THE PAINTER AND THE SHUTDOWN
As we watch our jobless claims skyrocket, our businesses close, and our government print currency in an effort to make us feel better about it, this may be a good time to take a step back, and consider what economic activity really is, at its heart. What is money? How is wealth created?
It’s a complex question, but as bureaucrats crank up their printing presses and argue about where to send those crisp new dollar bills, we may be better off taking a step back and considering the subject “from 30,000 feet,” as the saying goes.
The Parable of the Painter
A man bought $10 worth of paint and canvas, and went to spend a sunny day at a local park. He set up his easel at a spot with a good view, and went to work on a scene.
At the end of the day, just as he was finishing up, a passerby saw his work, and was impressed. The passerby paid him $500 for the painting, on the spot.
This is wealth creation. The painter – through use of his creativity and skill – transformed
$10 worth of materials into a $500 product in the span of a single day.
Now, we could also dive into all the disparate aspects of the economy that play a role in this transaction – studying how the paint was made from chemicals, how the easel was built and marketed, how the canvas was processed from raw flax or refined from crude oil… but for that level of detail, I’ll just refer you to the classic essay, “I, Pencil.” Leonard Read did a better job with that 1958 masterpiece than anyone else.
So let’s stay at 30,000 feet. In one day at a park, our painter created $490.00, not out of thin air, but out of his own ability and creativity. This one man took some materials, and by the end of the day, those few materials were worth a great deal more.
He wasn’t the only party involved, however. As with any transaction, there must be both a buyer and a seller. Whatever the painter hoped his work would be worth, he needed a buyer to propose a price acceptable to him. So it is that the buyer also played a role in deciding that this output was now worth $500.
This $500 will now continue to move through the free market. The painter will start by purchasing more materials for future paintings, and then he’ll use his profits to pay other bills. His rent, his groceries, his car payment, his clothing, and yes, his taxes too, are all paid because of his success in creating value, by painting and selling work like this.
That’s how the economy functions. A automaker buys $7500 worth of parts, and assembles them into a $15,000 car. An injection molder buys 50 cents worth of resin and molds it into a $10 plastic product. A kitchenware maker buys clay and glazes, then manufactures ceramic dishes and bowls, cups and saucers. A furniture maker buys lumber, fasteners, stains and varnishes, then assembles them into desks, bookcases and cabinets.
The price points differ from industry to industry, and from product to product. Each has different material costs, engineering requirements, automation and equipment needs. Our painter needed only brushes and easel; a heavy manufacturer may need CNC machines, robotics and conveyor belts.
But what they all have in common is that they buy materials, and then sell those materials for a greater sum, whatever price the market will bear. That sale transaction – covering the labor and profit that went into it – is when wealth is created. Until there’s a sale, those are all just costs. But once you sell your product, you’ve created new wealth in the economy.
That’s how the economy works. We don’t have some silly “limited pie” for bureaucrats to divvy up, for micromanaging politicians to redistribute.
We have a growing economy in which every participant contributes something – creativity, talent, hard work, genius, maybe all of the above – constantly applying themselves to add wealth to the world they live in. A free market gives everyone a chance to contribute to the best of their ability, finding the niche – from assembly line to boardroom, from home office to retail floor – where they will be the most successful, both for themselves and for the economy at large.
The CCP Virus Shutdown
All this came to a near halt in recent weeks, as an escaped virus from China has infected the world. We don’t know all the details yet, and perhaps we never will. From a lab in Wuhan to a wet market down the road, from factories and communities in Asia it spread around the globe.
Wise preventative measures (such as the President’s January orders to ban air traffic with China, and then with Europe) were quickly built-upon to include draconian state shutdowns of plants, malls, churches, theaters, practically all gatherings in every state, by the end of March.
Many of us can still work from home, and do. Some can still go to their jobs (if they are blessed by the government branding them as “essential”). We can still make some purchases, chiefly by ordering online, but most transactions are stopped. Millions of us twiddle our thumbs, waiting for the cease-and-desist order to be lifted.
What does this mean to the economy, long term? We won’t know until it’s over. The economy can and does handle brief closures for holidays, and boom and bust periods related to weather and the seasons. Many factories close between Christmas Eve and New Year’s Day; small businesses often build in a one or two week closure for vacations. At the end of it, you pick up right where you left off, and the economy doesn’t suffer.
The uncertainty is our problem today. At first, we didn’t know if it would last a week or a month; today, we don’t know if it will last one month or two. Some politicians propose a six or twelve month shutdown, or even more. We live in insane times.
Our challenges are many. How long can we survive such a shutdown? Organizations like the National Restaurant Association are predicting that 10% of the companies that closed for this will never reopen There is a limit to how long a company can last without income coming in.
Granted, the politicians are trying – allegedly – to craft programs to ease these burdens. They try to apply the levers of regulatory relief, tax credits, stimulus checks and interest free loans to help these companies make it through the crisis.
But central planners cannot succeed in such efforts, on the grand scale. They have tried for centuries; it can’t be done. However honorable their intentions, the government cannot meet the needs of the business world in the same way that the marketplace can.
The sooner we can approve treatments and vaccines for this CCP virus, the sooner we can make the case for reopening the economy. We can’t wait until all risk is ended, because all risk is never ended. The illness is severe, even fatal, for a very small percentage of the people who get it. Once the medical community has reasonable responses for them, we need to let America get back to work.
After the Shutdown
Let’s return to our painter.
He’s lucky, in a way, in that he can paint on his own, as long as the government doesn’t lock him in his house, and as long as he can get his materials. He might be able to build up a stack of paintings during the shutdown, so can get right back to selling as soon as the order is lifted.
Most factories won’t be that lucky, as they will emerge from the shutdown without inventory, and will take time to restart their equipment, retrain people who’ve forgotten their jobs after a month on layoff. But eventually, companies that can restart, will do so.
What will be the profit margin then?
This is the question that the politicians don’t dare to discuss (and half of them, frankly, don’t think of at all).
After the economy has been creating new money at a much slower pace for one month, two, or even three, will customers be as able to pay the asking price as they were before?
Our painter in the park still has that painting, and the passerby may still see it and like it. But after he’s been without an income for a couple of months, will he be able to offer $500?
The odds are greater that he’ll offer $400, or $250, or maybe even less. Our painter will need to take it, because he’s been painting without customers throughout the shutdown, and he needs every sale he can get. But that will mean less for him, for the same amount of work, than he would have received if it weren’t for the shutdown.
And it therefore also means that the economy will likely be producing much less wealth than before, even if we fully ramp up immediately.
Perhaps we can return to nearly-full employment when the shutdown ends, but we won’t be able to return to our prior level of growth, so critical to the American standard of living.
Even after we come back, we won’t be making profits at the rate we were before, and that means that the politicians are not only spending money we don’t have now, they’re spending it based on future tax receipt expectations that are woefully unrealistic.
A significant proportion of any economy, good or bad, is based on confidence and enthusiasm. People are more willing to spend more on a product when they are confident about their own future than when they aren’t, and that therefore affects the profitability of the stores where they shop.
The longer this shutdown goes on, the more we depress our future results, even after we reopen.
It is critical that we reopen America as soon as possible.
Copyright 2020 John F. Di Leo
Written by the Wise Owl.
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