Originally Posted by
olly
Sorry if that article lead to a redistribution mindset -poor selection on my part in attempting to illustrate the point. The intent was to highlight the impact of aggregate "demand" (derived from consumer spending) as a stimulative effect on the economy & employment.
I believe the problem with this analysis is that it is relatively static and assumes that the mere velocity of money equates to economic activity. Rather it is the velocity of goods and services, not money that is economic activity.
For example, if A gives $1 to B, who gives it to C, then D, then E, who gives it back to A, each with no remuneration in goods or services, it would appear there was $5 in economic activity, when in fact there was $0. If each had received $1 in goods or services for their payment, then there would be $5 in economic activity.
Now let us say that the government taxed the $1 from C, and then gave it to D, and the cycle then continued normally back to A. In the end, economic activity was actually reduced from $5 to $4, even though the same $ changed hands.
Of course this is also a simple example, but it is a dynamic view, not static. We must also account for the idea that perhaps C wasn't going to spend his $1 anyway and the only way to get that money in motion is to tax and redistribute it. There are at least two problems with this idea. The first is that it discounts the psychology of cash holding. An individual will retain cash holdings based on his psychological state at any given time. This amount could be determined through careful analysis, or more of a subconscious decision. Although C may not intend to spend the $1 that was taxed, it is likely he will reduced his spending elsewhere by $1. The other issue with this idea is that the money C does not spend is "idle". Unless it is in his mattress, this is not the case. If it is in the bank, it is being lent. If it is in the market, it is being used to finance economic activity. Money is rarely idle.
This is not a indictment of redistributive programs, however. Social safety nets are, I believe, necessary to an extent, and properly designed may actually induce some economic benefit (perhaps increasing economic risk taking which may produce economic reward). But I think the suggestion that that they have a direct positive economic impact is just cover for leftist policymakers. Really it ranks right up there with the idea of just dropping bags of money from helicopters to stimulate the economy.