State of Innovation

Patents and Innovation Economics

Food Stamps’ Multiplier Effect: Economic Voodoo

The insidious multiplier effect raises its ugly head again in the form of Nancy Pelosi.

At a press conference in her home town of San Francisco, Pelosi explained that the program’s multiplier effect –the amount of money generated in the local economy as the result of the subsidy– far exceeds the nearly $60 billion spent this year by the federal government and is a sure-fire way to stimulate the economy. For every dollar a person receives in food stamps, Pelosi said that $1.79 is put back into the economy. The U.S. Department of Agriculture cites an even higher figure of $1.84.

According to Pelosi the multiplier effect for food stamps (the new politically correct name is SNAP – Supplemental Nutrition Assistance Program) is 1.79 and the Agriculture Department cites and even more absurd multiplier of 1.84.  The absurdity of the multiplier effect can be easily proven by reductio ad absurdum.  If the multiplier effect is true why don’t we just spend an infinite amount of money then we will be infinitely wealthy?  You cannot create wealth by taking money from one person (who created the wealth) and giving it to another person to spend – on food in this case.  Entropy proves that you cannot even get $1 of return for each $1 spent on food stamps (welfare).  The obvious losses include the cost of the bureaucrats to run the food stamp program, the time, effort and gas the recipients expend to obtain the food stamps.  This does not add to GDP, since it is consumption.  Economists seem confused that the P in GDP is for spending or consumption, when it stands for Product or production.

Any economist who repeats the multiplier effect lie should be immediately fired.  Any politician who repeats the multiplier effect lie should be treated the same as people in the Flat Earth Society, as insane.  The multiplier effect is a con game designed to justify stealing.

Advertisements

October 9, 2010 - Posted by | -Economics | , , ,

18 Comments »

  1. I totally agree! They should be immediately fired! Not surprising that Nancy Pelosi would say that though. She is mathematically and economically illiterate.

    Comment by khalling | October 10, 2010 | Reply

  2. Why yes, you’ve surely proven with reductio ad absurdum that the multiplier effect is nonsense. We all know that there are an infinite number of people living in the US who can all eat an infinite amount of food, and the goverment collects an infinite amount of money from its people. Who doesn’t know this basic fact?

    Your entropy point was also spot on. The founding fathers in America were correct in giving us the rough $14 trillion when we started out so that we would have enough money for the rest of our time to cycle the money around in our system. Just like the water cycle! The amount of water on Earth is constant, it just changes form. 1 drop of water never gives you more than 1 drop of water later, just like economies of today.

    It’s so nice to have well educated people like yourself dedicated to using their free time to extrapolate on topics of politics with such understanding as to produce eloquent detailed responses and rebuttles to things that people just drink down and take as fact.

    I look forward to your next blog posts.

    Comment by Herpderp | October 11, 2010 | Reply

  3. Herpderp,
    Although I agree that using a fallacy (reductio ad absurdum) to prove a point is highly ineffective, it does show the need for the other view to provide a reason why… for instance: I can eat an apple – (reductio): then I can eat infinite apples (obviously false): The reason why the reductio is fallacious is because I have a finite stomach and time. So, it is incumbent on those who claim a multiplier effect to stipulate the ‘why’ and ‘how’ of its limits – they need to answer the question of ‘why not always public spend?’.

    In regard to your ‘entropy’ sarcasm… very bad analogy. You obviously are confused about what money is. IF the founding fathers started us with a given amount of money, the growth of the economy would not be hindered at all – the ‘economy’ is NOT the money supply, it is goods & services and these are priced in a monetary unit. If the economy grows, and the money supply does not, then the value of the money will grow instead. So, instead of a dollar today being worth the same as a nickel back in 1913, a dollar today would be worth $100 in 1913.

    Given that any money spent by government must come from the private sector (1:1 ratio), what needs to be proved by those advocating the use Multiplier Effects is: “Government spends money more efficiently/effectively than the private sector”. And if that statement is proved, then the ‘reductio’ needs to be addressed: “Why not have government spend ALL of the money?”… Can you answer those two questions?

