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Frequently, extra handout to poor people during economic crisis is motivated by the multiplier effect. The reasoning goes something like this: since the recipients are poor they will consume the extra money more or less immediately and this starts a process that increases the turnover in the economy (The stores need to hire more staff, the staff gets more salary, salary that they use to consume. Rinse and repeat. Etc.). This compares to if rich people get the extra money, they don't need it for immediate consumption so they will save at least part of it (poor people might also save a part of it but that part is smaller than the part rich people save).

However, rich people aren't like Scrooge McDuck and use money as a collectible. They have a few options instead of consumption like deposit the money in a bank account, invest in the stock market, down pay a mortgage etc. These actions also have multiplier effects:

  • Deposited money increases the money supply which decreases the price on money - the interest rate - which makes more investments that depend on loans profitable. If I deposit some money that might decrease the interest rate with 0,01 % which is just what is needed for a real estate developer to start a new project or a private individual to buy that car.

  • I might buy stock for my handout - but that means that someone else is selling stock, maybe so they can afford a new car or whatever.

Etc.

The money aren't destroyed or removed from circulation just because the recipient is well off. They just enter the economy through different channels.

You could argue that investing is a better (longterm) help for the economy than immediate consumption. Investing increases the economy's capital stock which in turn increases the longterm "payout" of the economy, while consumption "consumes" (duh!) the money with no longterm gain.

You could also argue that the way money are distributed in the economy if you give rich people extra money is more "market driven", which generally is considered more efficient than the alternatives, than poor peoples consumption: if a rich person deposit the money in a bank account and that way decreases the interest rate, it affects the market actors just like any other event on the market. Similar arguments applies to buying stock etc.

Isn't handouts to rich people a more efficient way to "kickstart" an economy, through the multiplier effect and other means, in recession compared to if the handout targets poor people?

IIRC, Keynes explained the multiplier effect when some ship yard built some luxury cruising ship during The Great Depression and although a shipyard isn't a person, they act like a rich person when they invest in a new ship.

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Isn't handouts to rich people a more efficient way to "kickstart" an economy, through the multiplier effect and other means, in recession compared to if the handout targets poor people?

No. The problem is that in recession people are afraid to invest. You would be correct to say that in regular times there is multiplier on investment spending so it does not matter whether person spend money on consumption or investment.

However, during periods of recession investment dries up because it is extremely difficult to tell good borrower from bad during recessions (e.g. see Bernanke & Gertler 1995).

So during times of great financial and economic distress such as Great Depression or Great Recession, saving won't have multiplier greater or equal to 1 which means that on margin extra saving suppresses aggregate demand and makes recession worse. The same does not hold for consumption multiplier and poorer people tend to have larger marginal propensity to consume.


Regarding some points in your post:

You could argue that investing is a better (longterm) help for the economy than immediate consumption. Investing increases the economy's capital stock which in turn increases the longterm "payout" of the economy, while consumption "consumes" (duh!) the money with no longterm gain.

Investing is good for the economy in long-term but this is moot point. When people discuss redistribution to help economy during the recession it is to fix the recession not to necessarily maximize the long-run output of an economy. Moreover, as discussed in answer in a deep recession people usually are afraid to invest. Empirically investment drops during recessions and usually you see flight to safety where people buy bonds (especially government bonds) rather than stocks.

You could also argue that the way money are distributed in the economy if you give rich people extra money is more "market driven", which generally is considered more efficient than the alternatives, than poor peoples consumption: if a rich person deposit the money in a bank account and that way decreases the interest rate, it affects the market actors just like any other event on the market. Similar arguments applies to buying stock etc.

Investing is not more market driven then consumption of necessities. Nonetheless, what you say would be correct outside of recessions, but problem is that despite lower interest rates banks won't just lend money to anyone. They still have to worry about people repaying the money back and thus they have to spend money on screening applicants (this is one of the reasons why banks exist). During deep recessions screening might get so expensive that banks will rather ration the credit than offer enough loans so that the market clears. So ironically even despite lower interest rate you might get less lending and also investment during recessions. Not because lower interest rate would not increase demand for investment, but because banks are too scared to lend despite sitting on large supply of funds.

IIRC, Keynes explained the multiplier effect when some ship yard built some luxury cruising ship during The Great Depression and although a shipyard isn't a person, they act like a rich person when they invest in a new ship.

Yes, but buying luxury ship is consumption not investment. If rich people would consume higher proportion of the income than poor it would be good idea to redistribute to the rich during the recession. But empirically I don't think there is any study that ever showed rich people have higher marginal propensity to consume.

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  • $\begingroup$ Thank you for your answer. Some remarks follows. $\endgroup$
    – d-b
    Nov 15, 2022 at 20:05
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I’m going to answer from what I know from Intro to Macro. This model may not be too accurate in real life but hopefully my post is somewhat useful.

A common function to model consumption is

  • $C = C_0 + MPC \cdot (Y-T)$,

where

  • $C_0 =$ base consumption
  • $Y =$ Income
  • $T =$ Taxes
  • $Y-T$ would be disposable income
  • $MPC = $ Marginal propensity to consume, i.e. how much would you spend per additional dollar of disposable income. $MPC$ is a number in $(0,1)$.

Since a person's expenditure is another person's income, the total effect on income/production of an increment on government expenditure $\Delta E$ (handing out cash to its citizens) would be

  • $\Delta Y = \Delta E (1+MPC + {MPC}^2 + {MPC}^3 + \dots )$

Since $MPC \in (0,1)$, by the geometric series,

  • $\Delta Y = \Delta E \cdot \frac{1}{1-MPC}$,

which gets bigger as $MPC$ gets bigger (it blows up near $1$).

Wealthier people would save and invest a higher proportion of their disposable income since they don't need to spend it immediately, while poorer people would need to spend more of their disposable income to cover their basic needs, therefore having higher $MPC$'s, leading to a higher overall income/production increase $\Delta Y$ in the country.

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  • $\begingroup$ IRL economy is a bit more complex. There is also a multiplier on I that is given by MPS. What you present is from 101 model where investment is made exogenous and then the investment multiplier disappears. That is not necessarily wrong in times of recession, but it does not hold more generally yet you do not mention this important caveat in your answer at all $\endgroup$
    – 1muflon1
    Nov 14, 2022 at 20:21
  • $\begingroup$ @1muflon1 edited to point out I’m using Intro to Macro knowledge. $\endgroup$ Nov 14, 2022 at 20:34

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