Economic Stimulus and the Multiplier Effect

Economic Stimulus? Yes!

Now to explain. For this, we will need to create that all-important metaphor. In
addition, I should like to apologise in advance for the one snarky remark I will
make about a former President. (One must compare apples to apples.)

For the purposes of this lesson, we will assume that Joy, brown-bags it every day
except Friday. On Friday, she takes 10 hard-earned dollars and goes to Whoopi's
Sandwich Store for a baloney sandwich.

Now Elisabeth is out of work. But Jimmy Carter feels her pain. So he taxes Joy
$10 and gives it to Elisabeth so she can buy a baloney sandwich. Joy is not
happy. She's being ripped off. And Elisabeth is no better off because she still
does not have a job. And Whoopi? She is no better off because she is still selling
one baloney sandwich a week.

In response to critics, Jimmy decides to tax Whoopi $10 to train Elisabeth how to
make baloney sandwiches. After getting her certificate, she goes to Whoopi's
store looking for a job. But Whoopi tells her, "Sorry, Friday is my last day. Jimmy
Carter taxed me out of business."

Now, President Obama comes along and says, "That is not how to do it. I am
going to have the SBA lend Elisabeth the money to go into her own business."

Elisabeth opens up a soda store next door to Whoopi's Sandwich Store.

Back to Joy. Aptly named because her tax cut allows her to go back to Whoopi's
store and buy a baloney sandwich; and to go next door to buy a soda.

Elisabeth is happy because she's making money, so she treats herself to a
baloney sandwich.

Whoopi is thrilled because she doubled her sales volume and revenue. In fact,
she is doing so well; she hires Sherri to help make sandwiches. (Whoopi trains
Sherri, as it should be in business.)

Sherri is happy because she has a job. And, please forgive my little joke, her
compensation package includes a free lunch. But no beverage. So, Sherry goes
next door to Elisabeth's soda store to buy a soda. Well, with all this soda being
sold, Elisabeth hires Barbara to work in her soda store. Now Barbara is thrilled
because she has a job.

Back to the Oval Office:

The President's economic advisor comes in.

"You wanted to see me, Sir?"

"Yes, I have some money for you. It is part of Sherri's and Barbara's benefits
payments. They are out of work. I want you to send the money to Sherry and
Barbara."

However, the advisor says to the President, "But Mr. President, Sherri and
Barbara don't need that money anymore. They have jobs."

"That's great," the President says. "The government is saving money."

The advisor continues. "It's better than that. Since they are working, they are
paying income taxes. So, I have some money to give to you from Sherri and
Barbara."

"Wow", the President says. "I save money because Sherry and Barbara are
working, and I bring in money because they are paying taxes. This stimulus
package is great."

This is how economics works. It takes a little time, but this is how the system
works. Now, to understand why the system works, we look at an illustration of
The Multiplier Effect.

The Multiplier Effect

1. What is the Multiplier Effect? The Multiplier Effect is what happens to
every dollar you spend after you spend it. Say you buy an $800 coat at the
Main Street Coat Store in River City, Kansachusetts.

2. What does the owner of the Main Street Coat Store do with the $800 he
made selling the coat? The owner of the Main Street Coat Store sends
$400 to the River City Mfg. Company to pay the wholesale price of the
coat. Then, he goes next door to the Main Street Suite Store to buy a
$400 suit.

3. What does the owner of the Main Street Suit Store do with the $400 he
made selling the suit? The owner of the Main Street Suit Store sends $200
to the River City Mfg. Company to pay the wholesale cost of the suit.
Then, he goes next door to the Main Street Jacket Store to buy a $200
jacket.

4. What does the owner of the Main Street Jacket Store do with the $200 he
made selling the jacket? The owner of the Main Street Jacket Store sends
$100 to the River City Mfg. Company to pay the wholesale cost of the
jacket. Then, he goes next door to the Main Street Shoe Store to buy a
$100 pair of shoes.

5. What does the owner of the Main Street Shoe Store do with the $100 he
made selling the shoes? The owner of the Main Street Shoe Store sends
$50 to the River City Mfg. Company to pay the wholesale cost of the
shoes. Then, he goes next door to the Main Street Shirt Store to buy a
$50 shirt.

6. What does the owner of the Main Street Shirt Store do with the $50 he
made selling the shirt? The owner of the Main Street Shirt Store sends
$25 to the River City Mfg. Company to pay the wholesale cost of the shirt.
Then, he goes next door to the Main Street Tie Store to buy a $25 tie.

7. What does the owner of the Main Street Tie Store do with the $25 he
made selling the tie? The owner of the Main Street Tie Store sends $12.50
to the River City Mfg. Company to pay the wholesale cost of the tie. Then,
he goes next door to the Main Street Café to enjoy a cappuccino venti,
extra foamy.

8. Now, let’s see what happened to that $800, shall we? The $800 spent in
the coat store becomes $400 spent in the suite store, which becomes
$200 spent in the jacket store, and so on down the line. The total spent on
Main Street in River City, Kansachusetts is $1,587.50. Not bad for an
$800 purchase on Main Street.

9. But wait, there’s more! Do you remember the River City Clothing & Mfg.
Company? Do you remember the money they made on the wholesale
price of the clothes? That adds up to a respectable $787.50. And the
people who work at the River City Clothing & Mfg. Company WILL BE
SPENDING THEIR MONEY ON MAIN STREET!

10. The Illustrated Effect of the Multiplier Effect Shows: The $800 becomes
$2,362.50 in our Main Street Economy Now, this is not an explanation of
the multiplier effect. This is an illustration of the multiplier effect. It is
analogous to a new building going up in the city and the architect who

designed the building publishing an artist’s rendering of the new building in
the paper, rather than publishing the blue prints. This was a picture!

11. What happens if a piece of the economic puzzle is missing?
o Everything is predicated on the assumption that we shop on Main
Street, or at the Mall, or on-line from our Main Street or Mall Street
merchants.
o However, when we go elsewhere…?

These are illustrations of economics in our society. They are not explanations.
The best analogy I can come up with is the news of a new building in the city.
You will routinely see an artists rendering of what the building will look like. You
do not see the blue prints. Blue prints are generally understood by engineers,
architects, and construction contractors. The blue prints are necessary to build
the building. However, they do nothing to present a visual image.

Copyright © 2005 Slim Fairview. All Rights Reserved

slimfairview@yahoo.com

Economic Stimulus and the Multiplier Effect

Recommended

Recommended

More Related Content

More from Bob Asken

More from Bob Asken (20)

Recently uploaded

Recently uploaded (13)

Economic Stimulus and the Multiplier Effect