If you’re wealthy enough to be sure you’ll never spend it all, you might be thinking — especially at this time of year — about giving away some of the excess. Unfortunately, that’s impossible.
What you can do is force some people to give to other people, and you might very well want to do that. But as for your own excess wealth, you can’t give it away, because you already have.
There are two ways to explain this. Pretty much everyone agrees that one explanation is much clearer than the other, but it seems like they’re split about evenly as to which is the clearer one. So I’ll offer both and you can take your choice.
You give $100 to a guy named Laszlo. Laszlo uses it to buy a turkey. That turkey had to come from somewhere, and it didn’t come from you, so it must have come from someone else.
There are only two possibilities: Either someone somewhere gives up a turkey or someone somewhere raises/butchers/markets an extra turkey.
So here is one scenario: Laszlo buys a turkey that would have gone to Jenny, who instead buys a ham that would have gone to Junfei, who instead buys a rib roast that would have gone to Pablo…and somewhere down the line, someone goes hungry. Your “gift” to Laszlo was not a gift from you at all, but a forced gift from some total stranger. Maybe you feel okay about that, which is fine — but you shouldn’t fool yourself about it either.
Or here is another scenario: Horace the butcher works overtime to provide Laszlo’s turkey, either taking time away from his family, or sacrificing his daily exercises, or maybe spending less time driving his Uber, which means that his would-be passenger Olga waits a little longer for a different Uber, which means someone else misses out on that Uber and so on down the line until either Freddy can’t get an Uber at all and has to walk or his sister Frederika gives him a lift, taking time away from her own family or ….
If you were poorer, it would be easy to give a gift to Laszlo. Give him $100 and you’ll be the one who has to go without a turkey or without an Uber ride or (if you decide to work a little harder to make up that $100) without a little family time. But when you’re rich and you give away $100 you were never going to spend anyway, you’re not really giving anything up — so someone else has to.
(A different, and perhaps slightly cheerier perspective, is that you can’t give away that $100 because you already gave it away on the day you realized you’d never spend it. That was the moment when you decided you wouldn’t be claiming the turkey or the Uber ride or the hour of leisure your $100 entitled you to, leaving that turkey or Uber ride or hour of leisure for someone else. You can’t give away the same thing twice.)
You give $100 to a guy named Laszlo. Where do you get that $100? If you were poor you might get it by working harder or eating a little less. But if you’re rich you probably get it from your bank account, or maybe from that bathtub full of cash you like to swim in.
If you take it from your bank account, you’re making it harder for someone to get a loan. That person, whose name might be Jenny or Pablo or Horace or Freddy, is now short of funds, and responds by buying one less turkey or one less rib roast or one less Uber ride, or by taking time away from family to work overtime.
If you take it from your cash pile, you put more cash in circulation, which drives up prices and has the same effect — Jenny or Pablo or Horace or Freddy responds with either less consumption or more work.
You might be wanting to object that injecting an extra $100 bill into the US economy is going to affect prices by such a minuscule amount that it will be impossible for almost anyone to notice. You’re right about that, but that’s actually why the story works — the effect only has to be large enough (and no larger!) so that one person out of three hundred million gives up a turkey.
The two stories — the ones I’ve labeled “follow the goods” and “follow the money” — are two different correct perspectives on the same situation, so they have to lead to the same conclusion, and they do.
It’s not giving unless it hurts.
Seems like you could still consider the donation as an enforceable contract that you won’t *ever* spend the $100, vs “deciding” you won’t spend it in a way you can later renege on at no cost.
One’s reasoning might be that if you give someone $100 to buy food, someone else somewhere will have to give up $100 worth of something — and it might be food, but it might also be some other good that they can live without (and perhaps might even discover that they don’t miss much and can live without).
I know this is sacrilege to some economists who would say “$100 worth of resources is $100 worth of resources!”, but I think this would be my underlying logic if I bought food to donate to someone.
Another way to see it is that you worked or did something to earn the $100. If you aren’t going to spend it, then you worked for free, and that’s you gift to the economy.
@Chris: a way to make sure you won’t ever spend the money is convert it into cash and burn it.
Retailers throw away a lot of unsold food.
If you buy someone else a turkey, I feel that the most likely net result is that somewhere in the great US grocery universe some fewer cabbages get thrown away. Or something.
On the other hand, I guess it’s possible that next Christmas, MORE cabbages get thrown away, at least if you don’t buy another turkey for someone else.
But perhaps even if you do. Hmmm.
Suppose every year Alice buys a turkey from Lazlo for $100 and Lazlo uses the money to buy a Christmas tree from carol, who uses the money to pay Alice to come and sing to her on Christmas day.
