss I see is that the person has stopped producing whatever goods or services they were producing. But that negative would not apply to the bail outs?

I am sure I am missing something here.

 

[The_Doc_Man]

There are many ways to look at this. I prefer to choose this dichotomy: Welfare for living expenses vs. bailouts (welfare) for banks that do mortgage lending.

When you supplement someone's income for living expenses, that money immediately re-enters circulation. Money in circulation is doing something useful.

When you supplement the money reserves in a bank, if they don't use the money to make new loans pretty quickly, you run the risk of that money staying out of circulation. Money that isn't circulating isn't helping the economy.

Another issue is that welfare isn't inherently bad, but it can lead to some terribly bad situations. When welfare isn't controlled enough to keep "dead-heads" from milking it dry, we have wasted the money. Uncontrolled handouts is like uncontrolled bleeding. You do enough of it and you bleed to death, unable to keep your circulation going.

In the final analysis, welfare is a pyramid scheme. Which ALWAYS loses if you late in joining the scheme. That's why it has to be controlled.

 

[pbaldy]

In the case of welfare, if someone ceased work and we will assume their work had a salary of $1000 per week, then if the gov't gives them a $1000 a week the only loss I see is that the person has stopped producing whatever goods or services they were producing.

Two issues. First, if someone were making $1,000/week they were paying taxes, if they get $1,000 from government they are receiving taxes. Other taxpayers have to pay more in tax to cover them.

You say the only loss is that person's lost productivity, but what about the other taxpayers' loss of the freedom to do what they wish with their money? Instead of buying a widget, they have to pay more in taxes to support this person.

Your theory seems to operate on the presumption that government has some inexhaustible source of money. It does not. If enough people cease work and get supported by the government, who's going to pay the tab?

 

[Mike375]

Your theory seems to operate on the presumption that government has some inexhaustible source of money. It does not. If enough people cease work and get supported by the government, who's going to pay the tab?

Not at all.

Let's say the gov't starts with $1000 and gives that 1000 to someone. The only way the $1000 will not all end back at the gov't is if the person sticks it under their bed. But as soon as they spend it or lend it to a bank then the money is on its way back to the gov't.

Since the $1000 went back to the gov't it does need to come from other people.

Take this scenario. A small country town is on the bones of its arse and the gov't imports some immigrants and puts them in the country town and gives them welfare. The welfare will be spent in the town and via indirect and income taxes will all go back to the gov't.

Try this scenario and assume an income tax flat rate of 30%. A company pays Bill $1000 and thus Bill gets $700 and $300 to gov't. Bill then gets $700 worth of house painting done by Jack. Jack keeps $490 and $210 goes to the gov't. Jack then gets $490 of Access work done from Joe who keeps $343 and sends $147 to gov't etc and etc. Eventually the $1000 that Bill was originally paid all winds back at the gov't

 

[Steve R.]

We need to view the government as a business, if revenues are less than expenses you eventually end up in bankruptcy.

Pbaldy correctly notes that when the government gives money to someone, that that money has to come out of our taxes.

You say the only loss is that person's lost productivity, but what about the other taxpayers' loss of the freedom to do what they wish with their money? Instead of buying a widget, they have to pay more in taxes to support this person.

Now, if the government borrows money, which has been happening, to provide money for bailouts and welfare we have additional "costs". One cost is postponing the day of reckoning and transferring the liability of that debt to our children. Since this "hides" the problem, this is what our politicians have been doing.

Next, using debt improperly we are creating an inflationary spiral. For example, if you make money available to someone with very favorable payback terms; that person will view the money as a "gift". What that means is that instead of feeling constrained by economic reality to a $100,0000 house that person will feel empowered to buy a $120,000 house. Unfortunately we are now finding out that many of these home buyer's really could not afford what they bought. Again to bail them out means transferring wealth from the taxpayers to these people who acted irresponsibly.

In the case of the automotive industry, do we really want to bail them out? Here is an industry that has been dying for decades. Management has clearly been incapable of solving its problems. If we bailout out the auto industry by simply giving them money, the cost to our economy will be great. We will not have solved the sickness of the automotive industry. All we will do is postpone the day that they go bankrupt. In the meantime we will simply have provided the automotive executives with a "bonus" (Welfare) for doing a bad job.

Giving "free" money in the form of bailouts and welfare will have significant and very adverse effects to the economy. (PS: I will acknowledge the need for some degree welfare payments.)

 

[pbaldy]

Let's say the gov't starts with $1000

How did the government get the $1,000 to start with?

I understand what you're saying. It's velocity of money as it applies to taxation. My problem is that you're starting the transaction at step "B" and not "A". Sure, if the government gives out money it may come back at some point. My point is that the government had to take that money from someone to start with.

