Recently you might have read about tax cuts being ineffective stimulus compared to food stamps. If your goal is to get poor people to spend more (make no mistake, this is the goal), this is true.
Food stamps are effective fiscal stimulus because they are targeted and limited. They are targeted at poor people who have their heads below water. They are also limited to grocery stores, which is significant. Both the target and the limits help keep the velocity of money high. The velocity of money is a measure of how much the same dollar exchanges hands. That is, if you buy bread from the baker for $10, and he buys flour from the store for $5, and the store buys flour from the farmer for $4, and the farmer saves it, then the velocity of those ten dollars was 1.9 (the units are “per year”, but are often elided).
People who are below water are not likely to be able to save money just because they have food stamps. If you gave me a hundred dollars in food stamps, I would save an extra hundred dollars this month. For me, the velocity of money from the food stamps is zero. For someone below water, the velocity of money is one. They’re very likely to (net) spend all the money in food stamps they get. Actually, the velocity is very likely to be higher than that. Not only are poor people likely to spend the food stamps in addition to any money they would have spent, the grocery store is almost guaranteed to restock their shelves. That would give food stamps a velocity of two, except for the fact that there’s some crowding out. The poor person would likely have still bought some food without the food stamps, it’s just that they wouldn’t have bought something else (and still would have bought less food). That something else might have a lower velocity of money associated with it. The velocity actually might be higher, because the supply chain may be inefficient.
Incidentally, extending unemployment benefits has only slightly less impact per dollar because it is targeted roughly the same, but it isn’t limited to grocery stores, so there’s a slight hit to the effectiveness. This reasoning should also make it evident that there’s an upper limit to the effectiveness that such stimulus can have. I won’t discuss fairness issues at all.
The fact that a wealthier person has the option of saving money from a tax cut causes the fiscal impact to be less. The velocity of money for saved dollars is zero. Employment is quite correlated with the velocity of money. But employment, despite my posts, is not a great indicator of economic health. The point is made by the graph I linked to at the top of this post. For $10 billion, if the government pays $10 / hr, it can afford to pay 25,000 people to dig ditches and another 25,000 people to fill those ditches in. 50,000 people would be directly employed for a whole year. The velocity of money is very high for those making close to minimum wage, so it’s quite possible that 100,000 jobs would be created (The Viking ship made of toothpicks would likely employ significantly more people than estimated, but it would run afoul of minimum wage laws). It’s also quite clear that the economy is not healthy. Nothing was accomplished other than the creation of jobs. This is the problem with relying on single metrics as measures of economic health. It is quite easy to manipulate a single statistic.
