7 ms·

As someone who really doesn't understand economics: if the government prints money to build infrastructure, where does the value they've added come from? I can'

by zelos 6y ago

As someone who really doesn't understand economics: if the government prints money to build infrastructure, where does the value they've added come from? I can't follow the logic of it: the government makes some money and pays a load of workers to build a bridge. It seems like the bridge is 'free', paid for with bits of paper they printed. Is the real cost the increased price of bridge building for everyone else, because demand for bridge builders is pushed up?

JumpCrisscross 6y ago
> if the government prints money to build infrastructure, where does the value they've added come from? Increased real productivity. Imagine a toy town where only two goods are produced on opposite sides of a river. To trade them, risky river crossings risking product and person must be attempted. A bridge removes that risk and cost. The town will become wealthier for having the bridge despite its cost. (Same for e.g. ancient Mesopotamian, Mesoamerican and Hohokam canals.) > the government makes some money If the government prints money to fund its deficit then inflation “taxes” everyone. It is analogous to a company selling stock to do something useful. The share count went up but the aggregate value (hopefully) will too.
- gassius 6y ago
  Increased real productivity might occur due to public spending, but its less likely that it was in the 1800s, if the Govt "bet" on that bridge does not payoff, then is each dollar printed to bet on it is diluting the value. I wouldn't trust the public sector to correctly allocate the resources to increase the real economic output over the private sector, for self evident historical lessons. And now that the low fruit has been taken, they might be tempted to build bridges to nowhere https://www.alaska.org/detail/bridge-to-nowhere https://www.alaska.org/detail/bridge-to-nowhere
fmsf 6y ago
The printed money is effectively diluting everyone's else's money. So technically you could think of it as an indirect tax, because the overall currency value drops. Similar to a company emitting new shares to pay employees. It's the shareholders who are paying the cost via dilution.
- synnejye 6y ago
  Disagree. :-) Printing money does not automatically lead to inflation. Since inflation is just the price of stuff rising, the question becomes, when do prices rise? The price can rise for multiple reasons: The price can rise because the company just wants to charge more, like Apple. The price can rise because a company's underlying cost rises. Maybe some type of metal became more expensive. Either way, the only way that money printing can lead to inflation is if that money creates so much demand that a company needs to expand production capacity to produce more, and if that capacity has rising costs. If a company expands from, let's say 65% capacity to 75% capacity, and has constant costs, then it doesn't matter. Then more people will be employed due to increased demand, and the economy will boom. This makes money printing a good policy. If, however, the company goes from 85% to 95%, then the company might start to invest in extra capacity, which might add costs, and thereby might raise prices. So, do prices rise just because a certain amount of dollars were added to an economy ? No, certainly not. Which is why the money printing should only happen when the economy is dysfunctional. Basically Keynes in a nutshell. :-)
  - deleted 6y ago
    [deleted]
  - ghastmaster 6y ago
    > Since inflation is just the price of stuff rising... Inflation literally is money printing. Price increases is not inflation. Price increases can be caused by inflation. Prices can remain nominally the same while money supply has increased. > So, do prices rise just because a certain amount of dollars were added to an economy ? No, certainly not. Which is why the money printing should only happen when the economy is dysfunctional. The prices while having not risen nominally are still artificially inflated. A dysfunctional economy is not a real thing. It is just the economy. If you are referring to a recession, printing money during a recession arguably may not cause prices to rise nominally, but it artificially inflates them. During a recession prices typically go down due to falling demand. This is a good thing. It allows people who are suffering to enjoy lower prices. Recessions are a healing process for a previous period of misallocation of resources. Money printing only serves to exacerbate and extend the misallocation. As the period of misallocation is extended and exacerbated, the recession necessary to balance that is larger and more frightening. We left the gold standard because we were afraid to deal with the recession from the spending of '60s and we've been afraid to deal with our issues ever since. One day we won't have a choice. Tough times are ahead.
roenxi 6y ago
The economy has two components - today and the future. Today, we decide who gets what stuff. Then the people who have most of the stuff decide what to create for the future. The bridge isn't free - the resources needed to build the bridge (time, steel, engineering attention, government attention, etc, etc) are being reallocated from someone else who would have used the resources to do something. If the bridge is more productive than whatever the person the money came from wanted then there will be more stuff in the future and prosperity likely increases. The problem with money printing is it is all but impossible to figure out where the resources are being reallocated from - with taxes it is fairly obvious. With money printing it is not. It may well be impossible to say what we lost to get the bridge built because we can't figure out what would have happened if the money had not been printed.
