Money From Nowhere Going Somewhere

Private industry and government both contribute to the economy. An economist uses a rule of thumb that private investment has a 5 to 1 multiplier effect on the economy; whereas government expenditures contribute at a 2 to 1 ratio. So, to stimulate the economy, private investment is the most cost effective and transfer payments the least.

Here is where I get shot for simplification again. Divide the government into five areas of financial involvement; administration, infrastructure, defense, education and retirement.

Administrative tasks produce nothing and could be considered transfer payments. It comes from our taxes and goes into a paycheck (government, police, fire etc).

Infrastructure and defense purchases by government create jobs where something is produced for the economy. Congress spends billions dollars on the Iraq war. The money is not shipped off to Iraq. Private companies build new war machinery. This mirrors private investment returns at a somewhat lower scale.

Education is kind of a necessary lubricant for the whole system. It has returns that benefit the economy; they are not as visible. When a sales clerk can’t make change for a $20 bill, the need for education becomes very apparent.

Retirement and government health care are also transfer payments. Our tax dollars go into a retiree's bank account. This stimulates consumption but no new product was added to the economy. I know someone will say, “Hey that Social Security money is mine, I paid into the system.” How about if we cut your benefits off when you exceed what you contributed? The fact is some guy, who died after 35 years on social security, probably consumed all of your contributions and ten other people’s as well.

So let’s go one step further. Home equity loan withdrawals are another form of transfer payments. Notice, the money extracted from mortgage equity withdrawals (MEW) was not earned by building something new for the economy. Housing just doubled in price; it’s free money (this is the way the government does it). Of course, the homeowner is supposed to pay it back. It looks as if that concept has a “few” holes in it.

Step back and look at the big picture. Government can issue checks for retirement and health care costs by increasing the national debt. This is what the homeowner was doing with a MEW. The American consumer has been on a buying binge with US monopoly money. Where did all of this stuff that we didn’t make but we needed to purchase come from? Here's a clue “lead paint.”

Looks like this Thanksgiving, we are giving China the bird. Just maybe they will give us a goose for Christmas (triple pun intended).