“A firefighter has never been criticized for using too much water.” – Bank of Canada Governor Stephen Poloz
What is the problem with paying people to do nothing?
Let’s begin with an extreme example first, then work back into a real-life example using the airline industry. What would happen if the government shut down 90% of all businesses but continued to borrow or print money so that everyone could get paid their annual salary for an entire year?
The first problem would be the production of goods and services would grind to a halt and supply shortages would become ubiquitous. The money given to everyone would only complicate things further because now everyone would have more money that can be used to purchase the few goods available. The decrease in supply of goods plus the increase in money would lead to what is commonly called hyperinflation; this concept is relatively foreign in the West, but those in Venezuela, Zimbabwe and many other countries are familiar.
Some may say that this seems highly improbable in advanced economies such as the USA and Canada; so let’s see what is possible:
1) The US Government approved a $2 Trillion stimulus bill. The Financial Times notes that $58 billion is to be allocated to the airline industry “with half set aside to pay employees’ wages and benefits.”
2) Also note a CNN article says that from 2014 to 2019 the Big Four Airlines spent $42.5 Billion on share buybacks; however that is beyond the scope of this article. We can also ignore the Fed’s upcoming $700 billion asset purchases as well.
The Airline Industry – Money for Nothing
Per the above article, nearly $30 billion will go to wages and benefits. We don’t know where the other half of the $58 billion will be allocated. This is a waste of resources and is anti-capitalism, also known as socialism.
Under capitalism, a company that cannot meet its obligations, such as employee payroll, will go bankrupt unless it can borrow, raise funds, cut costs or increase revenue in the free market. The problem is that government intervention distorts the price and profit mechanism by lending money to companies that would probably go bankrupt without government intervention. The consequences of this distortion is devastating and effects the poorest members of society most.
What appears to go “unseen” by governments and most mainstream economists is that a decline in airline traffic is not a “bad” thing because of airlines losing money and their potential for bankruptcy. Rather, it indicates that society does not value the good or service that a company offers and/or the company is being poorly managed.
If airline traffic decreases by 50% for the next year or two, then many customers would be able to save money or reallocate it into other desired goods or services. For an airline company to survive it might have to change prices, purchase less planes, operate less, or any other cost cutting or revenue boosting measures.
Consider life under and after quarantine. Depending on how the virus is ultimately dealt with, it may take a year or more for people to become comfortable traveling again; therefore it’s possible that airline revenue will be down for a considerable amount of time. Contrary to what we are told, this is not bad. Life under and after quarantine has changed consumer’s preferences away from airline travel and towards things such as food, medical supplies, guns and ammunition. If airline revenues are down by 50% for the next year due to fear of the virus, it’s likely that consumer cost saving from travel would be allocated to more “survival type” of goods and services. In order to prevent a shortfall of services, the production of “survivables” would have to increase.
Murray Rothbard explains inflation succinctly and uses it in its appropriate usage in the introduction to America’s Great Depression:
The Austrian prescription is precisely the opposite: we can only surmount the present and future crisis by ending government intervention in the economy, and specifically by ending governmental inflation and control of the money supply, as well as interference in any recession– adjustment process. In times of breakdown, mere tinkering reforms are not enough; we must take the radical step of getting the government out of the economic picture, of separating government completely from the money supply and the economy, and advancing toward a truly free and unhampered market and enterprise economy.
The government’s intervention in the airline industry makes everyone’s life worse off, not only because the inflation (i.e. increase in supply of money and credit) will carry an interest charge borne by future generations, but also because the government is literally paying companies and individuals “to not work.” In the case of the airline industry, a shortfall of $30 billion in revenue will be paid by society and given to people to not produce anything. The individuals will now have $30 billion worth of money to spend, but society has $30 billion less of “airplane supply” to show for it. In other words, the money supply has increased by $30 billion, but society is receiving $30 billion less in goods/services. If the recipients decide to speculate on stocks, buy bonds, real estate, or if they use the money to buy guns or toilet paper, then it’s likely you’ll see an increase in the above asset prices or a potential shortage of goods. This also negates the effect of banks pyramiding the $30 billion and increasing the money supply many times more.
We can now expand this idea to consider that the same thing will happen for all industries and individuals receiving the $2 Trillion bailout, while also remembering that the Fed will add an initial $700 billion to go to banks. Then add the effects of commercial banks pyramiding these trillions of dollars by those individuals who are not producing anything in society.
There is no money, dollar, liquidity or other crisis as mentioned on the news. The issue is that mainstream economics has failed us and we are approaching the end of socialism where people are getting paid to “consume.” Once socialism runs its full course, economic collapse and a complete breakdown of the system is to follow.
The Allure of Socialism
The naïve individual might say:
“Come on Econ, the problem of the airline industry is not due to mismanagement, share buybacks or anti-capitalist unions, it’s because of the Virus and the government forced them to shut down. Surely they should get compensated for this?”
The answer to this is an emphatic “No!”
No, society should not pay people to produce nothing. Businesses fail all the time for reasons beyond the entrepreneur’s control and when the government picks winners and losers you have socialism. Under a completely voluntary free market, it would be easy to see how the change in consumer demand for airlines would mean that people choose not to travel anymore; therefore, a bailout would not be reasonable. Under socialism, this could confuse people. They will claim the government is causing the problem; therefore, the government should compensate the people.
This is dangerous thinking! But, we must realize that under socialism there is no economic calculation. Every decision is based on arbitrary guess work or bribes at best. This is the system we have. That being the case, it is still a bad decision for the airlines to be grounded by the government, but then pay $58 billion to the industry so that people cannot work. The cost of the inflation and price distortion makes life more unaffordable for society, but so few people understand this idea.
In such a world, it would probably be better if the $58b was not given to airlines who are not offering a service. However, if the $58 billion was reallocated to make a new industry, such as ventilators and medical supplies, then at least society could say that the $58 billion was given so that labour could work towards producing something of value, rather than to produce nothing. The problem is that this may lead some to think that it’s simply a matter of “better socialism,” however this is not sustainable. The answer is simply to give no one money to an individual or corporations.
The Bank of Canada Governor said it best in that criticizing the money printing would be like “criticizing a firefighter who adds too much water to fire;” the quote is utter nonsense.
Perhaps you won’t criticize a fireman for adding too much water to a fire, but you might have a problem if a fireman responds to an out of control bonfire in your backyard by waterboarding you until you drown… that’s kind of what is happening here.
 Bank Of Canada Makes Another Emergency Cut To Interest Rate, CBC News, https://www.cbc.ca/news/business/bank-of-canada-interest-rate-1.5512098
 Murray Rothbard, America’s Great Depression, (Auburn, The Ludwig von Mises Institute, 2000), p. (preface xxx).