Printing money to redistribute wealth

A fictional country has 100 people. The total printed money is $2000. Ten rich people own half of it ($100 each), the remaining 90 are comparatively poor : ($\$2000 = 10 \times \$100 + 90 \times \$11.11 $) To make things more even, the government decides to print another $2000 (no independent Central Bank here) and give them to all inhabitants, $20 each. Surely, this triggers inflation, prices double. But the net result is a redistribution of wealth, the poor are now less poor than before. This looks as a simple progressive tax scheme which is beneficial to the poorest people. It could even be applied in some periodical and predictable way. Of course, this is utterly stupid and cannot work - I guess. Why? • Because most economies are not closed and boxed in. Money supply in most (if not all) countries are not fixed (except maybe a few) because of fractional reserve banking. – ssn Mar 2 '18 at 16:06 • @ssn Post answers as answers so that they can be voted on! – Giskard Mar 2 '18 at 17:16 • An odd feature of your fictional scenario is that although it includes wealth and money, there is no mention of income. The normal meaning of being poor is having a low income. In the real world some people have a positive income, but negative wealth because they have borrowed (eg to fund consumption or education) in the past. – Adam Bailey Mar 3 '18 at 11:07 • This question is purely political. The reality is that doing so could work. Monetary policies in general are (directly or indirectly) influenced by those who have "time" to do so. BTW, your question has huge socio-political implications. – keepAlive Mar 11 '18 at 1:52 4 Answers It is "stupid" only to the extent that it doesn't take into account the socio-economic and political realities. It appears the government tries to make the plan acceptable by giving to everybody, rich and poor, the same nominal amount of money. So it seems this is not "in favor of the poor against the rich" so why would the rich people react against it? Well, because their purchasing power will get a massive hit, and poor or rich, I haven't encountered many people that will take that lightly. Under the implied assumption that the economy is at full capacity (an assumption that is needed so that the full effect of the increase in the money supply to be reflected in inflation, otherwise this will not be the case), total output will be the same but the price level will indeed double. Setting the price level before the transfers at$P=1$, we have : FOR each POOR person The real value of money holdings (i.e. in units of goods) was$11.11$and now it will be $$(11.11 + 20.00) /2 = 15.555 > 11.11$$ an increase of$40$% in real purchasing power. This means that each poor person will be able to consume$40$% actual units of goods more than before. FOR each RICH person The real value of money holdings (i.e. in units of goods) was$100$and now it will be $$(100 + 20.00) /2 = 60 < 100$$ a decrease of$40$% in purchasing power. This means that each rich person will be able to consume$40\$% fewer units of goods than before.

Do you imagine the rich will stay quiet faced with such large decline in their living standards?

This does not mean that historically governments have not used increases in the money supply to hand out transfers to the poorer segments of the population. They have, but it wasn't implemented in such a "grand redistribution scheme" style, and it wasn't so widespread that it would seriously affect the purchasing power of the rest.

The main problem is that wealth does not equal cash. Those ten rich people probably have most of their wealth in real estate and stocks. Imagine all you own is a Lamborghini, then the government prints a lot of money, does that impact you?

Depending on the situation the money printing may be progressive or regressive. And the cost are high: There will not just be one inflationary moment, there will be inflation because the initial inflation breeds an expectation of even more inflation leading to hyperinflation.

Finally when you've done this once, nobody will ever want to hold your currency again because they distrust you. Leading to a number of other problems.

It would be tedious, not to say impossible, to empirically address your question without describing incomes' formation and circuit

Indeed, what will be a real change for a given person, may be nominal for another depending on how their respective "dividends" inflate in parallel.

To illustrate this need for such a description, let's consider, in the schematic and highly simplifying world you describe, the (as schematic) following closed economy -- incidentally the world economy is a closed econony:

Say that the (only one) dividend-generating sector is equitably owned by "richs". Printing money as you suggest would at first directly increase poors' income. But will they keep this wealth for real over the long term? Put differently, will this increase be nominal or real? If they save it -- which they empirically don't --, chances are that they will get richer. But if they consume goods/services produced by the owned-by-rich sector whose supply stay constant, it will generate inflation, which in turn will make poor's income-increase be nominal. Where will then be this injected money? In richs' pockets. The government's (potentially infinite) solvency will just be transfered to richs... That being said, note that if quantitative easing is strong enough -- putting aside the discussion about bubbles since the present example is monosector --, the supply may increase and (generate jobs and) stimulate GDP with a growth rate higher than that of inflation: which means real growth...

But in reality, strong monetary policies, which (stimulate demands here and there and thus) disturb markets' equilibria in an unpredictable manner are rarely, not to say never applied, because those who sharehold markets do (not like free volatility an do) not "take that lightly".

• Any question @Leonbloy ? – keepAlive Oct 17 '19 at 11:36

@JFugger_jr 's answer seems quite all right but I have one addition:

In most economies, the money supply has vastly increased over the years (around 5% yearly for the euro), yet people are not massively fleeing from the currency.

As @JFugger_jr said: The more assets you have outside of the currency, the less you will be penalised by the expansion of the money supply (regardless of who gets the new currency). Thus the 'strategical' choice for a currency holder to make in the current is exactly the same as in the system you are proposing. Flee the currency, or you will experience demurrage. Yet people are not completely abandoning the currencies of these economies (in most cases), as they have to pay taxes in them.

If it isn't clear: My argument is that the arguments against an 'equal distribution of minted money' are just as valid against the current system, where money is created through methods like open market operations or quantitative easing.