Monday, February 11, 2013

Does credit card fraud have a GDP multiplier?

The exposure of an 18-person credit card fraud ring, which involved 7,000+ fake identities and 25,000 credit cards, got me thinking about parallels between government stimulus and private fraud.

Some of the most popular arguments for government spending go something like this: "companies are sitting on lots of cash, holding out reserves which could be stimulating the economy if they were put to good use." Banks, manufacturers, tech companies... All with big cash stockpiles that make government spending enthusiasts' eyes grow wide.

So what exactly is the difference between government taxing away money and spending it, versus fraudsters tricking banks into lending them money and spending it? The recently uncovered ring is estimated to have stolen $200 million - small potatoes when it comes to stimulus - but it seems the effect on the economy is nearly identical to government spending, just on a smaller scale. If the Keynesian story is correct, all those purchases of luxury cars, jewelry and so on should be applauded because they increased aggregate demand and spurred job growth in associated industries.

Going a little deeper, most of the arguments for why fraud is bad for the economy also apply to stimulus.

1. Fraud takes resources away from higher valued uses to lower ones. But, government stimulus likely does the same, by bidding away inputs from the private sector to the public and investing them less efficiently.

2. Fraud undermines trust which is essential to a market economy. But does anyone really trust that government is spending money wisely either?

3. Fraud causes dead weight costs when businesses try to protect themselves against fraudsters through costly measures. But tax evasion and IRS-dodges are also wasted resources to avoid the grabbing hand of Uncle Sam.

4. Fraud creates bad incentives, causing potentially productive people to exploit others instead of producing. Government service may be less directly exploitative but it tends to generate more paperwork than goods, generally speaking.

5. Government can spend on infrastructure or other public works which generate future growth, but fraud is money wasted on immediate consumption. I think this claim is actually fairly persuasive, although unfortunately most government spending is also consumption - missiles and medical treatment - and lots of supposed "infrastructure" ends up being bridges to nowhere or Solyndra-style investment. But it's at least marginally better than fraud.

The implications are thought provoking. If dedicated Keynesians are convinced our problem is just that austerity-hawks in Congress are damming up the necessary flow of federal dollars to create a robust recovery, it seems like the solution is to encourage more "private Keynesianism" through credit card fraud. If the multiplier works then we should all be happier if banks have their funds stolen and wasted on consumption.

The fact that most of us think this idea is ludicrous and even immoral when done by private agents, but much more plausible when undertaken by the state, says something about the heuristics that people bring into play when talking about government and the economy.

7 comments:

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  5. "companies are sitting on lots of cash, holding out reserves which could be stimulating the economy if they were put to good use."

    Yes, because companies love to just hoard their cash like Scrooge McDuck.

    And even if they did, that money is typically stored in a bank. And banks use that money to - gasp - give people loans. Contrary to popular belief, banks don't just create money out of thin air.

    - Sarah

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