- RobertoG 6y ago
  >>"The problem with money printing is it is all but impossible to figure out where the resources are being reallocated from - with taxes it is fairly obvious. With money printing it is not. It may well be impossible to say what we lost to get the bridge built because we can't figure out what would have happened if the money had not been printed. " It seems to me that, following your logic, if you don't "print the money", it's also impossible to know what would have happened if the money have been printed.
  - roenxi 6y ago
    If income is taxed, less resources get allocated to work & workers. If alcohol is taxed, there is less alcohol. Tax petrol, less cars. It is a high bar on the word 'impossible' not to be able to guess what the rough impact of a tax is.
linschn 6y ago
It comes from the workers' work. If you print money to buy stocks, the money goes into the capitalists' pockets, where it tends to stay, because capital is already extremely highly concentrated and avenues for investment are few at this scale. Also you get the adverse externalities mentioned by GP. Whereas if you pay workers for infrastructure, you get some infrastructure (I. E. Productive capital) and the worker will actually spend their money, thus enabling other workers to create value in turn. All of this is about putting workers to work. You can try to order the workers to work, with a central planning system (soviet Russia, or any large multinational corporation such as Google) or with money. But if you give money to rent seekers who are already full of money, they are not going to put workers to work, which is what is currently happening in the West.
- tcgv 6y ago
  > It comes from the workers' work. I disagree. The workers' work is the cost of building the bridge. The value comes from the infrastructure's utility / ROI. If we assemble a group of workers to build some useless infrastructure, say a bridge connecting nowhere to nothing that won't be used by anyone, we just effectively handed out money to this group of workers (for their time) without adding any real value to the economy.
fuoqi 6y ago
The idea is that rational infrastructure projects create additional economic growth in future (i.e. more stuff gets moved across the built bridge, more real value gets created), so the printed money are used to support this growth. So effectively government invests into a long-term project by "borrowing" money from those who are saving them today (in a sense they borrow from "future"). If investments are good, the "loan" gets payed by more taxes being collected. If investments are bad (e.g. as many infrastructure projects in China), they will cause various problems in future since economy gets injected by money not backed by productive activity.
HourglassFR 6y ago
> if the government prints money to build infrastructure, where does the value they've added come from? From the labour of the worker. Notice that does not depend on where the money comes from in the first place. In our economic models, value always come from human labour (or capital, which is crystallized labour). But of course those models are lacking, crucially they implicitly consider natural ressources as infinite, a fine assumption to make in the 19th century but is now quite ludicrous.
Angostura 6y ago
The value comes from decreasing the value of the currency for everyone else. Every additional banknote you put into circulation reduces the value of every existing banknote by a teeny-tiny bit.
jpgvm 6y ago
The bridge is the value, it will increase productivity and quality of life (same can be said for other infra projects). The money comes from everyone holding the currency. When you print money you devalue all the existing money, this is called inflation. So effectively "everyone" paid for the bridge that is holding your currency.
OGWhales 6y ago
I highly suggest looking up MMT, there is a podcast called the MMT podcast that explains these things well, but you can find other sources that may be faster to read if you search the acronym. It's simply a good way of framing these issues to make them more intuitive. edit: there are a lot of misconceptions about money printing and inflation here. Please be weary of that.
PascLeRasc 6y ago
I've always struggled with this too, I just cannot understand it. Same with seeing like a $1B yacht or a massive diamond - I don't know how you'd go about turning that into insulin or low-cost homes. Even as I type this out I don't understand what I'm saying, so if anyone sees what idea I'm struggling with I'd really appreciate any help.
- RobertoG 6y ago
  I think the key insight is to realize that money is just a distraction, it's numbers in some computers. At the end of the day we have three kind of real resources: matter (raw materials and energy), labor and knowledge. Money is about how those resources are used. Whoever has the money can mobilize those resources for any goal of its choosing. The value can only be measure in function of what those goals are. It's obvious that you can't choose turn a $1B yacht in insulin, but you could redirect the economy to produce more insulin and less yachts (or the other way around). The believers in Laissez-faire, will tell you that the system, by itself, will produce the exact quantity of insulin and yacht necessaries. In other words, they think that the optimization function and the utility function are all implemented in the power of markets. In the other side of the spectrum (a totally centralize economy), they will tell you that the optimization function and the utility function can be wrote by hand. Personally, I think that the optimization function have to be learned by the markets, and the goal function have to be handcrafted. The economy is just a machine that really doesn't care, it will create yachts or insulin or whatever.

