Rx for Economy: Policies That Keep Businesses Busy

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Rx for Economy: Policies That Keep Businesses Busy
(AP Photo/Mark Lennihan)
Rx for Economy: Policies That Keep Businesses Busy
(AP Photo/Mark Lennihan)
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The shutdown of the U.S. economy over COVID-19 highlights an often misunderstood aspect of wealth: it’s created by money moving. When money stops moving, wealth swiftly disappears. Put another way, wealth is a stream, not a lake.

For example, Marriott’s net income was over $500 million in 2019, and the aggregate value of the stock in Marriott was nearly $50 billion two months ago. So, Marriott’s rich, right? 

Yet Marriott announced it is furloughing tens of thousands of its 174,000 employees worldwide -- that’s tens of thousands of people who won’t have paychecks next week and perhaps for weeks to come. What gives? Are the folks running Marriott just greedy and not willing to share their wealth?

Marriott’s employees, from the CEO to dishwashers, are all paid by Marriott’s current customers. Marriott’s “wealth,” such as it is, is the flow of cash that passes through Marriott’s properties from its customers to its employees, and to the people who supply the capital and food, beverages, buildings, linens and other things Marriott offers to customers. The bigger the flow of cash from customers, the more that’s available to pay everyone associated with making Marriott a place people wish to visit and enjoy. No customers, no flow of money, and no more wealth to share -- so everyone associated with Marriott loses out.

Marriott no doubt has some cash in its bank accounts, but the amount of money it has at any one time is a tiny fraction of the $50 billion at which Marriott was recently valued. When we talk about how much any corporation is “worth,” it’s an assessment of what the company will earn over time from future transactions, not a measure of what’s in its bank account.

A few Harvard students had an idea that became Facebook. They formed Facebook, Inc. to raise the money (offering investors limited risks and potential great profits) to hire thousands of computer programmers to create something billions of people now enjoy. Facebook has been immensely successful – and very “wealthy” – because people pay to engage other people through Facebook in a variety of ways.

But if the Internet were turned off tomorrow, the tremendously “wealthy” company Facebook Inc. becomes worthless.

The same principle applies to the average individual. If a person is unable to sell his or her services or ideas or capital, the flow of money into that person’s bank account comes to a halt.  When the flow into a person’s bank account ends, the flow out of the person’s bank account will swiftly end too -- once their credit limits are reached. Like corporations, the vast majority of people have only a very small percentage of what they are “worth” or spend in their bank account at any one time.

The sudden, dramatic economic impacts arising from our national response to deal with the spread of COVID-19 demonstrate that wealth is variable, not constant. Policies that make business busier are policies that create wealth. Policies that make it harder for businesses to operate (more costly or less busy) are policies that make wealth disappear. Wealth exists because of, and to the extent of, voluntary transactions between real people.

Some politicians act as if wealth is a static pool to be shared instead of a stream that grows or shrinks with freedom and ingenuity. While we need, for public health purposes, to pause our economy and the billions of transactions by which money moves between us, let’s at least take away a broader lesson from this experience for our future benefit: we need to promote policies premised on the understanding that wealth is as fleeting as the flow of money through transactions, that business being busy is important to real human beings, and that corporations are only rich to the extent its customers and suppliers are able to freely transact.  

Richard Porter is a lawyer in Chicago and Illinois’s national committeeman to the Republican National Committee.



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