Let Them Eat Little Bits of Green Paper

From The Militant

People live well when they have enough money to buy the consumer goods they want and need.

People are poor when they either don't have enough money, or when consumer goods are not available at an affordable price. In Keynesian parlance, the former case is known as a demand side shock, while the latter is a supply side shock. (Without getting into any argument about the relevance of Keynesian economics, the nomenclature is helpful.)

The Great Recession of 2008 was a classic demand side shock. Housing prices collapsed, the stock market went down, and trillions of dollars of wealth were destroyed. The result was a sharp drop in the money supply, greatly reduced demand, after which followed bankruptcies, factory closures and unemployment. Everything spiraled downhill from there.

The Keynesian solution to a demand-side shock is for government to pump money into the economy by deficit spending, thereby putting people back to work again and so increasing natural demand until the economy recovers. This is called stimulus, and the federal government under Bush and Obama did approximately that. The economy has since recovered. At least that's the simple story--one can argue about how true it is.

The problem today is precisely the opposite--we have a supply-side shock. To illustrate, in January people used to eat in restaurants. By April, because of the virus, restaurants were deemed unable to serve food safely, and therefore nobody ate in restaurants. All of a sudden the supply of restaurant meals collapsed to zero--despite the fact that consumers had plenty of money to spend in restaurants.

A similar story can be told for airlines, hotels, and Uber rides. The problem was never lack of money, but rather the lack of safe supply of said services. Workers in those industries were laid off, unemployment ensued, rent and mortgages went unpaid, and it spiraled downhill from there.

Demand-side and supply-side shocks both end up in roughly the same place, but they get there by two different routes. The solutions have to be different. As mentioned, for the demand-side shock the government needs to provide stimulus. But for a supply-side shock that is precisely the wrong medicine.

The best solution for a supply-side shock is for the Fed to wave a magic wand and get all the restaurants to reopen again. (They'd also have to re-establish consumer confidence in restaurant safety. As said, it's a magic wand.) Then all the restaurant employees will be back at work and people will happily spend the money in restaurants buying the meals they planned on buying anyway.

But if the restaurants are all closed, more stimulus will not help. No amount of money will convince consumers to eat in a closed, unsafe restaurant. Instead of enabling consumers to eat in restaurants, all the stimulus did was pass out little bits of green paper. Consumers can't eat bits of green paper, nor will restaurant employees get their jobs back. This is the opposite of living well--I can't buy what I want, and the waitress can't earn a living. Stimulus doesn't change anything for either of us.

So instead of spending their stimulus checks, many people just put the money in the bank. That's what I did--because I'm retired my income has remained unchanged. Because of lack of supply (i.e., my wife & I can no longer go out to eat) and also because of the government's stimulus check, my bank balance has increased since the pandemic began. This drives up asset prices, such as the stock market. My experience is similar to others who haven't lost their job or otherwise been able to maintain their income. But for "non-essential" workers such as restaurant employees the outcome is very different. Their income has just gone to zero. 

Of course I don't have to save all my stimulus money. While I can't spend it on restaurant meals, I can spend it on something else. In my case home repairs took up a big slice. Others have spent it on used cars--the used car market is quite hot right now. There are a lot of people looking to buy a house, though inventory is very low. And, of course, especially since we can't eat in restaurants anymore, we will have to spend more money in grocery stores.

The result is more money (stimulus plus foregone restaurant meals) chasing fewer goods that remain in supply (cars and groceries). It's a classic recipe for dramatic inflation. Unless bits of green paper suddenly become edible, more stimulus will just make things worse and increase inflation even more.

An article in The Militant entitled Joblessness soars worldwide, spurs working-class resistance by Roy Landersen (likely a pseudonym for the competent Brian Williams) demonstrates this. The graph above reveals the sharp inflation in grocery prices that have resulted from both added stimulus dollars, plus the disruption in the supply chain. Grocery prices have gone up by 2.6%.

Disruptions in the supply chain include this: while restaurants all closed down, grocery stores got more business. The problem is that food for restaurants is not the same thing as food that's sold in grocery stores. For example, many people enjoy eating in Chinese restaurants, but only a few people cook Chinese food at home. So there's now a huge surplus of Chinese ingredients that used to be bought by restaurants but can't now be sold in grocery stores.

The result of all of this is higher prices.

At some level Mr. Landersen understands this; after all, he did compile the graph above. But his proposed solutions are wrong--they amount to Let them eat little bits of green paper. He condemns "paltry government handouts" as being woefully insufficient.

In the U.S., individuals have been forced to skip more than 100 million payments on student loans, auto loans and other forms of debt. A wave of apartment and home evictions loom, threatening millions with homelessness.

He has a point--all these defaults will lead to bank failures, and then we're all toast. So some short-term help for unemployed restaurant workers is appropriate. And that's been done--though it remains to be seen if it's enough. But it shouldn't be called stimulus, and to the extent it adds to the money supply it's inflationary.

Sending an extra "stimulus" check to somebody like me--who has suffered no income loss--is completely counterproductive.

His second suggestion is gonzo:

The Socialist Workers Party calls for workers and their unions to fight for a government-funded public works program to provide jobs at union-scale pay, building things working people need — hospitals, housing, day care centers, schools, and to repair the crumbling infrastructure.

Why build more hospitals when a) we have enough, and b) we don't have the extra doctors and nurses to staff them? Those professions are already in short supply, and jacking up the salaries of doctors and nurses won't help restaurant employees at all. This really is a Let them eat little bits of green paper strategy. It would be massively inflationary.

I want to eat in a restaurant, but Mr. Landersen will force me to buy a new hospital instead. How silly is that?

The solution--the only solution--is to find a way to reopen restaurants, airlines, hotels, and tourism and travel generally. Little green pieces of paper are useful only if there is something consumers want to buy with them.

Further Reading:

• Socialist Resurgence Demands Steep Wage Cuts for Healthcare Workers
• Useful Marxist Economics: Michael Roberts
• The Militant Visits Manila