Saying that giving a free $1,000 to someone doesn't cost anything ignores the fact that all the people in your example had to give up 30% of their income to make it happen.

 

[Mike375]

How did the government get the $1,000 to start with?

I understand what you're saying. It's velocity of money as it applies to taxation. My problem is that you're starting the transaction at step "B" and not "A". Sure, if the government gives out money it may come back at some point. My point is that the government had to take that money from someone to start with.

Let's assume the program starts from today

Saying that giving a free $1,000 to someone doesn't cost anything ignores the fact that all the people in your example had to give up 30% of their income to make it happen.

But the money has come back to them because everyone/business either directly or indirectly receives money from the welfare/gov't system. At the most simple level the pensioner buys groceries and I sell insurance to the grocery shop owner and you charge me a fee to make a data base for my insurance needs.

Let's say the gov't increased pensions by 10%, they would then announce that the "cost" is $x. However, all that money will be returned to the gov't.

If the gov't outlays the $1000 and does not get it back, then where did it go? As far as I can see the only money it will not get back is money put under the bed.

 

[marleymanner1]

If the gov't gives someone $100 in welfare then that person buys food, petrol for the car etc. That will involve indirect tax being paid, income tax being paid by the suppliers of the goods or services and more indirect tax and income tax as the suppliers of the goods and services spend the money they received and on it goes until the $100 goes back to the gov't.

Ditto for the money for bail outs.

In the case of welfare, if someone ceased work and we will assume their work had a salary of $1000 per week, then if the gov't gives them a $1000 a week the only loss I see is that the person has stopped producing whatever goods or services they were producing. But that negative would not apply to the bail outs?

I am sure I am missing something here.

Mike,

I don't think there anything wrong with the bailouts, other than the lack of leadership that it shows. Why would the taxpayers pay for it (although they probably will)? By the way economics goes, the government buying toxic assets just feeds into their debt. That's about it. As from what we can see right now, the government doesn't seem to give the first shit about how much debt they have on top of them. And as for me, I don't really care either, as long as the owner of the debt doesn't come after us with nuclear weapons. If that doesn't happen, what is there to care about this crap that is going on!? Why should u even worry about it? I personally think that these ugly politicians that are involved this deep with economics should really just kill themselves anyway, because the equation that they are foolishly trying to balance will NEVER become a zero. To me, that's the most ridiculous thing I've ever heard of. U?

 

[Steve R.]

Let's assume the program starts from today
....
If the gov't outlays the $1000 and does not get it back, then where did it go?

Inflation.

If the government simply prints money to jump start the economy, it can create an initial appearance of wealth, not real wealth. The sellers of products/services realizing that this "free" money is out there begin to raise their prices to increase their profit margin. Obviously, if everyone raises their prices we are back to to where we started but at a higher base level.

Alternatively the government could issue a $1000 bond to cover the $1000 distribution. In that case the money supply stays balanced. However, the government then needs to acquire money through increased taxes to "recapture" the bond principle ($1000) and to pay the bond coupon. In this scenario, giving money away today, means higher future taxes which would be considered a drag (a cost) on future economic growth.

 

[Mike375]

Steve,

Let's not print money. Australia as an example has a budget surplus.

Now if the goverment increases welfare tomorrow by $1000 then if the $1000 does not wind back at the gov't then where does it go?

I suspect the answer is that money is like water. It is needed but is never used or lost and the gov't is the central dam. However, if welfare is increased by 10% then that means "water" sent that way is not available for elsewhere BUT the actual cost to gov't is zero since all the water will return to the central dam.

Printing money (or borrowing money) would be similar to there be insufficient water in the system. Thus ultimately new water must be found or some of the existing water must be sent back to the "lender" each year.

 

[Steve R.]

Steve,

Let's not print money. Australia as an example has a budget surplus.

Now if the goverment increases welfare tomorrow by $1000 then if the $1000 does not wind back at the gov't then where does it go?

I suspect the answer is that money is like water. It is needed but is never used or lost and the gov't is the central dam. However, if welfare is increased by 10% then that means "water" sent that way is not available for elsewhere BUT the actual cost to gov't is zero since all the water will return to the central dam.

Printing money (or borrowing money) would be similar to there be insufficient water in the system. Thus ultimately new water must be found or some of the existing water must be sent back to the "lender" each year.

OK

 

[statsman]

It's time we discussed the real reason for the bailouts.

Currently, Ford GM and Chrysler in North America are looking for government money to stay in business. The governments at various levels will give them the money.

Why?

How many people in North America are employed by the Big 3? How many people have their livings directly connected to auto manufacturing (parts makers, car transporters etc.).

The bean counters will sit down and to the math. It will cost the governments $5 Billion dollars to keep them afloat opposed to $10 Billion for unemployment and welfare if the companies go under.