by zelos 6y ago

JumpCrisscross 6y ago

> if the government prints money to build infrastructure, where does the value they've added come from? Increased real productivity. Imagine a toy town where only two goods are produced on opposite sides of a river. To trade them, risky river crossings risking product and person must be attempted. A bridge removes that risk and cost. The town will become wealthier for having the bridge despite its cost. (Same for e.g. ancient Mesopotamian, Mesoamerican and Hohokam canals.) > the government makes some money If the government prints money to fund its deficit then inflation “taxes” everyone. It is analogous to a company selling stock to do something useful. The share count went up but the aggregate value (hopefully) will too.

gassius 6y ago
Increased real productivity might occur due to public spending, but its less likely that it was in the 1800s, if the Govt "bet" on that bridge does not payoff, then is each dollar printed to bet on it is diluting the value. I wouldn't trust the public sector to correctly allocate the resources to increase the real economic output over the private sector, for self evident historical lessons. And now that the low fruit has been taken, they might be tempted to build bridges to nowhere https://www.alaska.org/detail/bridge-to-nowhere https://www.alaska.org/detail/bridge-to-nowhere

fmsf 6y ago

The printed money is effectively diluting everyone's else's money. So technically you could think of it as an indirect tax, because the overall currency value drops. Similar to a company emitting new shares to pay employees. It's the shareholders who are paying the cost via dilution.

synnejye 6y ago
Disagree. :-) Printing money does not automatically lead to inflation. Since inflation is just the price of stuff rising, the question becomes, when do prices rise? The price can rise for multiple reasons: The price can rise because the company just wants to charge more, like Apple. The price can rise because a company's underlying cost rises. Maybe some type of metal became more expensive. Either way, the only way that money printing can lead to inflation is if that money creates so much demand that a company needs to expand production capacity to produce more, and if that capacity has rising costs. If a company expands from, let's say 65% capacity to 75% capacity, and has constant costs, then it doesn't matter. Then more people will be employed due to increased demand, and the economy will boom. This makes money printing a good policy. If, however, the company goes from 85% to 95%, then the company might start to invest in extra capacity, which might add costs, and thereby might raise prices. So, do prices rise just because a certain amount of dollars were added to an economy ? No, certainly not. Which is why the money printing should only happen when the economy is dysfunctional. Basically Keynes in a nutshell. :-)
- deleted 6y ago
  [deleted]
- ghastmaster 6y ago
  > Since inflation is just the price of stuff rising... Inflation literally is money printing. Price increases is not inflation. Price increases can be caused by inflation. Prices can remain nominally the same while money supply has increased. > So, do prices rise just because a certain amount of dollars were added to an economy ? No, certainly not. Which is why the money printing should only happen when the economy is dysfunctional. The prices while having not risen nominally are still artificially inflated. A dysfunctional economy is not a real thing. It is just the economy. If you are referring to a recession, printing money during a recession arguably may not cause prices to rise nominally, but it artificially inflates them. During a recession prices typically go down due to falling demand. This is a good thing. It allows people who are suffering to enjoy lower prices. Recessions are a healing process for a previous period of misallocation of resources. Money printing only serves to exacerbate and extend the misallocation. As the period of misallocation is extended and exacerbated, the recession necessary to balance that is larger and more frightening. We left the gold standard because we were afraid to deal with the recession from the spending of '60s and we've been afraid to deal with our issues ever since. One day we won't have a choice. Tough times are ahead.

roenxi 6y ago

The economy has two components - today and the future. Today, we decide who gets what stuff. Then the people who have most of the stuff decide what to create for the future. The bridge isn't free - the resources needed to build the bridge (time, steel, engineering attention, government attention, etc, etc) are being reallocated from someone else who would have used the resources to do something. If the bridge is more productive than whatever the person the money came from wanted then there will be more stuff in the future and prosperity likely increases. The problem with money printing is it is all but impossible to figure out where the resources are being reallocated from - with taxes it is fairly obvious. With money printing it is not. It may well be impossible to say what we lost to get the bridge built because we can't figure out what would have happened if the money had not been printed.

