Sitting in on Bailouts 101
by Paul Hein
by Paul Hein
Student: Professor, could you explain this bailout?
Teacher: Of course. The first thing to bear in mind is that the problem is very complex, and cannot be easily described in a few words. But in a nutshell, it boils down to this: American companies — and individuals — are heavily in debt. This makes expansion and modernization difficult, or impossible; and debts difficult to pay. Plants may have to lay off workers. These workers are thus unable to spend at their usual rate, causing further business depression, more layoffs, still less spending. There is a multiplier effect at work, a vicious circle.
S: So the problem is that there is not enough spending?
T: In essence, yes, and that makes it difficult for companies to earn enough to repay their debts. That is why the government must step in and do the spending. As Lincoln, I believe it was, once remarked, the job of government is to do for the people what the people cannot do for themselves.
S: Why did American companies get so far into debt to begin with?
T: For one thing, they have the highest labor costs in the world. American auto workers, for example, are paid significantly more, both in pay and in benefits, than their foreign counterparts.
S: Then why don't the workers agree to work for less? Wouldn't that be better than being laid off?
T: Not when you are laid off at about 90% of what you'd get if you were working. Besides, American workers deserve to get as much as they can.
S: Don't American consumers deserve to get as much as THEY can? Why should they be forced to subsidize auto manufacturers so they can pay good wages to workers who aren't working?
T: As I said, the problem is complex. We cannot deal with all of the ramifications in a single class. Any further questions?
S: Yes. Where is the money for this bailout coming from?
T: Ultimately, of course, it is the taxpayer who'll provide the funding. This is, I remind you, a democracy. The people share equally in the country's financial opportunities and obligations.
S: But if the taxpayers are to provide trillions, then the taxpayers must have trillions. If the problem, as you indicate, is insufficient spending, then it would seem strange that the taxpayers have so much money, but they're not spending. Why aren't they spending it? It's surely a buyers' market. And aren't we often told that Americans have the lowest rate of savings in the industrialized world? So how did they accumulate these trillions?
T: Again, I remind you, the problem is complex. Briefly, though, we can point out that the taxpayers aren't necessarily sitting on trillions, but will be taxed on their earnings in the future. And in —
S: Wait a minute! With increasing unemployment, and the president promising tax cuts, does it make sense to count on future earnings to finance these bailouts?
T: Ah, you young people! How quick you are to see things in terms of black and white, when the problem is really much more complex than that. But to respond to your remark: it will probably be necessary for many people to borrow in order to accomplish the economic goals of the bailout.
S: But from whom? Aren't the banks themselves looking for handouts? Why should people have to borrow from the banks in order to provide funds for the banks?
T: As you will see when we discuss the Federal Reserve, and the banking system in general, banks can only create deposits as loans. If nobody is borrowing, there can be no new deposits created. And in the present economic downtown, the big borrowers — GM, etc., have stopped borrowing. And the banks probably would be reluctant to lend to them even if they sought new loans. So the economy spirals downward, without new borrowing to pay for previous borrowings. That is why the bailout — an infusion of new capital — is required.
S: So are you saying that the bailout, in its essence, is the government compelling us to borrow for the benefits of the banks and certain large industries?
T: How many times must I remind you that the problem is far too com —
S: Why doesn't the government simply stop all taxing for the next few years, and let the people do what they want with the money they'd save?
T: The allocation of financial resources cannot be left to chance. It is for financial experts to make these decisions, and —
S: What if the people just said NO.
T: (gasping) WHAT?
S: You know, like they did with King George. Just NO. We've had enough. We won't take it any more.
T: (aside, to his aide. Put that kid's name on the suspected terrorist list!) I see our time is about up for today. Class dismissed.
February 20, 2009
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