One year Alice decides she wants to add $100 to her dollar bill collection and so does not buy the turkey which means that Lazlo can’t buy the tree and Carol can’t pay for a singer. It looks like Christmas will have to be cancelled that year. But Rich Rob, seeing Lazlo’s sad face takes $100 from his bath and gives it to Lazlo, who uses it to buy a tree from Carol who uses it to pay Alice to sing. Alice now has too many dollars in her collection and decides to buy the turkey from Lazlo.
Rich Rob has saved Christmas by increasing the money supply in response to an increase in demand to hold money!
In the second scenario, the Fed would respond in various ways. Seems important, at least in terms of the “who.” Or maybe the “whom,” I’ve lost track…
Really cool argument and discussion! Very pertinent given that Fed has printed $4 trillion in cash in the last decade most of which is in fact not circulatinghttps://fred.stlouisfed.org/series/BOGMBASEhttps://fred.stlouisfed.org/series/M1V
I think the wording is a little misleading. You can certainly transfer “excess wealth”. What you can’t do is transfer consumption. Agreed if you are not consuming less then the rest of the world can’t consume more food.
The argument also strictly only applies to cash wealth which you will never spend. If you remove money from the bank, even from a checking account, then it is more subtle. You might in fact increase consumption, but at the expense of less investment in capital creation, i.e. the bank may not lend that money to someone to build a house for the future and instead you make it available for someone to buy a turkey today.
Obviously charities and their advocates would not agree. I wonder if anyone has published a serious rebuttal. Peter Singer, for example, is the world’s most famous philosopher and a big advocate of giving to charity. What does he say?
Does it also follow that the for people who are going to die with unspent money, the government isn’t really taking anything from them by taxing them, because they have already, effectively, given that money away?
A Scrooge by any other name… I am sure the analysis is correct. When confronted with a counter intuitive result it is interesting to explore where your intuitions go wrong.
“If you’re wealthy enough to be sure you’ll never spend it all,”
You will do something with it, if only pass it on to inheritors, who will spend it. You will be depriving them of consumption and allowing someone else to consume instead.
Say you knew you were to die tomorrow, and decided to give your $100 to Lazlo to buy the Turkey. If you don’t that $100 goes to your spendthrift nephew Stan in a couple of months who will spend it on booze. You think Lazlo deserves the turkey more than Stan deserves the booze. If Stan spends it on booze, then someone somewhere has to make more booze or someone has to do without. You are making a a value judgement.
“Horace the butcher works overtime to provide Laszlo’s turkey, either taking time away from his family…” But that is a choice he makes. He gains more by the overtime that he would spending time with his family. In this particular scenario, who loses? Does this come further down the line when Horace spends the $100 and someone else has to do without?
@Roger, #9:
Most charities do not carry much balance. The best charities spend as they receive.
I am not an expert on Peter Singer, but what I have read from him advocates spending as you earn. He has been targeting the middle class and suggesting they reduce their lifestyle and ship the savings from their new frugality to people in need. Again, in this case, the money would not come from savings, but earnings.
Of course, if a charity received a donation from a rich person who already had the money, then Steve’s example would kick in. Presumably, the charity believes that whatever people or animal or trees they help are the ones most in need. So they should be OK with transferring a good or service from an arbitrary person to the target. If the person losing out was already of the target, then it is a wash. In all other cases, they successfully transferred resources to their cherished target from the outside.
Steve, you say — “If you take it from your bank account, you’re making it harder for someone to get a loan. That person, whose name might be Jenny or Pablo or Horace or Freddy, is now short of funds, and responds by buying one less turkey or one less rib roast or one less Uber ride, or by taking time away from family to work overtime. ”
Would it really ever affect someone getting a loan though, as pretty much everyone keeps their money in a bank? If you take funds from your bank account and give it away, then one or two steps down the spending line, that spent money will be put in someone else’s bank account, meaning it’s back in banking circulation again for a loan to another customer. So it’s unlikely that someone will miss out on a loan isn’t it?
Like both explanations! Believe this is an expansion on your post “The man who can’t be taxed” from several years ago.
Dollar Bill (#13)
If you take funds from your bank account and give it away, then one or two steps down the spending line, that spent money will be put in someone else’s bank account, meaning it’s back in banking circulation again for a loan to another customer.
Yes, but the interest rate has to rise along the way (assuming the recipient actually increases consumption or investment along the way, rather than just putting the funds in the bank, in which case of course you haven’t really given him anything), inducing someone to consume less.
Derek (#14): Good catch.