    Thought not

    Comment by leopardpm | December 1, 2010 | Reply

    • Herpderp,

      If food stamps created jobs or had a multiplier effect, then we should cut out the middle man (government) and steal from grocery stores. According to the multiplier effect this would create enormous wealth.

      Theft does not net wealth or jobs. One person is getting something without being providing anything and another person is providing value without getting anything in return. Clearly the freeloader decrease net wealth, because they are consuming but not producing. Stated another way entropy means that transfer 1:1 and it is impossible for government to spend money more effectively than the person who produces it. If it were possible then theft would create wealth the thief is consuming without producing.

      Comment by dbhalling | December 1, 2010 | Reply

  4. Food stamps or SNAP which is the correct name, is NOT welfare…ignorance

    Comment by Alice Wonder | December 2, 2010 | Reply

    • really? It may not be ‘called’ that, or part of the ‘official’ Welfare program, but Food Stamps ARE a form of government welfare – redistribution of money from one group to another.

      Comment by leopardpm | December 2, 2010 | Reply

  5. the reason his reduction to absurdity is dumb is because of diminishing returns

    Comment by jason | December 14, 2010 | Reply

    • How do diminishing returns apply? There is absolutely no way that taking money from one person and giving it to another person can result in a “multiplier effect.” If it were true, stealing would lead to a multiplier effect.

      Comment by dbhalling | December 14, 2010 | Reply

  6. The multiplier effect is only valid on a micro economic scale looking at the local economies the money is going into. You make a valid point about the macro implications in that, the only way we can assume a multiplier effect on the macro level is if there was a 100% assurance that if that money had not been taxed, it would have never been spent at all (which is obviously not true).
    On the micro scale, the multiplier effect certainly does apply in localities with a low level of wealth in that money is injected into the economy of a township and or county that would not have been there otherwise. When you spread the cost out over the entire US and then look at the benefit to a low-wealth locality- you can claim the multiplier effect only without calculating the net loss from the money being taxed in the first place.
    If you can say that the money was going to be taxed anyways- there are certainly worse ways the money could be spent than food assistance and or medicaid as far as economic impact.

    One thing is that you can KNOW that the money that goes onto the EBT cards WILL be spent within a short amount of time- but there is no assurance that the money- if never taxed- would have been spent even in our lifetime. From that perspective, you might be able to argue that it does force immediate money into the economy that may not have been there otherwise.

    Thoughts?

    Comment by Rob | May 10, 2012 | Reply

  7. Diminishing returns would apply to your stealing example if the person doing the stealing was going to spend 100% of the money, where as the person being stolen from was going to spend 0% of the money.
    The multiplier effect may apply to dollars that would have been hoarded but not to dollars that would have been spent.
    There is no research to show the percentage breakdown of this so no conclusion could really be drawn.
    Not that ALL money won’t eventually be spent- but wealthy people save money in bad economic times that if spent, could help create jobs etc.

    Comment by Rob | May 10, 2012 | Reply

  8. Rob,

    Spending money does not create wealth. If it did a framer could get wealthy by eating his seed corn or Robinson Crusoe could have created wealth by just eating his initial supplies without producing. Wealth is create by production, not consumption. Increases in per capita wealth are the result of increasing our level of technology (inventing or buy products that were invented). So spending money on consumption is theft – taking money from one person for another person’s personal benefit is theft and destroys wealth. Of course diminishing returns applies to theft, otherwise would could steal or consume our selves into infinite wealth.

    If you want to get the economy growing you have to lower the cost of production and increase the return for inventing and investing in new technologies. When the government takes/spends 50% of the GDP everything has to be 2x more expensive to pay for government. Now we cannot live without a government, but the evidence is that government share of the economy can be at least as low as 15% and still results in a faster growing economy than higher levels of spending.

