For years on The David Pakman Show, I've struggled to communicate even the most basic of economic concepts to conservatives and believers in supply side economics. Earlier this week, Asher Edelman, the real estate investor, investment banker, and derivative trader on whom Wall Street's Gordon Gekko vulture capitalist character was partially based, visibly stunned a panel of CNBC hosts by explaining not only that for the bottom 80% of the US there has been an effective recession happening for years, but that the best candidate for the economy would be Bernie Sanders. Take a look:
Although it was clearly a confusing concept for the CNBC hosts to wrap their minds around, Asher Edelman's explanation about the velocity of money is fundamentally sound. It related to the ideas of marginal propensity to consume, and economic multipliers. Although these concepts seem to elude many corporate media conversations about economics, they are common sense.
Consider two individuals, one earning $35,000 per year and one earning $350,000 per year. Given an additional $2500 to either of these individuals, it's easy to understand why the $35,000 earner would be far more likely to spend that $2500, while the $350,000 would be far more likely to save that $2500. Lower income individual has a far higher propensity to consume with additional monies received.
Further, consider the impact of giving $2500 back to taxpayers through either (1) $2500 in food stamps to those earning a low income or (2) $2500 in a tax cut to a very rich person. Common sense shows us that the $2500 in food stamps is very likely to be spent, specifically at grocery stores or other businesses where the economic multiplier will be high, thus stimulating the economy. On the other hand, the rich person receiving $2500 back in taxes is likely to save that money, an action with a very low economic multiplier.
Isn't it disturbing that these concepts seem foreign even to professional financial journalists?