This isn’t one of my best titles for a blog post, but I am going to attempt to analyze some of the economics in dealing with the massive shutdowns with businesses.

I have been analyzing various aspects of the government’s and the Federal Reserve’s responses to the current economic conditions, which were largely brought on by the government and the Fed in the first place.  For this post, it is going to be more high level in terms of the economics.

The government has certainly brought on this economic disaster by hyping up the fear of a virus that may end up killing fewer people than the seasonal flu.  On top of that, governments at all levels – especially the state level – have shut down many businesses that are considered non-essential.  Of course, they are judged to be non-essential by the politicians themselves and not by the business owners, the employees, or the customers.

But even if these businesses had closed down temporarily in a completely voluntary fashion, there is still plenty of blame that goes to the government and the Fed.  Many years of reckless spending, high regulation, easy money, and artificially low interest rates have left Americans and American businesses in a situation where they don’t have a lot of savings. Therefore, just a few weeks of temporarily closing down puts many individuals on the edge of bankruptcy. It is largely the same for business owners.

Now the government and the central bank are making things worse by upping the ante because of the current situation.  They are exacerbating everything, especially when it comes to spending and money creation.

It is important to understand what gives us a high standard of living.  It is the high production of goods and services that allow us to live well.  The government doesn’t increase production by spending money.  The Fed doesn’t increase production by creating money.  If anything, they misallocate resources and plant the seeds for a decrease in production.

You can only consume what has already been produced.  This holds true for all of society.  If people save money, it delays consumption.  It allows for more consumption in the future.

Decreased Production and Decreased Consumption

Let’s take an example of a massage parlor.  Let’s say that the massage parlor shuts down for a month due to fears of the virus.  For the discussion of the economics, it doesn’t matter whether this was shut down by the government or it was done voluntarily by the business owner.  It could also be a situation of closing down because people choose not to use this service at this time.

The massage therapist working there is no longer producing.  The production is massages.  But at the same time, people have reduced their consumption. They are not paying for massages.

In this example, there is no long line of production.  The business owner still has to pay rent for a building that is sitting there empty.  But overall, there is close to a net zero difference in society.  A massage therapist gives one fewer massage to a customer, while the customer receives one fewer massage.  But the customer then has the extra money that would have been spent on the massage.  The massage therapist does not have this money that would have otherwise been received.

To be clear, it actually is a slight overall reduction in living standards.  The customer has, let’s say, 60 dollars extra from not getting an hour massage.  The massage therapist did not have to work, but has 60 fewer dollars than what would have happened.  Under ordinary circumstances, the customer would have preferred an hour massage to the 60 dollars.  The massage therapist would have preferred the 60 dollars to an hour less of work.

But you can see that, on a whole, society is not much worse off.  From an individual standpoint, the massage therapist is not earning money.

If this were a permanent situation, the massage therapist would have to find other work (assuming no long-term government or charitable assistance).  If the new situation were permanent, then it might make sense for the massage therapist to work somewhere that is in higher demand. For example, grocery stores actually need more help with fewer people eating out at restaurants.  There is a shift in consumer demand.

The massage therapist could go into nutrition, where maybe the demand has stayed about the same. But someone who might have gone into nutrition will instead go work at a grocery store that is now paying higher wages.  The price system is supposed to work all of this out.

This whole concept is important to understand if you want to understand the workings of the economy, which most people don’t.  They don’t understand, and they probably don’t want to understand.

If everyone reduces their consumption, then production can actually go down.  It probably isn’t the case that most people want to permanently reduce their consumption.  They want to delay some consumption.  Due to uncertainty, many people are going to go into savings mode, even if they still have a secure income.  Many people are building emergency funds that should have already been built.

What we should really hope for is that production returns to normal while consumption goes down. The only thing is, if consumption goes down, then there will be a shift in some resources.  If people are consuming less at massage parlors and restaurants, then there will ultimately be fewer restaurants and massage parlors, or prices and wages will go down in those industries, relatively speaking.

In a free market, consumers ultimately determine where production goes.  It is a question of what they are willing to consume, and at what price.

Government Handouts

When the government hands out money to people who are unemployed, it is a redistribution of wealth.  When the Federal Reserve creates money out of thin air, it is a redistribution of wealth, even if it is used to hand a check to everyone.  It is impossible to distribute the money evenly, and an equal distribution is still a redistribution of wealth.

It may temporarily help people who have lost their income.  Most people understand that paying unemployment benefits helps people who are unemployed.  But it is important to understand that this is a redistribution of wealth. And in addition to this, it further incentivizes non-productivity.  Meanwhile, the Fed is distorting the whole price system and only exacerbating the situation by further misallocating resources.

In our current situation, consumption is down.  But with less consumption, we should be saving more.  Unfortunately, productivity is also down with consumption, so we may not be saving any additional wealth.  And with the government policies in place, it will actually serve to further decrease production in the future, at least as compared to where it was before.

I don’t think most Americans understand that our living standards are going to take a major hit. This is not just a temporary situation of things closing down for six weeks.  If the fears of a virus disappear tomorrow, we are not going back to normal.

If half of the businesses in the country closed for six weeks and then reopened with no interventions from the government and the Fed, then we would just be missing six weeks of production.  But the six weeks of a shutdown for some businesses is nothing compared to the damage of trillions of dollars spent by the government, along with trillions of dollars created out of thin air by the Federal Reserve.

What we have experienced over the last month is only the beginning of a very rough time ahead.