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Economics 101: The Ripple Effect

“I need to be supported!”

I know it’s easy for me to say – I have a job, working from home, for a good (but small) company, consulting to large companies – and so, so far, my income hasn’t changed much, but I cringe when I hear people expecting support.

[To be fair, I do have two of my four kids unemployed right now as a result of the virus, and one a school teacher at home. The fourth is running full bore out as she works in the “home health care” industry and is trying to schedule home visits, nursing home staffing, hiring and training in the midst of this virus crisis. I understand the desire for support from the government.]

I took an Economics course in university. I don’t recall doing well in it, mind you, but I do remember the basic principles fairly well, I believe. First and foremost in a free market society, like we have in Canada for the most part, is the concept that if a cost goes up, it will for sure be passed along down the line. Secondly is the concept that the government’s money, is really only money collected through taxes and tariffs.

With that in mind, let’s play out this scenario.

Joe is laid off because his employer has no current work for him because of the virus – let’s assume a small business retail establishment. They’ve been closed by the government issuing lockdown orders.

Joe still needs to feed his family. His wife is working from home (her company was able to keep going with the workers working remote), but they have a choice — keep the two toddlers in daycare, or keep them at home. If they keep them in daycare, that’s money spent that they really need to pay their rent. If they pull them out of daycare, the daycare operator loses her income. If she loses her income, she might lose her business which will make for less daycare spaces in the future possibly, which will raise demand, which in turn will raise the going rate for a space (the law of supply and demand). Hmmm…

Sally is the daycare operator. The husband works at the local grocery store. He’s scared to go to work, but since they need the money, he goes. His employer has generously offered to pay him $2 more per hour. But the employer can’t put his prices up, because the public will say he’s gouging, and he knows that a lot of his customers are hurting, like Joe. This hurts his bottom line, and you know eventually he’s going to have to put prices up, or cut staff, to make up for it later on (from family experience, I know that grocers make very little margin on most of what they sell! My Dad was in the business!).

Back to Joe for a minute. They’ve heard that they can postpone paying their rent (nice of the government to step in and say they can do that) and not be evicted. But they rent from Mr. Jones. He rented out the house so he could help pay the mortgage on his other house, but if he doesn’t get rent money, then he won’t have mortgage money. That’s okay, the banks said he can defer his payments. Of course he hasn’t realized that he can defer, but he’s still going to owe it eventually, and in the end, it will end up costing him more but the time the mortgage is paid off.

SO… the government steps in and says “Not to worry! We’re going to up EI for those laid off, and create special funds for others who can’t work” to help things out. But, like we said earlier, the government’s money is really only made up through taxes and tariffs. Giving this money will increase the debt, which means we’re going to paying more taxes to a) pay off the debt, b) pay off the interest on the debt (which is already huge!). You can bet that EI premiums will increase too somewhere down the road.

Because the grocer is going to have pay more taxes and tariffs for his goods, he’s going to have to increase his prices. Because he increases his prices, the daycare operator will have increase her prices, Joe will have to ask for a raise (assuming his employer hasn’t been put out of business by then because of his cost increase).

It’s a vicious circle. NOTHING is free. It all has to be paid for eventually – either by us, or by our kids.

So pray that this Covid-19 virus dies out soon, and in the meantime stay at home and watch cartoons!

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