A Bail Out for the Rest of Us

We have all been hearing on the news about the billions of dollars being requested (that's the polite term) by various huge corporations.  We see in the papers that $750 billion dollars has been allocated by Congress for the Secretary of the Treasury to disperse in the effort to save the economy.

But for some reason it doesn't seem to be helping, does it.  Things continue to get worse.  Over 500,000 people lost their jobs in November alone.  If all that money is helping our economy, why are more people losing their jobs?  What has $350 billion given to these banking organizations bought us?

Well let's consider.  We are all rational people.  We don't need economists to tell us the time of day.  Let's think about it for a moment.  What does a bank do with its money?  It loans money to businesses.  But the banks got in trouble for loaning money to businesses which cannot repay those loans.  Now the banks, with $350 billion of our money, won't loan money to the U.S. auto makers because they aren't able to sell the cars they are making.  Banks also know the sales figures from a wide variety of American businesses.  They know sales are down.  So who, in their right mind, would loan money to a new or expanding business when sales are going down even with huge discounts?  So the banks are reluctant to loan money to businesses.

Banks also loan money to people to buy homes.  But the crisis, we are told, was precipitated by banks loaning money to people who now can't repay the money.  So the banks are not willing to loan money to people to buy houses, either.  The banks know that almost everyone's jobs are now at risk. So the bankers put the money in the vault and sit on it.  But that doesn't really do us any good, does it.  It might be making some bankers rich but the economy still stinks.

How about giving more money to rich people?  That way they would have more money to invest in creating jobs.  But why invest to increase production when the economy can't sell the products it generates now?  If a person got rich by making shrewd investments, they certainly are not going to invest in a declining economy.  That's just throwing good money after bad.

Now you are a sensible person.  Let's say you are upper-middle class.  You aren't rich but you are comfortable.  You have only a few years to pay on your mortgage.  Your last child will finish college next year.  Your retirement investments have been seriously depleted by the drop in stock prices but you don't need that money for 15-20 years so that isn't a disaster, only a worry.  Your government gives you a check for $1000.  What will you do with it?  Will you rush out and buy something?  Well, it is near Christmas so you might spend some of it.  But that really won't make much difference in your spending decisions.  It is, after all, only $1000.

On the other hand, let's say you are poor.  Your income is about $20,000 per year.  You are 67 years old and have to make decisions about whether to buy your medicine or food.  The government sends you a check for $1000.  What will you do with the money?  Do you think you might buy some clothes?  Perhaps you will invest in some furniture.  Or maybe you will get some presents for your grandchildren.  Do you think you will have much left of that $1000 at the end of the month?  No, I don't think so either.

Let us now consider what you bought when you were the poor person.  Did you increase your spending for goods and services?  I'll bet you did.  You increased your consumption.  That money you spent at the store paid some sales taxes.  The money you spent was spent again and again by others as it circulated through your community.  It went into banks' checking accounts several times but came out again in payments to others.  But while there, it gave the bank more money to loan.  Several people in the community were better off because you as a poor person increased your consumption.

Now let's expand that $1000 to $100 billion dollars.  Let's chop that $100 billion into thousand dollar checks. That's 100,000,000 checks, isn't it?  So if we take a million poor families and give each family a thousand dollar check once a month for two years we will have distributed that $100 billion.  But look what will happen to your local economy.  Suddenly, a lot of the poor families have money to spend.  They can afford to move into better apartments because they have an assured income for two years.  The local merchants are doing more business and need to hire more people.  The goods the poor are buying must be produced which creates demand.  The money they spend circulates and generates more than 5 times as much spending as the poor alone provided.  The state gets more tax income from the increased spending.  More people can afford to buy cars.  The money flows up the economy from the poor to the rich and along the way makes everybody better off financially.

So by giving money to the poor, even those who don't deserve it, we bail out the businesses in their neighborhoods, the suppliers of consumer goods, the local banks, and create a lot of jobs. 

Of course giving money to the poor would be unfair.  What did they do to deserve it?  I can only ask what they did to deserve to be poor?  Many of them got old and can't work any more.  Many got sick or injured and couldn't pay their bills.  Many are still children.  Sure their parents are to blame but the children are still children and they are still suffering.  Some of the poor have just had bad luck. 

But what do you care that the poor getting a break is unfair if it gets you a good job and restores the value of the stocks in your portfolio?  Who is suffering more in these hard times than the poor?  Remember that the money given to the poor will quickly go to others because the poor will spend that money.  So if it is unfair for them to have the money it will only be unfair for a little while.  Then the money will go to those who deserve it, the bankers and CEOs who caused this mess in the first place.