Thursday, September 4, 2014
To the Editor:
If you think you don’t fathom the economy, but you’ve played the game of Monopoly, you’re wrong.
Monopoly imparts a precise understanding of why income inequality, while making life great for one player, drives everyone else to despair.
As the luckiest player acquires and enhances properties, other players are squeezed into submission until they are driven from competition.
They can no longer contribute to the economy. Like the real-life analogue of this game, even the winner eventually loses because once his monopoly is achieved, no one is in a position to patronize his businesses, so his income evaporates.
All of this grows out of a process called “the velocity of money.” The faster money circulates in the economy, the greater the number of people who benefit.
A farmer who buys $50 worth of plumbing work from a local company drives economic activity.
The plumber then buys $50 worth of pork and vegetables from the farmer, and $100 of economic activity has occurred.
If the farmer then spends that $50 to buy corn and soybeans to feed his hogs, $150 has changed hands, where the original $50 is all that ever existed as cold, hard cash.
The aggregate of all this activity, and much more, is called “the economy.”
When people or companies with extra money put it into corporate accounts, the stock market or hedge funds, or simply into savings accounts, the velocity of that money slows to a trickle and it does little to boost the economy.
Apple, for example, is sitting on 150 billion inert dollars. As far as the current economy is concerned, it’s as if that $150 billion didn’t exist.
When a millionaire, all of whose needs have long since been met, saves his current income at the bank, it contributes little to general prosperity.
But adding a dollar or two to the hourly wages of most workers results in a quick boost to the economy. Their immediate needs compel them to spend it rapidly, and everyone benefits.
If rooting for billionaires to become trillionaires makes you happy, by all means keep cheering.
But don’t deceive yourself into thinking that their wealth, and what they do with it, helps you or the economy in any significant way. Au contraire.
A deluded president in the 1980s thought that if he could manipulate the economy to make his supporters richer, money would trickle down from the wealthy to the needy. Like the once-popular notion of human spontaneous combustion, that theory is now sequestered serenely in the sub-basement of the mausoleum of discredited hokum.
It’s counter-intuitive, but the way for all of us to achieve greater prosperity is not to save, but to put more money in the hands of people who will spend it quickly.
Let’s try to pull this off surreptitiously. We’ll raise the wages of all poor people without even asking them if it’s OK.
A month later we’ll fool them again by raising their salaries so high they no longer qualify for food stamps or Medicaid.
Then they’ll spend money so fast that our businesses will all prosper, our taxes will be lower, and we will live happily ever after.
We will call our new economic program “The American Way.” Then we can label our opponents, if there are any, as un-American.