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Related, in a way, to What are the social and economic implications of giving everyone $4.33 million? I had a thought.

What would happen if, when the government printed money as part of its normal functions of maintaining currency, that newly minted cash was awarded to the lowest income folks?

Assume that bills which are destroyed and replaced with new bills remain in the government's treasury, so it's only the inflationary portion which is distributed.

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  • $\begingroup$ I don't think this differs significantly from a country combining inflationary policies with welfare payments. Money is fungible, i.e. one unit is as good as any other. So unless I've misunderstood it would make no difference that it was only the "inflationary portion" being distributed; it's all the same in the end. You'd get something like the UK in the 1970s. $\endgroup$ – Lostinfrance Jan 12 '16 at 21:23
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Outside of inflation, there wold be a very small effect where some poor people would be able to get out of poverty, but other people might actually descend deeper into poverty.

To explain, lets look at the situation where everyone is given $4.33 million. To make it simple to understand, I will enlist Charlie Sheen, myself and Elon Musk.

Charlie Sheen takes the $4.33 million and spends it on hookers and blow. The money is gone and he has only satisfied his short term urges.

I take the money, put myself and children through school and make relatively conservative investments which I can understand and am comfortable with. I become mildly more productive and much more creditworthy.

Elon Musk takes the money, and in a few months shows up on Mars with his new spaceship (or dies trying). He creates immense new wealth through his productivity.

The reality is most poor people are not poor because they are morally deficient, but because they have short time horizons and only work to fulfill their immediate needs. This is due to a combination of poor impulse control and generally poor life skills (and little formal education is designed to help people understand this. Do you remember any courses in school designed to help you improve your life skills?). Giving these people money might not result in massive Charlie Sheen sized melt downs, but for a person with poor impulse control, giving them a big chunk of "free" money will simply result in more spending. Instead of a beater, they will buy an expensive car, but fail to do periodic maintenance. You can think of other examples.

Most "middle class" people are not less skilled or smart than Elon Musk, but rather are risk adverse, so giving them money will help to a certain extent, but the effect will be swamped by the fact that everyone is getting a similar bonus (the middle of the bell curve will not move, but everyone inside that range will still be middle class with more money). IF productivity and creditworthiness isn't rising at the same or greater rate than the increase in money, then inflation will still result.

If people with the correct combination of skills, knowledge and risk management and tolerance are being given extra funding, then the situation is reversed. A horde of Elon Musks producing new goods and services will be creating new wealth. They become much richer (of course), but we all benefit from this as well. Consider that virtually everyone in Western economies has enough to eat, clothing to wear and shelter, and even notionally poor people in the US have TV's, access to the Internet and cars today, without any income levelling or massive redistribution schemes on the scale being discussed here.

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  • $\begingroup$ Ah, cool. Long answer that touches on the things I wasn't able to see myself. $\endgroup$ – Draco18s Jan 13 '16 at 2:29
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What would happen if, when the government printed money as part of its normal functions of maintaining currency, that newly minted cash was awarded to the lowest income folks?

I think the key here is the means used by the government to recognise the "lowest income folks". Most probably, the main goal of a large portion of greedy citizens would become to look impoverished while in fact they are not in order to receive free cash. If this is the case, then I assume that many "tricks" will be developed to hide one's actual wealth from the government. In this kind of system, the most wealthy would be the ones who better hide their wealth from the government.

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As I understand it, what you are saying is that you want to take money from the expansion of our money supply and give it to poor people instead of the government budget. If you subtract out the cost of printing and coining the new money, this is called seigniorage. So you want to distribute the seigniorage profits.

The first problem is that this would create a hole in the federal budget. Seigniorage is currently an income source, like taxes. So the deficit would be higher unless they cut spending. Where could they cut spending?

The obvious place to cut would be in welfare programs. Since the poor would have this money, they don't need welfare. So that would be the most likely result.

In a previous discussion, it was notable that these profits are intermittent. This means that some months would provide more money than others. This kind of uncertainty can be hard for the poor to manage, as they have little discretionary income that they can cut in short months.

The result might be that the poor are worse off. Sometimes they get a bonus payment. Sometimes they don't. If they get kicked out of their apartments once a year, they are going to struggle. Also, it's not clear that the average poor person would be helped by having extra on some months. If they invest or save it, great. But many poor people will spend it immediately. Some will spend it on things they shouldn't (e.g. gambling, booze, or drugs).

There is also the problem that this increases the incentives to add inflation. The more money that is printed, the more that the poor have. So it would be tempting for someone like Barack Obama (in the US) to expand payments to the poor by appointing people who will choose a higher inflation target. Since a president has more influence over appointments than over legislation, this may allow executive action to bypass the legislature. Or at least allow the president to bypass the House.

Note that the Republicans have controlled the House of Representatives since 2011 but only took control of the Senate in 2015. If Bernie Sanders wins the general election, there is a decent chance that Democrats take back the Senate. Since the nuclear option was used, a majority is enough to change the rules and allow a simple majority to approve appointments.

I'm not as familiar with the governments of other places, but I would presume that the same thing could happen elsewhere.

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It's a wealth transfer system, and will increase inflation.
So having the government replace the old bills in its vaults with new ones has no effect on the economy. The big deal is giving the new bills out to impoverished people. This will introduce more money(wealth) into circulation and drive down the value of money(cause inflation). It would help the impoverished and increase inflation, and lower the value of the US dollar.

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    $\begingroup$ * It would help the impoverished* - temporarily. Inflation is regressive in its effects. Poor people rely on cash more than rich people e.g. they are more likely to rent rather than own their homes. Rich people can inflation-proof themselves much more easily. $\endgroup$ – Lostinfrance Jan 12 '16 at 21:26
  • $\begingroup$ I'm not sure that it would effect the rate of inflation at all, as the number of bills being printed and entering the economy doesn't change, only where they enter the economy. $\endgroup$ – Draco18s Jan 12 '16 at 21:44
  • $\begingroup$ effect != affect $\endgroup$ – JDługosz Jan 12 '16 at 22:17
  • $\begingroup$ Of course it would affect the rate of inflation since inflation is the relationship between the supply of money and the demand for money. And to be perfectly clear - the rate of inflation would increase. $\endgroup$ – Ken Clement Jan 13 '16 at 0:40
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    $\begingroup$ But this isn't new money. It's money that they already add. They're just giving it to "poor" people rather than using it to reduce the deficit. The inflationary effect has already been counted. What would make it inflationary would be if they gave \$100 to every poor person and kept everything else the same. Borrowing an extra \$100 is not inflationary. Printing it is. $\endgroup$ – Brythan Jan 13 '16 at 4:33

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