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The Game of Monopoly to Understand Federal Deficits and Debt

Citizens Oversight (2013-03-02) Ray Lutz

This Page: http://www.copswiki.org/Common/M1346
More Info: Budget And Taxation

MonopolyGame327x245.jpg Our country constantly tries to grapple with the concepts of the Federal Budget Deficit and the National Debt. You hear about "Sequestration," which is essentially an austerity program to reduce spending by the federal government and reduce our deficits and get our "debt problem" under control. You hear that "we are broke" and that the best way to economic prosperity is to reduce spending or to increase taxes. Many people push for a balanced budget amendment because there is the perception that the government is wasting our tax dollars on pork, "entitlements," and other "anchors that are stopping our economy from flourishing." Fiscal conservatives believe that we should have government as small as possible, and it should be able to balance its checkbook just like any family, instead of seeing a mountain of debt that "we will hand down to our children."

Although these things seem logical, they are myths. But the economy and all its complexities are too much for people to get into their mind at one time to understand the realities of the situation. I hope to use the well-known game of Monopoly (TM of Parker Brothers) to explain this in a way that you will finally really get it. This game is so prevalent that almost everyone has played it. It is a great simple analogy of the real world, and how our economy works.

If you have a Monopoly game handy, I suggest you get it out, and maybe even try playing your family and/or friends with a few amended rules. If you have played the game enough, you can visualize how the game would play out.

We will be using this game to simulate our economy, including the federal budget, deficits, and debts. This is a simple analogy, so we will be eliminating a lot of the detail of the real economy so it can be modeled by the simple economy of the board game. I'll list some of the complexities that are left out in a moment.

Limitations

Our modeled economy will be pretty limited, but this will not effect the outcome of the demonstration.
  • The game of Monopoly does not have any other segments of the economy other than real estate, but the model can be mentally extended without any trouble.
  • Each player will manage their own money,
  • All transactions are in cash. There are no intermediate banks, no loans, mortgages or purchases on time.
  • There is no modelling of the Federal Reserve Bank and the loans it makes to the government as money is added to the system.
  • We will not try to model any prior game state. We will assume everyone has the same initial state per the instructions.
  • All state and local governments are not modeled. Since these governments have to have balanced budgets, they do not impact the overall economy.
  • Does not attempt to model property taxes, excise taxes, govt fees, capital gains taxes, depreciation, etc.
  • Does not model any social insurance programs like Social Security, etc.
  • In the model, the only source of revenue for the federal government is INCOME TAXES.
  • Does not model Gross Domestic Product.

Changes to the Rules

There are only a few minor changes to the rules, so that the game can model the entire federal economy, and the game can model a closed system.
  • Banks:
    • The main bank is the federal government.
    • The private sector pot is in the middle of the board and represents monies spent in the private sector but not yet randomly awarded to a player.
    • The magic bank models initial conditions and is used to add to a player's holdings but does not affect the main bank or the private sector pot.
  • Money spent to purchase properties or improve them buy adding houses or hotels must "stay in the private sector." Simply place it into the private sector "pot" in the middle of the board.
  • The money that stays in the private sector is randomly distributed to the players. When a player lands on FREE PARKING, he gets the entire pot, modelling that that player won the contracts in the private sector, selling properties, building houses and hotels for any player that purchases them.
  • Rent is paid as usual directly to the owner of the property, no change to these rules.
  • Chance and Community Chest Cards:
    • Movement cards (Go to nearest railroad, Go to Jail, Advance to Go, etc.) no change
    • Any payments to the player: (income tax refund, Insurance Matures, Inherit $100, Xmas Fund matures, Bank error in your favor, etc.) This is magic money that comes from the magic bank and does not impact the main bank (federal govt) or the private sector pot. This can be considered random initial conditions in addition to the $1500 that each player magically receives at the start. All this revenue is TAX FREE.
    • Any payments from the player: (Street repairs, School tax, hospital bill, doctor's fee.) Go into the private sector pot.
  • "Salary" -- Normally, when you pass GO, you receive $200 in "Salary." We will split this into two parts:
    • $Y -- private sector salary, up to a fixed limit, from the private sector pot. Thus, if $200 is the limit, and if there is $1000 in the pot, then you are paid $200 out of that pot and it decreases by $200. If there is only $100 in the pot, you get only $100. No money in the pot, and you get $0.
    • $X -- federal govt money. This money comes from the federal govt, the main bank. What this represents is money spent by the federal government on infrastructure projects, for example, and the $X represents the net revenue you earned from those contracts, "Government Contract Net Revenue."
  • Income Taxes. These must be paid by all players on every round of the game, except for the first round. The calculations are for money actually earned in the private sector and any govt contract net revenue.
    • To calculate income taxes, each player must keep an accounting of money actually earned in that round, including:
      • Private Sector Salary ($Y)
      • all rents received
      • property sales
      • awards of private sector "pot" monies by landing on FREE PARKING
      • govt contract net revenue
    • Unlike the game rules, you do not add up your total net worth to calculate income taxes.

