How does bailing out massive industries with millions or even trillions of dollars compared to the general population help improve the economy?
In: Economics
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First, most bailouts come in the form of loans which must be paid back.
Second, although it might not seem apparent, goods don’t appear on shelves by magic. Products and services we rely on have to be provided by some organization. There is no point giving citizens money if there is nothing to spend the money on.
That being said, it isn’t a case of either or. The situation is such that demand stimulus (cash to people) and supply stimulus (keeping companies running) are both going to be needed to avoid a long depression.
The government needs to provide cash to people because some job loss and disruption is already happening and will likely worsen in the short run. But doing so is a stopgap – people consume goods and services not money. And goods and services are mostly made by people through companies.
It’s pretty straight forward, Say Johnny has a lawn mowing business, and lost all his money when the weather turned really cold and all of the grass died and no one needed their lawn mowed (Covid-19 quarantine). Meanwhile, a lot of the other kids on the block used to work for Johnny mowing lawns. Some others sell lemonade and others bag groceries at the store. The kids are spending less money overall because they have less work. If the parents intervened they could elect to bail out Johnny’s business and all of his employees (and suppliers of gasoline and fertilizer) would benefit. They may even buy more lemonade from down the street because they have more cash, but the other kids wouldn’t see as much from that targeted investment. Every dollar spent on one kids business is a dollar that may not be spent on another, so while it all helps, the rewards may fall unfairly on all of the kids as a whole.
Some industries are seen as so essential to the economy or material to so many related industries, like the airlines ( all business relies on them), that the government may step in to prop them up to withstand this period of recession. Their employees, investors, customers, vendors, advertisers, and all related industries are all benefitted. And they’re all also members of the general population, and their money spends as well as the general population, so it all helps. It just may help them greatly and barely help you at all.
Did it last time and it did not work. Pay people directly and they can keep the businesses afloat that would naturally succeed. In stead of the government picking the multinational winners. The people would support the the local business of their choosing thus better supporting local economies. Some would pay down debt thus keeping the banks liquid. Some would buy cars helping the auto industry. Some would use the money on education to learn new marketable skills. And some would retire opening new job opportunities.
If some big industry goes bust it often has huge knock on effects.
For example if airlines go bust this will make it harder for hotels, if they go bust it makes it harder for restaurants and shops that rely on tourism.
If these all go bust it’s a lot of people suddenly out of work with no obvious way to replace those jobs.
That means that they’re spending a lot less which causes further job losses.
The idea is one big cash injection to stabilise an industry can prevent this and then later the individual weaker businesses in that industry can be allowed to collapse.
Most of the cash is going toward keeping markets liquid. Banks and major businesses are freaked out enough to not lend to each other. The Fed is stepping in and making loans to big banks so they make regular business loans to keep regular businesses moving. Money coming to a halt has many other very bad effects in the economy.
Could someone in finance or economics please add to this?
Bailing out business can keep people employed. Giving money directly to people won’t necessarily keep business demand up, as a lot of people will simply waste the money or not spend it. What’s the point of giving someone $1000 if the business they work for goes under?
basically there aren’t enough toys because the airplane man is throwing them away so the toy factory is making more toys
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