Saturday, March 21, 2020

Understanding the Bailout

If you've never been interested in how the economy works as long as you were given a decent paycheck every week, but now find yourself bewildered by all the talk about the bailout, and the protest that's generated by it, there is an article you can look at that might clarify some things for you.

The article came under the title: “Why Congress's Trillion-Dollar Coronavirus Bailouts Will Shackle the US Economy,” and the subtitle: “Like the New Deal, every additional billion dollars in stimulus and bailout spending will further delay the economic recovery we all want and need.” It was written by Blaine Conzatti and published on March 18, 2020 in The Federalist.

I must caution at the outset that the assertion you see in the title to the effect that the bailout is that of the Congress alone, does not reflect the thinking of the writer, but screams the intellectual dishonesty of the editors who chose that title. Here is what Blaine Conzatti actually wrote: “The White House and congressional lawmakers have proposed packages with a running price tag of more than $1.3 trillion”.

But why did the editors of The Federalist choose to distort a piece submitted by their own contributor? They did because even though Conzatti sits at the right-center of the spectrum, the editors wanted to make his piece sound more to the right than it is, and with that protest the government's decision to give out money to the poor and middle class rather that give it to the rich.

The core of Conzatti's argument rests on the relationship that brings together the money supply, the debt and inflation. Although anyone that's familiar with these matters, will have no trouble understanding what the writer is saying, other “laymen” may not. I shall therefore try to unpack the subject in a way that will make it easier to understand. And the best way I know how to do that, is to tell a fictitious story. So here it goes:

You work on the floor of a machine shop with three other employees. All of you have been faithful to the owner, and he has been good to you. He is old now, and has decided to retire. His children are lawyers and doctors, and will have nothing to do with their father's machine shop. He wants to give you the company but each of you has a dream of your own, and prefers to take some of the equipment to start your own business rather than stay together as a group.

The old man says he is okay with that but the distribution of the equipment will have to be done the right way. And so, he proposes that you gather in the conference room later in the day. You get there, sit around the table and listen to the man. He says the equipment in the shop is worth one million dollars, and you'll get all of it. But each of you will have to earn his share by participating in a short contest.

He says he also has one million dollars in cash, which he'll give to his children. But he'll pretend that he brought the money here to facilitate playing the contest with you guys. To start the game, he gives each of you 40,000 dollars for a total of 160,000 dollars. He says if you all agree, you can say that the equipment is worth this much and stop here. Accordingly, each of you will buy a 25% share of the equipment, and there will be no contest.

However, you'll all have the right to tell why you deserve to get more money, thus buy more than 25% of the equipment by telling what great project you have in mind. With that, the contest begins, and everyone describes the project he has in mind. Listening to the other three, you can tell that unlike you, they have a clear idea of what they want to do. You believe you had a weak presentation, and feel that you're going to lag behind money wise.

And sure enough, the old man says he'll give you only 40,000 dollars and give each of the others 80,000 dollars. If you all agree to stop here, a quick calculation reveals that a total of 440,000 dollars have been handed out, of which you only received 80,000 dollars. So, if you quit here, your share of the equipment will have dropped from 25% to 18.2%.

You all agree to go another round, and the old man asks that you describe the kind of philanthropy you'll be doing when you become very rich. You tell your stories and the old man decides to give you 50,000 dollars, give two of the others 100,000 dollars each, and give the third 200,000 dollars. This means that a total of 890,000 dollars have been handed out of which you only received 130,000 dollars or 14.6%. You go one more round and only one of the others gets the remaining 110,000 dollars. Your share drops to 13%.

What does that say? It says that even if you got more money after each round, the fact that someone else got more than you, has resulted in that you got a smaller share of what's distributed. If this were a real-life situation, it would mean that raise or no raise, the fact that others were getting paid millions of dollars when they pretended to work, and millions more as severance pay when they were booted out for misbehaving, made you poorer. 

It is therefore the expression of a legitimate concern and not that of jealousy to protest the big sums of money which are handed out to others.

What's asinine this time, is that the protest is coming not from the poor but from the rich. And why is that? Because part of the bailout is going to the poor and the middle class, and not the rich as it has always been.