Big, Unanswered Questions I Have About Economics
By David Metcalfe
August 20, 2019
Can We Just Donate Our Personal Income To End Poverty?
I used to think of fighting poverty as an entirely moral issue. “If only people would donate more money!” was the simple answer I had. It obviously frustrated me, because people seem to have very little, if any, interest in helping others if it means giving up something for themselves.
For example, sponsoring a child costs about $35 per month. If the average American makes about $3,000 per month after taxes, and spends $1,000 on their basic needs, then they have around $2,000 extra. This means that a typical American could sponsor 57 sponsor children! If all 200 million adult Americans averaged 57 sponsor children, there would be no child in poverty in the entire world.
But is it really that simple?
No, it’s not, and there’s a thousand reasons why, but I’ll just address a few. When the average American spends their $3,000 per month, the first $1,000 covers their basic needs. That extra $2,000 does not get thrown down a well, never to be seen again. Rather, it is spent on goods and services. This spending on good and services is what creates the very income that Americans have. Spending and income are reciprocal processes.
Think about it this way: let’s say there are only 2 types of goods in the entire economy, for simplicity’s sake- cars and food. 100 people live in the society; 50 work for the car company and 50 work for the food company. All 100 people make $50,000 dollars per year, and use all of their money to buy both cars and food (total GDP of 5 million dollars). Now, imagine if all 100 people decided they were going to only buy food and no one was going to purchase cars anymore. It would destroy the car company, and all of those 50 people would be unemployed, and have no income. However, since food sales have now doubled, there will theoretically be double the labor needed for the food company, and all of the people can simply work for the food company.
But, what happens if, instead of doubling food sales, that money was just lost from the economy? Now you have an economy where only 50 people are working, and the food company is the only one functioning (GDP reduced to 2.5 million dollars). This means that no one owns a car (decreased quality of life), and only 50 people are employed (the other 50 people either become in extreme poverty or are subsidized by welfare). If these 50 unemployed people are subsidized by welfare from the 50 working people, the 50 working people will no longer be able to spend $50,000 on food, and the food company’s sales will go down. The food workers wages will then have to go down, which will decrease the food company’s sales further, and this spiral effect continues into a recession.
All this to say: giving to help people in poverty takes money out of the economy, and reduces the wages and employment of people in the society from which it came.
But here’s the larger question: since we are a global economy, does that money really get lost from the economy?
Consider this: let’s say some country in Africa is in terrible poverty, and has essentially no economic production. America currently has 100 supply of bananas, and a banana typically costs $1 per. We give that African country some money to start a banana farm. They produce 100 supply of bananas, 50 of which sell domestic and 50 of which sell to America. This means that America now has 150 supply of bananas. With increased supply, the price can then be lowered. The average banana now costs 75 cents. This means that consumers have 25 cents more to spend on other things. As long as America gave less to the African country than they saved on increased supply, they actually gained economic growth. And obviously, we’ve created sustainable industry and economic growth for that African country.
All that to say: ending poverty is a lot less about individuals randomly donating, and more about massive economic development principles and their effective application. Jeffrey Sachs has done a million times more to end poverty than Mother Theresa, for example.
Now that we know the basics of where I’m coming from, we can consider my other unanswered questions:
Does Consumer Debt Increase or Decrease Economic Growth?
Let’s say John Smith makes $50,000 per year at his job. Therefore he can only contribute $50,000 through spending on goods and services. But, he gets a credit card, and spends an extra $10,000 that year. This means he’s spent $60,000 on goods and services, and the economy has grown, as well as his quality of life has increased. So for year 1, he contributes $60,000. Now, in year 2, he has to pay off his credit card; at 20% interest. So, he makes $50,000 again, but he has to spend $12,000 on his debt and interest. So for year 2, he’s only able to contribute $38,000 to the economy.
We might say then that consumer debt causes a net decrease in economic growth. For John Smith, specifically, yes, it hurt his personal finances. BUT that interest he paid is not actually lost from the economy; it goes to a credit card company who then pays their workers. So, in a way, it’s actually just spending on the credit card company rather than other things. This may decrease his quality of life (decreased consumer purchasing power). But overall, there doesn’t seem to be any obvious loss in economic growth.