    Comment by dbhalling | May 11, 2012 | Reply

  9. […] policies are preventing any kind of real economic recovery. A few years back Nancy Pelosi put her economic illiteracy on full display by declaring that, “For every dollar a person receives in food stamps, Pelosi said that […]

    Pingback by The Grinch who Gave America the Negative Stimulus (Guest Post) | Flopping Aces | December 22, 2013 | Reply

  10. every dollar spent on food stamps is created from nothing. (maybe not quite nothing…there is paper and ink and administration.) So creating food stamps increases the size of your economy by five bucks for every for every five dollar stamp. Eventually, this might well lead to deflation of the value of the dollar. It hasn’t yet.
    with me so far?
    Now the recipient goes to the grocery store and spends ten bucks in stamps. The store owner breaks even and the government has fed a person. However it doesn’t end there. The grocer gets his five bucks from the government…so the stamp is not an issue any more.
    still with me?
    The grocer pays tax of, say 30 percent every year. The farmer will get paid, and HE will pay his thirty percent every year. And the farmer and grocer both have to get haircuts, have to buy cars, and put their kids through school.
    So five bucks plus 2 bucks plus (thirty percent of two bucks is 60 cents to the the barber) plus 30 cents to the commission salesman who sells you the vehicle, plus ten cents to school tax. That means the economy is stimulated by five bucks. That for the morons in the audience means that the government got five bucks in cash by printing five bucks in food stamps. That is no 1.84 that is 100%.
    Now it goes down when people buy out of the country, like a computer or pretty much anything from Walmart. That is the REAL drain on an economy…not the food stamps of veteran’s pensions, or for that matter policemen or politicans salaries. Get over it. They payback to the vets is the same as the payback from the food stamp thing. The payback from the “bloated union pension funds” is also 100% FROM THE GOVERNMENT’S POINT OF VIEW. So get over it. The government will always get its cut.
    Now the fact that often the government does NOT get its cut. People hide cash income a lot, and a lot of people are too poor to pay tax. Heck….you have 7 million illegal immigrants! But they are so poor from the shitty wages they have to accept that they rarely pay much.

    Comment by Bill | January 24, 2014 | Reply

    • You’re an idiot. “So creating food stamps increases the size of your economy by five bucks for every for every five dollar stamp.” The economy is not expanded because the food stamp receipt did not provide anything of value. n

      Comment by dbhalling | January 24, 2014 | Reply

  11. Sorry…he spends five bucks not ten bucks. The five bucks will all come back.

    Comment by Sorry | January 24, 2014 | Reply

  12. Poor people spend all their money. By giving them money for food, they have more money to spend on everything else…. they still end up spending all their money. Each month grocery stores and vendors have to hire more (or give more work to) people when food benefits are distributed. I know this first-hand, raking in overtime pay near the beginning of the month working for a food vendor. It doesn’t really matter what people spend their SNAP benefits on, just as long as they spend all of it. This influx of business activity ripples through the economy. With the extra hours I’m working, I can pay my bills and pay for my car or go to a restaurant to eat. With that money, the auto mechanic and restaurant staff get more hours of work and more pay. Same deal with poor people as they can spend money on other things because food is taken care of. Person A can afford a service from person B, person B can then afford an extra service from person C, and person C can afford an extra service from person D……. so on and so on….. each cycle the effect dies off partly because taxes dip into transaction in one shape or form.

    Why not just give SNAP benefits to everybody? Poor people typically have to spend all their money, so the biggest bang for the buck is to give them the benefits because they’ll spend their other money anyway. As you climb up the wealth ladder, the effect drops. People spend what they need, save the rest, so that extra money for wealthier people isn’t necessarily being used to stimulate the economy and would be a waste for the government to fund because the idea is to increase transactions which increases tax collected.

    Comment by G King | July 1, 2014 | Reply

  13. G King,

    Spending on food is consumption and consumption does not create wealth. Why is it so hard for Keynesians to understand such a simple point?

    In addition, SNAP is the equivalent of theft, the person using SNAP is providing no value. So Keynesians believe theft can create wealth.. You are very good at repeating Socialist nonsense, but not very good at logic.

    Comment by dbhalling | July 1, 2014 | Reply

  14. You clearly are unfamiliar with the concept of “velocity of money” which is described in every elementary book on economics. The “multiplier effect” is real. Every economic transaction has a multiplier effect but not all are the same size.

    Comment by chrisgalas | December 18, 2016 | Reply


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: