A distant friend of mine was wondering about all the bailouts, and saying things like "why couldn't they take the 825 billion dollars and chop it up thusly: give every citizen one million dollars to spend and stimulate the economy."
I ambushed my kids and asked them what was wrong with this idea while they were trying to rush through their breakfast so they wouldn't be late for the bus. To be sure, there are a lot of things wrong with the idea. The first answer I got was that not everyone would spend their money, some might save it and that wouldn't stimulate the economy. Clearly, the kids have been listening to the news that I have on in the morning!
But I'm more concerned at the moment with the math. The population of the United States is around 300 million people.
My friend from before had a little trouble with large numbers. After I tried to explain that the $825 billion was not enough to give everyone a million dollars, she wanted an explanation along the lines of "if we give 300 million people one million dollars each, why doesn't that simply amount to 300 million dollars?" I told her that $300 million is what it costs to give each of them simply one dollar.
I don't think that was simply intellectual laziness; I think people's brains shut off when confronted with large numbers. She's not the only one having a problem with this. I've heard many people suggest that the way to help the economy is to dump the bailout money on citizens, or just "people with debt." But whatever you advocate, don't fall into the trap of overestimating $825 billion, or underestimating the number of US residents, US households or US taxpayers.
Over 138 million individual tax returns were filed in 2006. Even if you just gave those people the bailout money, it would be less than $6,000 per taxpayer.
We've already done something like this, but smaller, and it didn't work in the end. It was called the Bush tax cut. And Obama has some of the same kind of cuts built into the stimulus bill that the House just passed (without any one Republican lifting a finger to help).
We can disagree on the types of stimulus that cause the greatest and quickest benefit, but confusion about the scale of the problem, and the scale of the available money will dilute support for necessary stimulus, and minimize the complexity of the problem and the dire need for a solution. Another example of how mathematics is important to citizenship.
Just for fun, how much would it cost to give everyone a million dollars?
If you give 300 million people each a million dollars, that's 300,000,000 * $1,000,000 = 3*1014 or 300 trillion dollars.
That sounds like a lot of money. Is it?
Yes. According to the Federal Reserve, all the printed money in circulation in the US amounts to about 792 billion dollars. Not even one trillion dollars.
But there is much more money than that in the United States, including checking accounts, CDs, and such. The Fed tracks how much money people have in a value they call "M2" which covers households and individual investors and currency. The M2 money supply was reported to be just under $1.6 trillion in December of 08.
If you include institutional money market fund balances, repurchase agreements and Eurodollar deposits in the equation, the figure is probably up around $10 trillion, in a measure the Fed calls the M3 money supply. Interestingly, the Fed announced they would discontinue calculating this number in 2006. Ron Paul has argued that M3 is the most reliable measure of how quickly the Fed is creating new money:
"M3 is the best description of how quickly the Fed is creating new money and credit. Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation. Yet this report is no longer available to us and Congress makes no demands to receive it."
Interesting. Were the Fed trying to hide something? In any case, 300 trillion dollars is clearly a couple of orders of magnitude more money than exists in the whole United States.Posted by James at January 29, 2009 9:20 AM