Thursday, April 2, 2020

The Government is Borrowing Money to Fight Coronavirus. What Does That Mean?

The Government is Borrowing Money to Fight Coronavirus. What Does That Mean?

Russell Hasan

Where is All This Money Coming From?

The federal government is borrowing trillions of dollars to pay for the coronavirus bailout. What does that actually mean? Where does that money come from? Who pays for it? And if the government can give away $2 trillion, why don't they do so more frequently?
The best analogy is a farmer and seed stock. A farmer harvests seed. Some of the seed, he and his family eats. Some of the seed, he saves to plant a future harvest. The seed he saves? That's his seed stock.

Economics is simple, with a few basic premises. To spend money is to consume stuff. To make money is to create stuff. You pay for the stuff you consume with the stuff you create. If someone spends money to eat food, that's like eating some of the seed. The consumer's money pays for the seed. If someone invests money, that's like paying for seed stock. If someone gives you a loan, it's like they're buying seed stock for you. You pay them back from next year's harvest.
The American economy has an enormous amount of what is metaphorically seed stock. Americans invest wealth in productive activities and reap their profits in the future. For example, an investment in real estate buys food to feed the workers who are building a skyscraper set to open in five years.

When government borrows money to give to people for them to consume with no return on investment, it is taking wealth that was slated to pay for future profits, and consuming it today. You pay the workers so they can eat, but the building isn't built.

Death Now, Death Later

The government borrowing money to give to people during the age of coronavirus is as if the farmer is about to starve to death, so he eats some of his seed stock. That is the correct decision for him. He would die otherwise. But he can't eat so much of his seed stock that he doesn't have enough left to plant for next year's harvest. If he did, he would die of starvation when next year's harvest is due to be eaten.

So the government can borrow the money, and the economy can pay for it. But there is a serious, fatal risk if Trump and Pelosi borrow and spend too much. They need just the right amount: enough for us to survive the coronavirus crisis, but not so much that the economy can't pay off the debt and goes bankrupt. Everyone dies if the government does too little or too much. Theirs is a grave responsibility. I hope they get it right.

Infrastructure and Jobs

Another recent policy proposal from Trump and Pelosi is borrowing money to build infrastructure to create jobs. That is not rational. The only reason why all the jobs went away is because of the coronavirus. If the coronavirus crisis ends, the jobs will come back. They will have no reason not to come back. And if the coronavirus crisis isn't over yet, then it's the wrong time to be gathering large groups of workers for construction projects. One infected worker could spread it to all the others. So it's pointless.

With small business loans so easy to get now, that money will be invested in private business if it doesn't end up in a federal infrastructure project. To return to my farmer analogy, it just shifts which fields the seed stock gets planted in. It does not actually create more seed for anyone to eat.

This concludes my explanation of federal debt for coronavirus relief.