The details of the corona virus rescue package are not yet known. What we do know, no matter what the final version looks like, a whole bunch of money is going to be given and/or lent to businesses.
This sounds reasonable, right? Give companies money, they stay in business, continue to employ people, people get paychecks, and life goes on.
The problem is that it doesn’t work that way. The goal of businesses is to make a profit. Profits are maximized by increasing revenue (sales) and decreasing expenses. Employees are expenses. Companies are not in business to hire employees, from a corporate perspective, they are a necessary evil. Don’t take my word for it. Why are you checking out your own groceries at the supermarket? Why are you checking yourself in for a flight at the airport? Why do you have to talk to a never ending series of machines before you can speak to a human when you call customer service? Why is the customer service representative located on the other side of the world? All of this is to reduce the number and cost of employees.
There are two views of how the economy works. On is top down, the other is bottom up. One is right, one is wrong. One works, one doesn’t. One encourages competition and innovation, the other fosters stagnation.
Care to guess which is which?
The top down view is that if you put money in the hands of businesses (euphemistically called “job creators”), they will invest in growing their businesses, resulting in additional jobs. Another way to express this concept is to say that increasing the supply increases the demand. Reduce taxes on Apple, Samsung and the others, and they will make more phones.
The bottom up view says that increased demand leads to increased supply. If consumers want more phones, Apple, Samsung etc. will make more phones.
It’s not hard to figure this out. Corporations spend millions of dollars to figure out how many phones the market is going to demand, and they plan accordingly. No matter how much money you put in the hands of the phone manufacturers, they aren’t going to make more phones than they can sell. And the only way they can sell more phones is if consumers want them and have the money to buy them.
You know who had a top down economy? The Soviet Union. We know how that worked out.
It is always useful to remember, somebody else’s spending is your income, and your spending is someone else’s income.
By the time you read this, it’s likely that the stimulus bill will have been agreed upon. I don’t know what’s going to be in it. I know that the Senate (i.e., the Republicans) want to give billions of dollars to businesses with no commitments to keep people employed. There’s only one word for something like this. Absurd. The Democrats were right not to agree to it.
I know what the bill won’t do – it won’t give all the money to the people. Workers. It won’t even be seriously considered.
They say the price tag is going to be north of $2 trillion. That comes out to about $20,000 per household. Give every household $20,000, and there won’t be a recession. People will have enough money to keep spending, buying phones and going to restaurants. That’s what we need. In a bottom up economy, the only thing that works is giving money to the people who will spend it.
