Economic Stimulus or Bailouts and the Bathtub

Back in the ’80s I was working for a major US corporation that was trying to manufacture and market a computer to the consumer market before most consumers had any idea they wanted computers. The people in charge of marketing and sales came upon the idea of offering all sales outlets a no-risk stocking plan. To the best of my recollection, the way it worked was that an outlet could warehouse and stock as many as they wanted. Payment was only due upon final sale to a customer. In a nutshell, they created a massive distributed stocking pipeline that was then filled with product that was technically still owned by the company. Sales were entered on the books when the product shipped from the factory, ignoring the non-standard net-due agreements. There were plenty of people in the company who raised the alarm early-on that the plan violated accepted accounting practices. They pointed out that we were hiring, expending resources, and consuming material based on I.O.U.’s written to ourselves. The proponents kept pointing to the “sales” numbers; in their minds, eventual profits were assured.

However, once stores figured out that most consumers didn’t know they wanted computers, they began to want their stocking space back. When they product began to be returned, all that creative book keeping began to come unraveled. The company donated computers to schools until they were saturated. Truckloads then went in the local landfill. Hundreds of technicians that I helped hire and train had to find other work.

The “economic stimulus” bill kind of works the same way, though there are a few different possible scenarios.

  1. The government removes money from the economy by taxing businesses and individuals, and places it into the economy by giving it to other businesses or individuals. On the macro scale, this is a little like bailing water out of the bath tub and pouring it back into the same bath tub. The people doing the bailing get counted as the recipients of “created” jobs. On the micro scale, how this looks depends on whether one is on the removing end or receiving end of the redistribution. One thing to keep in mind in assessing this approach is that the people who had money to be taxed are the ones who had figured out how to make a profit (and create jobs) and the “bailees” are those who had not figured out how to make a profit or create jobs. Which do you want to reward?
  2. The government prints money and places it into the economy by giving it to businesses and individuals. This might seem to avoid the taxes of (1) but in practice it works the same way by diluting the profits and property of the ones who had previously been making things go. Say you invest in company A which issues 100 shares of stock with the potential of a total profit $10 per (initial) share in two years. After one year, the company runs out of operating capital and issues another 100 shares of stock without any real upside to the valuation or eventual potential. Your expected gain just went down by half.
  3. The government borrows money to accomplish 2, with all of the detriment thereof, plus the added benefit of interest owed.

All of these approaches incorporate a cardinal rule of politics: the politicians decide how to redistribute the money removed from the economy in such a way as to maximize the likelihood of reelection.  Can this work?  Let’s  say I take money from Bill Gates for example, and give it to nine other “deserving” individuals.  Bill won’t like it.  But he only gets one vote, even though we took enough to get nine others to vote for me.  That’s the root of the problem we have now.  Politicians have become experts at bribing people to vote for them.  Voters vote based on perceived personal benefit rather than on any kind of principals.   It takes uncommon character for an individual to voluntarily refuse the government windfall because he recognizes that it is making him complicit in the Progressive plot to inject government into every transaction and decision.

I’m going to have to restate that quote from Alexis de Tocqueville:  “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”

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