By now, everyone in the US has received the bailout chain letter email that says the government, instead of bailing out AIG, should give every American over the age of 18 $425,000. Each person then pays tax at a tax rate of 30%, which leaves $297,500 in their pocket. They claim this will boost the economy more than bailing out AIG. People would pay off their houses, buy new cars, put something aside for college, and life would be one big block party.
As if.
It sounds wonderful. Everyone would benefit from a boost in lifestyle, the recession would end, and the US would be strong.
No, not really. Let me explain.
It’s not just that their math is wrong, which it is. The logic is what is flawed the most. I’m not going to cover everything, but let’s look at a simple view. The effects will fan out from there.
1. If AIG is not bailed out, millions of people would immediately become uninsured. The money that they get from the bailout alternative would need to be set aside to cover medical costs, to self-insure their property and casualty risk, and cover investments and retirement benefits that they have lost.
2. Those who invested with AIG, and were receiving retirement payouts would lose their benefits. The bailout alternative payment would not cover their living expenses and medical costs for the rest of their lives, and these people would then increase the rolls of welfare recipients. They lose their quality of life, and everything they worked for.
3. Many businesses who depend on AIG for their liability coverage, workers comp, employee benefits and lines of credit will fail. Their employees will lose their jobs. The money these employees would get from the bailout alternative would need to sustain them while they try to find employment, while competing with the drastically increased numbers of unemployed. These people would be at a huge disadvantage to everyone else who didn’t lose their jobs, and got this bonus.
Step back from AIG now, and look at what this payout would do to the economy.
1. Raising minimum wage has been proven many times to have no positive impact on the economy. It just raises the dollar value of the poverty level to keep it in line with inflation. The poor stay just as poor as they were the day before.
2. More money doesn’t equal greater wealth. Flooding the market with more dollars has the opposite effect. If everyone got a big check as suggested, the dollar value of the poverty level would be raised once again. As we learned in Economics 101, prices will go up. More people will become impoverished. The rich stay rich; the poor stay poor, with more dollars in their pocket. That dollar is now worth less.
None of this takes into account all the money AIG owes others, the money the US owes foreign governments, the money foreign governments owe us, and all the complicated bookkeeping that goes into running a country as large and wealthy as the United States. Our leaders are making the best of a very difficult situation in order to protect everything we hold dear. It’s more than a simple financial decision.
