Sorry, Willie, That’s Just Half the Story

I have an extensive collection of quotes I have gleaned over the years from many sources. There is is usually one which is appropriate to whatever issue is at hand. From H. L. Mencken, we get… for every complex problem, there is a solution that is simple, neat and wrong. The following is an example.

Willie Brown is a long-time and very astute California politician.  He was the Democratic Speaker of the State Assembly for many years, during which time he went toe-to-toe with Ronald Reagan for the latter’s two terms in office.   An annual poll of the press in Sacramento routinely declared him the smartest guy in the Capitol.  He was later twice elected Mayor of San Francisco.  Such was his sway among his fellow politicians that, even after retirement — and against not-insignificant public opposition — the legislature named the San Francisco-Oakland Bay Bridge after him.  (Never shy to spend the taxpayer’s money, some thought that limiting the honor to just the toll plaza would have been a sufficient honor and clearly more appropriate.)

Since leaving the political arena, Brown had been writing a weekly column in the San Francisco Chronicle.  On April 26, 2020, he related the following story, which he attributed to a friend.  

A tourist drives into town, stops at a motel and lays a $100 note on the desk, saying he wants to inspect the rooms upstairs before picking one for the night.

As soon as the tourist walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher.

The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.

The pig farmer takes the $100 and heads off to pay his bill to his feed supplier at the co-op.

The guy at the co-op takes the $100 and runs to pay his debt to the local hooker, who is dealing with the same economy as everyone else and has been offering her services on credit.

The hooker rushes to the motel and pays off her room bill.

The motel owner then places the $100 back on the counter and waits for the tourist to come back from checking out the rooms.

Just then, the tourist comes down the stairs, says the rooms are not satisfactory, picks up the $100 note and leaves.

No one produced anything. No one earned anything.

However, the whole town is now out of debt and can look to the future with a lot more optimism.

And that, my friends, is how a stimulus package works.

Sorry, Willie, that’s just half the story.  The whole town may be out of debt, but to get there, the whole town gave up assets equal in value to the aggregate debt repaid.   Everyone in the story starts out with a $100 debt, which he or she cannot pay, and everyone has an asset worth $100, which apparently cannot easily be turned into cash. If this is the extent of each person’s assets and liabilities, then he or she has a net worth of zero.  The aggregate net worth of all of them is also zero. 

in the story, the $100 from the tourist sets off a round of debt repayment. If this had been two people instead of five — I owe you $100 and you owe me $100 — there could be a simple agreement to let one debt cancel out the other. The story depends on the reasonable assertion that each of the five parties is unaware of assets and liabilities beyond his/her own. Were this known, they too could just cancel all the debts with no money actually changing hand. Any way it is done, however, the ledger is cleaned up but no one is better off in the end.   As there is no additional money in town, nothing is stimulated.  

Let’s change the story just a little.  What if the hotel owner personally takes the tourist to see the room and there is no round of debt repayment. The hotel owner laments to the tourist how bad business has been because travel is limited due to the government-imposed quarantine.  The tourist tells the hotel owner that the hotel is below his standards and so he will not be staying there.  However, he is touched by his plight and lends him a $100.  He tells the hotel owner that he can pay it back if and when things get better, but not to worry about it.  It’s even okay is the debt is never paid.

This is more like how a stimulus package works.  The hotel owner uses the $100 to pay off a debt and is surprised when the hooker pays off her debt to him of $100.  Having taken in $200 and shelled out $100, the hotel owner is up $100 while the tourist is out $100.  In this case, there is a real stimulus which is the impact of the owner spending that extra $100.

It doesn’t matter much if the hotel owner orders take-out from a local restaurant or rehires the maid he laid off. What is relevant – indeed essential – is that he spend the money locally. Likewise it matters that the tourist is not a local. A gift or loan to the hotel owner from a neighbor would not be stimulative, but would just shuffle money around town. 

The story in Willie Brown’s column sounds good.  One’s first reaction is wow-everyone wins-and-no-one-gets-hurt.   Only when you dig a little deeper does in become apparent that no one actually wins anything.   There is no cost but there in no stimulus. The alternative story produces a stimulus but only at comparable cost. As they say, there’s no such thing as a free lunch.

And so another appropriate quote in my quote collection; this one from Murray N. Rothbard:

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.