Imagine that 95%+ of people on Earth were forced to stop working for
years, but the government paid everyone's old income. What would happen? ~Nothing would be produced, so the world would become a zero-sum game. Prices for everything would approach infinity: due to storage, maybe there'd be enough to keep prices sort-of sane for a month or two (though they'd rise due to
expected scarcity), but quickly there'd simply be nothing to buy at any practical price. If the government wanted to increase their payment to people in order to account for this, then they'd have to exponentially increase the payment, and very quickly there would either be hyperinflation or a bankrupt government. Moving money around does not create value.
What's happening now is still pretty far from that situation, since 50-85% of people still seem to be more-or-less working, and imports from more productive countries are also possible (especially since USD is the world reserve currency). Still, it's important to realize that government payments are not creating any value whatsoever, but are merely moving around now-more-limited resources. The virus and the response to it took a bunch of toothpaste out of the tube, and now the government is squeezing the tube in various ways. As with the extreme example, I would expect to see price inflation (perhaps to infinity; ie. shortages) in areas where production/supply have been stopped/curtailed, though in the short-term this may have been counteracted by a one-time cratering of demand due to shifted lifestyles.
So when the government gives everyone $1200, they're moving value around, not creating anything. An important and difficult question is where is that value coming
from? The economy is complicated, and I'm not 100% certain, but AFAICT the main way the value will be transferred will be something like this:
- It's not really coming from tax revenue, since taxes have not been increased and probably won't be increased due directly to this spending.
- On the surface, it will be funded by issuing bonds, and the cash will come from the buyers of bonds. Buyers of bonds are mainly the Fed (ie. money creation), other central banks, other banks, pension funds, and other institutional investors.
- But the interest payments on the bonds are long-term-unsustainable, and are almost certainly going to be paid for with money-printing long-term. Basically the government prints money, gives it mainly to rich people, borrows it back from those rich people a little later, and the cycle repeats. You get an endless cycle of people who already hold assets getting increasingly more assets via money-printing, while it will be increasingly difficult for anyone else to become rich in the future, since yields on future investments will be reduced, and the economy will slow down due to misallocation of resources, debt "crowding", etc.
I certainly don't support tax increases, but in some ways it'd be more fair if this sort of thing was actually funded through past or future taxes instead of the Fed monetizing the debt. MMT
increases inequality.
The bailouts for companies (including small companies) and the Fed's efforts to reduce volatility across every area of the market are really bad. Businesses that can't survive should die, even in a black swan event. That's how capitalism weeds out bad businesses. Businesses should either structure themselves to be able to survive this sort of thing, or they should buy insurance. But since the government keeps bailing out companies, it creates moral hazard: companies
think (correctly) that they'll get bailed out, so they increasingly don't prepare for disasters (by eg. having sane amounts of debt), they don't buy appropriate insurance, and they don't properly hedge their investments against black-swan volatility. In fact, some in the mortgage market
lost a lot of money because they were hedging against interest rate increases, and the Fed's MBS purchases screwed them; maybe they've "learned their lesson", and will in the future just rely on the Fed to save them from volatility. All of this intervention causes mispricing of time (ie. interest rates) and risk, leading to the increasingly-widespread existence of companies which don't actually provide optimal value to the economy, and may in fact be net drains on the economy. It's a (long & slow) path toward economic collapse.
The stated justification for the business bailouts is to save jobs. If that's the goal, then they should just give everyone a UBI payment for 6-12 months. The bad businesses will fail, and the newly-unemployed-but-not-starving people will find something more productive to do, such as starting businesses that
won't fail and are maybe
more useful in the post-recession environment. If you want to stop people from losing their paycheck, just give them a paycheck: don't prop up garbage businesses to act as a middleman. It seems as though a lot of people view businesses as immovable machines which distribute money to the immovable proletariat class, when in reality things are and should be much more fluid.
An additional largely-unstated reason for the business bailouts is to keep the stock market from crashing even more. Members of Congress and their donors tend to have large net worths, almost all of which is in the stock market. A lot of Americans also have a lot of money in the stock market, and they will not be happy with their representatives if their retirement fund is cut in half. But bad businesses
should fail, and if you're not prepared for this, then you shouldn't invest in them.
On principle, I don't support the individual relief (ie. the $1200 checks and expanded unemployment benefits), either: people should save for disasters on their own, and if they can't/won't, private charity should be the answer. But people have been trained to load up on debt and rely on the government to save them from disasters, so they don't generally have a lot of savings, and in these conditions,
something like the individual relief was politically inevitable. Without it, a lot of people would be totally hosed. So I don't mind the individual relief too much, though I don't think that it'll have much effect aside from keeping (some) people afloat for a month or two, and the longer the government wants to keep people at home, the more they'll have to pay due to the inflation/production effects I mentioned at the beginning of this post. The economy is basically halted, so it won't really
stimulate the economy. Even though the total spend is large, because it's so widespread, I suspect that the
payment itself won't have many long-term positive or negative economic effects, though the lockdown/virus which prompted it is economically disastrous, of course. Short-term:
- Since the individual relief is actually going directly into the real economy, unlike a lot of what the Fed does, maybe we'll see some inflation from it. Probably in food and other Walmart-type stuff.
- Since the unemployment insurance is pretty generous, employment numbers (and therefore production / economic growth) will probably be somewhat depressed for as long as the boosted benefits last.
I think that Trump will take and get credit for the payment. Maybe people will call it the "Trump check" or something, even. It could be pretty helpful for his campaign.
(Unrelated to the payment: I keep thinking that this would be a really bad time for some other black swan event, like an attack by Russia on a NATO member or something like that. It could happen, though.)
