Bathtub economics busts three economic myths

Take a look at the video of bathtub metaphor for economics above. It shows money as water (that’s why we call it “liquidity”) flowing from consumers to companies to governments and municipalities and then back again. It is that simple for 75% of the population who do not own major assets like shares or properties.

MYTH ONE: We need to pay workers less

According to the model, if you pay workers less they will have less to spend and companies will sell less. And there will be less government income. So the way to make the system work is to pay workers more.

MYTH TWO: Government spending is wasted money

Looking how all money coming to government goes back into the economy, and that goes to wages which people spend with companies, it is fairly clear that government spending of that sort is vital. In fact that brings us to myth three.

MYTH THREE: Governments should balance their budgets

Not so. If the Government’s bathtub is empty it is better for the government to print more money and keep the economy going. All those government contractors ana employees will spend the money and that will come ack to the government in the form of taxes. So the trick is to keep it moving. Anyway, what is the point of governments having a positive balance? It just means they are removing money from the economy and if they do that, there will e less government income. So the best way to get income is to spend.

I know a lot of this is counter-intuitive

It is because the economy is a system, rather than a single body in a system. Systems work with stocks (like a bathtub filling up) and flows (like a bathtub being emptied). So you need to think more in those terms than say a household economy.

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