Wednesday, January 18, 2006

Dividends aren't such a bad thing

I've come to think again about what I said about government paying out dividends: that it's a bad idea because the money can be invested into big infrastructure projects. It's not so one-sided to me anymore because I've thought of three advantages to paying dividends rather than keeping the money, even if it can be used for big infrastructure projects.

First, dividends modularize the allocation of money and make investing easier to manage. It splits up a large sum into more manageable chunks. It's hard to be careful when sitting on a billion-dollar pile of cash, but if you give it to people in smaller amounts, they'll be more frugal with how they spend the money. Amassing money is good and necessary for big projects (like infrastructure), but if we want to use money efficiently, a finer-grained approach makes more sense. This doesn't mean we abandon big projects completely; we'll always need roads.

Second, dividends promote good will among the recipients. It keeps people happy, so it's easy to see how tempting it is for politicians to pay dividends to their constituents. Who doesn't want extra spending money? It may be wasteful when people go on spending sprees, but in certain situations, good will can be even more valuable than efficiency. When people are hostile and angry, it doesn't matter how efficient a government can be, when that government is on the verge of being overthrown.

Now, paying dividends to consumers may seem wasteful when we look only at efficiency, but when we look at a third possible benefit of paying dividends, the efficiency sacrifice may not seem so bad. Paying dividends puts extra cash in the hands of consumers--just like a tax refund. If there are enough consumers and enough cash being handed out, this payout may stimulate demand. This might be an option to consider when demand is at a low level and economic activity needs jumpstarting.

Of course, these possible benefits do not apply in all cases. We shouldn't pay dividends when our dirt roads are washed out every winter when it rains; we use the money to build roads. We shouldn't pay dividends with the intention of calming the public when they're content already. It doesn't make sense to try to stimulate consumer demand when spending is out of control and everyone is maxing out their credit cards. When we make decisions about what to do, we should, as always, take into account the specific needs of the situation at hand.

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