But what if he used this $10,000 debt toward a business opportunity? Like, he bought a boat and then rents out the boat to people on vacation. Sure, he lost $12,000 in year 2, but he’s now making $5,000 per year from boat rentals. This means he’s now making $55,000 per year, and spending that same amount. John Smith’s personal finances have improved, he’s generated economic growth, and he’s provided a service to increase the quality of life of others.
Let’s say, rather than the business venture, John Smith instead spent the debt on an instantly depreciating asset. Like, he went out to fancy restaurants all year. He created temporary growth for those restaurants, but in year 2 he has to pay off his debt. But John Smith doesn’t pay off his debt that year, because he continues to spend his entire $50,000 salary. In fact, he takes on $10,000 more on credit cards. By year 3, he has $22,000 of debt. If he continues this pattern, he will eventually get so into debt that he will have no way to pay it off through his regular wages. John Smith declares bankruptcy, and most of that debt is completely lost from the economy. This means that John Smith created a small amount of temporary growth for the restaurants he went to, but the credit card company does not get their entire loan back, or the interest, so that money is gone, and overall, there is a loss in economic growth.
Basically, debt can increase economic growth, but lenders have to be smart about who and what they lend to. Credit card companies generally hurt the consumer who borrows from them in the long term, but also do provide employment opportunities for people, so economic growth may be sustained.
Ok, This Article Is Getting Too Long, So I’ll Just Ask The Rest And Let You Think About Them
On National Debt:
Why is almost every country in debt and constantly running a deficit? Why does national debt not seem to have an effect on GDP or general quality of life? Is a sustainably growing national debt actually an asset? What defines an “acceptable” deficit?
On Consumer Income:
Does artificially increasing income for low and middle income consumers (minimum wage, government stimulus, tax breaks) increase economic growth and quality of life simultaneously? Or is it too much of a burden on corporations and the wealthy that it hurts the economy (increasing pricing on goods and services or disincentivizing/limiting investment)? For example, would taxing businesses more in order to give consumers more money just increase the cost of goods and not really drive any net increase in consumer purchasing power? Or, maybe not increase the cost of goods, but increase unemployment or decrease wages?
On The Ultra-Wealthy:
Do billionaires spend/invest their money in such a way that actually increases economic growth, or would it be more effective to put a high tax on them (or even a maximum income) and redistribute that income to low and middle income people (or, give them tax breaks and let the ultra-wealthy carry more of the tax burden)?
On International Trade:
If Canada has more than enough oil to supply itself, why does it buy so much from foreign markets? In addition, why does it send so much of its oil to be refined in US? Is it more economically effective to sell our oil to foreign markets and then import other foreign oil? I suppose it provides more work for all the transportation workers and accompanying industries, but how could it really be a beneficial trade to sell away our oil and purchase it from elsewhere? Also, why do some countries demand tariffs for goods? Wouldn’t it be fine to just pay the market price and leave it at that, assuming it’s advantageous to buy from foreign markets anyway?
On Global Development:
Why can’t we find a way to develop sustainable industries for poor nations? Like, can’t we just assess what natural resources or skills they have, and cater some kind of demand to it, and then facilitate that along with every other nation? Like, if we distributed manufacturing more diversely? On that note, is it beneficial for both America and China to allow them to use extremely underpaid labour to manufacture our goods? This obviously gives more jobs to Chinese people, and creates massive industry, while also providing Americans with cheaper goods (increasing consumer purchasing power), but it also keeps millions of Chinese people in working poor situations. Or maybe if it is beneficial economically, is there a moral component that should set a standard for how we manufacture, sell and buy goods?
Alright, there’s the kind of strange things I think about. I imagine that some of these questions are easily answerable, and I will come across them as I read and think. Some of them are probably extremely difficult to answer, and the best economists in the world are working on them and not coming up with clear answers. And some of these questions might be literally unanswerable by humans.
Which ones are which, I will find out.