RobertoG 6y ago
>>"The problem with money printing is it is all but impossible to figure out where the resources are being reallocated from - with taxes it is fairly obvious. With money printing it is not. It may well be impossible to say what we lost to get the bridge built because we can't figure out what would have happened if the money had not been printed. " It seems to me that, following your logic, if you don't "print the money", it's also impossible to know what would have happened if the money have been printed.
- roenxi 6y ago
  If income is taxed, less resources get allocated to work & workers. If alcohol is taxed, there is less alcohol. Tax petrol, less cars. It is a high bar on the word 'impossible' not to be able to guess what the rough impact of a tax is.

linschn 6y ago

It comes from the workers' work. If you print money to buy stocks, the money goes into the capitalists' pockets, where it tends to stay, because capital is already extremely highly concentrated and avenues for investment are few at this scale. Also you get the adverse externalities mentioned by GP. Whereas if you pay workers for infrastructure, you get some infrastructure (I. E. Productive capital) and the worker will actually spend their money, thus enabling other workers to create value in turn. All of this is about putting workers to work. You can try to order the workers to work, with a central planning system (soviet Russia, or any large multinational corporation such as Google) or with money. But if you give money to rent seekers who are already full of money, they are not going to put workers to work, which is what is currently happening in the West.

tcgv 6y ago
> It comes from the workers' work. I disagree. The workers' work is the cost of building the bridge. The value comes from the infrastructure's utility / ROI. If we assemble a group of workers to build some useless infrastructure, say a bridge connecting nowhere to nothing that won't be used by anyone, we just effectively handed out money to this group of workers (for their time) without adding any real value to the economy.

fuoqi 6y ago

The idea is that rational infrastructure projects create additional economic growth in future (i.e. more stuff gets moved across the built bridge, more real value gets created), so the printed money are used to support this growth. So effectively government invests into a long-term project by "borrowing" money from those who are saving them today (in a sense they borrow from "future"). If investments are good, the "loan" gets payed by more taxes being collected. If investments are bad (e.g. as many infrastructure projects in China), they will cause various problems in future since economy gets injected by money not backed by productive activity.

HourglassFR 6y ago

> if the government prints money to build infrastructure, where does the value they've added come from? From the labour of the worker. Notice that does not depend on where the money comes from in the first place. In our economic models, value always come from human labour (or capital, which is crystallized labour). But of course those models are lacking, crucially they implicitly consider natural ressources as infinite, a fine assumption to make in the 19th century but is now quite ludicrous.

Angostura 6y ago

The value comes from decreasing the value of the currency for everyone else. Every additional banknote you put into circulation reduces the value of every existing banknote by a teeny-tiny bit.

jpgvm 6y ago

The bridge is the value, it will increase productivity and quality of life (same can be said for other infra projects). The money comes from everyone holding the currency. When you print money you devalue all the existing money, this is called inflation. So effectively "everyone" paid for the bridge that is holding your currency.

OGWhales 6y ago

I highly suggest looking up MMT, there is a podcast called the MMT podcast that explains these things well, but you can find other sources that may be faster to read if you search the acronym. It's simply a good way of framing these issues to make them more intuitive. edit: there are a lot of misconceptions about money printing and inflation here. Please be weary of that.

PascLeRasc 6y ago

I've always struggled with this too, I just cannot understand it. Same with seeing like a $1B yacht or a massive diamond - I don't know how you'd go about turning that into insulin or low-cost homes. Even as I type this out I don't understand what I'm saying, so if anyone sees what idea I'm struggling with I'd really appreciate any help.

RobertoG 6y ago
I think the key insight is to realize that money is just a distraction, it's numbers in some computers. At the end of the day we have three kind of real resources: matter (raw materials and energy), labor and knowledge. Money is about how those resources are used. Whoever has the money can mobilize those resources for any goal of its choosing. The value can only be measure in function of what those goals are. It's obvious that you can't choose turn a $1B yacht in insulin, but you could redirect the economy to produce more insulin and less yachts (or the other way around). The believers in Laissez-faire, will tell you that the system, by itself, will produce the exact quantity of insulin and yacht necessaries. In other words, they think that the optimization function and the utility function are all implemented in the power of markets. In the other side of the spectrum (a totally centralize economy), they will tell you that the optimization function and the utility function can be wrote by hand. Personally, I think that the optimization function have to be learned by the markets, and the goal function have to be handcrafted. The economy is just a machine that really doesn't care, it will create yachts or insulin or whatever.