Harold (#11): Yes, absolutely regarding your heirs. You are not making a gift to Laszlo; you are forcing someone else to give a gift to Laszlo. If you have heirs who are looking forward to spendning that wealth, then they are the forced donors.
As for Horace, yes, the can can get kicked down the road several times before we identify who actually bears the cost. But Horace’s time is valuable, he no longer has as much time as he had, so the world has lost something valuable, which means that someone somewhere must bear the cost.
Steve’s argument (if I understand it correctly) only applies to wealth held in the form of a fiat currency that has no intrinsic value. If I kept my wealth in the form of turkeys and gave one away then the rest of society is better off to the tune of one turkey. If I kept my wealth in the form of gold coins and gave some of them away then the rest of society is better off by a number of gold counts (they could for example melt them down and make nice jewelry). My gift may have consequences that make some people winners and other losers but there is clear gain in net wealth.
If I give only fiat currency away then I think both of Steve’s scenarios are correct as my gift ultimately does not change real wealth.
However while people often give money away in the form of cash they rarely store all their wealth in that form. If a rich person first sold a real asset (a turkey, a gold coin, or some stock in a company) for cash then gave that cash away I do not think Steve’s argument applies. After the transaction and the cash gift the rest of society has the same amount of money and more real stuff in their possession than before just as if I had given away the asset directly.
What you can do is determine who benefits from your beneficence. If you just sit on your pile of cash, or burn it, you benefit everyone by a tiny amount. But if you hand over your pile to a charity you want to help, you will direct all your beneficence toward it.
If you are rich and don’t spend all you’re money, that is a form of giving. But it’s giving to random strangers. I wouldn’t donate to a charity that gave money away at random.
On balance I think Steve’s conclusion ‘It’s not giving unless it hurts’ does not hold.
If someone gives away excess wealth in a form that can be used to increase consumption (either consumption goods themselves or previously unused resources that can be used to create greater consumption then painless gifting is possible.
Bob, 18 and 21
I contend it doesn’t require fiat currency. If I give away a turkey that would die otherwise (from my lack of consumption) or a gold coin that I would have had buried with me, we have a different case. But, if I give away a turkey or coin my heirs would otherwise have received on my demise, I’m 100% with the analysis Steve presents.
@David 22
I agree that if you include heirs then any gift from a rich person that doesn’t cause them personally to reduce consumption will by necessity (and making reasonable other assumptions) cause someone else at some point in time to reduce their consumption no matter what form this gift takes.
As both gifting and consumption by a rich person reduce potential consumption by heirs I (probably incorrectly) assumed that Steve’s was excluding heirs from the equation. Neither of his explanations directly reference heirs without whom (in the light of your comment) his post seems incomplete.
However as his overall point seems to be “If I have some claims to consumption that I will never use and I pass these claims on to someone else then the overall effect will be that other people will have to reduce consumption by an equal amount to my gift” then (if you include potential heirs) this point is good no matter what form (fiat money, consumption good, or whatever) the gift takes and so my earlier comments are incorrect.
And ‘potentiality heirs’ can really mean ‘anyone in the future who would have consumed based on my unused claims to wealth had I not gifted these claims to someone else during my lifetime’
There does however seem to be a difference between:
1. A rich person disposing of excess wealth via a cash gift. In this case the cash gift will result in the recipient consuming more and some other people consuming less
2. A rich person gives away excess wealth in the form of consumer goods. In this case the recipients of the gift get to consume more but no-one has to consume less unless you count people (heirs) who consume less than they mistakenly thought they would.
Steve’s two examples both cover the first case. The second case seems to amount to no more than the fact if someone consumes something then others are worse off to the extent that can’t now consume that thing (and if they had been expecting to consume it they may feel the loss keenly).
I’m still a little unconvinced that Steve’s post covers the second case.
Steve, what about a non-exclusionary good like giving some money to someone who buys an mp3 song? It seems that no one has to do without after the purchase.
Also, how would that conclusion be consistent with the “follow the money story.”
I see a big hole in this type of thought experiment: it ignores the dynamics of the banking system.
Your stipulate that Bill Gates withdraws $100 from his checking account, gives it to Laszlo, who gets a free turkey, then Jenny
misses her Uber, yada yada.
However, the premise here is that the cash is just sitting idle in Gates’ account, like a gold bar. Not so; idle cash is a dead weight to the bank, they’re paying interest! The banking system strives intensely to keep money circulating, minimize cash reserves.
Therefore, Gates’ cash has already been withdrawn, loaned to Laszlo, with concomitant effects, prior to his writing a check, which manifests as an illusory withdrawal.