Game Variables -- "Fiscal Policy"

The variables we can modify, are:
  • $X: net govt spending per player at the start of every round.
  • $Y: salary taken from private sector pot, when available.
  • Taxes paid to the federal government, set by tax rates or other means.
  • D% = Deficit Percentage of Govt Revenue (not GDP).

There are several ways to go about this. In the real world, tax rates are set independently from the money spent. They set a budget which is supposed to be roughly the same as tax revenue. If they spend more than the tax revenue, this is the annual deficit.

You can try to play the game with several fiscal policies, like the following:
  • NO GOVT.
    • $Y, up to $200 is taken from the private sector pot, when available, when you pass go.
    • No income taxes.
    • No govt spending ($X=0)
    • RESULT: amount of money in the economy stagnates, with only $1500 per player plus any magic money entering the economy.

  • SPENDING CONSTRAINED, LIMITED "FLAT" TAXATION, BALANCED BUDGET
    • Set tax rates to a fixed value, like say 30%, of player earnings.
    • Govt Spending $X based on a fraction of the current fed. bank balance, based on the number of players.
      • Example: $1000 in federal bank, 4 players, player gets $1000/4 = $250 in govt spending salary.
    • If less than $200 is collected by a player, the balance is collected as $Y from private sector pot up to $200.
    • RESULT: amount of money in the economy stagnates, same as no govt. scenario, but with a whole lot more work.

  • SPENDING FIXED, TAXATION FLOATING, BALANCED BUDGET
    • Govt Spending set to a fixed value, like $200. Federal bank can go into deficit until taxes are paid.
    • Players must pay back all govt. net spending to balance the budget.
    • $Y, up to $200 is taken from the private sector pot, when available, when you pass go.
    • RESULT: amount of money in the economy stagnates, same as no govt. scenario, but with a whole lot more work.

  • SPENDING CONSTRAINED, FLAT TAXATION, FIXED DEFICIT, UNBALANCED BUDGET
    • Set tax rates to a fixed value, like say 30%, of player earnings.
    • Govt Spending $X/D% based on a fraction of the current fed. bank balance, based on the number of players, increased by the deficit.
      • Example: $1000 in federal bank, D%=50%, 4 players, player gets ($1000/4)/.5 = $500 in govt spending salary.
    • If less than $200 is collected by a player, the balance is collected as $Y from private sector pot up to $200.
    • Calculate the total govt debt by summing all deficits of each round.
    • RESULT: amount of money in the economy increases and economy booms.

  • SPENDING CONSTRAINED, FLAT TAXATION, FIXED DEFICIT, UNBALANCED BUDGET
    • Govt Spending set to a fixed value, like $200. Federal bank can go into deficit until taxes are paid.
    • Players must pay back all govt. net spending divided by deficit D%.
    • $Y, up to $200 is taken from the private sector pot, when available, when you pass go.
    • Calculate the total govt debt by summing all deficits of each round.
    • RESULT: amount of money in the economy increases and economy booms.

  • FIXED SPENDING, NO TAXATION, UNLIMITED DEFICIT, BALLOONING DEBT.
    • Govt Spending set to a fixed value, like $200. Federal bank can go into unlimited deficit.
    • No Taxation
    • $Y, up to $200 is taken from the private sector pot, when available, when you pass go.
    • Calculate the total govt debt by summing all deficits of each round.
    • RESULT: Booming economy with threats of currency devaluation (inflation).

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Title The Game of Monopoly to Understand Federal Deficits and Debt
Publisher Citizens Oversight
Author Ray Lutz
Pub Date 2013-03-02
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Topic revision: r3 - 11 Mar 2015, RaymondLutz
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