The Multiplier Effect
Economists banter back and forth about the validity of the Keynesian multiplier effect. But nobody can dispel the fact that an increase in consumer spending will eventually lead to an increase in production and Gross Domestic Product (GDP).
Consider $100 of cash in your pocket. If you go to your local store and purchase a product, that retailer replenishes their stock by buying more from their distributors. The distributors in turn buy more products from manufacturers, who have to buy the raw materials to make the products. All along the way, the $100 goes towards paying salaries, taxes and some is saved. Part of the reality is that inventory levels are high because we were continuing to produce products while the economy turned downward. Because of high inventories and low demand, companies have to let employees go. So to get ourselves out of this situation -- you guessed it -- we need to spend! Just more responsibly and with much less debt than before.
I'm not an economist and openly admit that this is a simplistic explanation on the flow of cash in the economy (if you are an economist and want to help please Contact us so you can contribute). I encourage everyone to do your own research to have a better understanding, but the principle is that the more we spend the more growth we will experience. Conversely, the more we save (or withhold from putting back into the economy), the bigger the drop in GDP.
How Did You Spend Your 2008 Tax Rebate?
About 130 million Americans received a check from the Treasury under the 2008 Economic Stimulus Package. The fear of our elected officials was that we would save the money or use it to pay bills and debt, resulting in a minimal impact on the economy. At a minimum, the tax rebate check was $600.00. Using simplistic math, here's what the impact of that money could have been using a couple of different Keynesian multipliers:
| |
|
|
Multiplier |
| Number of Checks |
Example Rebate |
Total Amount |
x3 |
x5 |
x7 |
x9 |
| 130,000,000 |
$600.00 |
$78,000,000,000 |
$234 billion |
$390 billion |
$546 billion |
$702 billion |
As you can see, we can have a tremendous impact upon our economy if we spend responsibly. And with the government looking to cut taxes further, and the possibility of another round of rebates, we need to put it to good use this time around for all our sakes.
More To Come...
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