“Like I said, the personal income tax was well received, but the corporate income tax has clearly had a negative impact on spending. Governments see these taxes as an extra avenue for revenue. However, these taxes are basically inflators. They drive up the costs of both goods and services because business owners have to maintain their profit margins in order to keep operations steady and predictable. They are able to do this by passing their tax bill onto customers.”
Edmunds stood again, returning to his role as professor.
“The increase in costs hampers spending on both goods and services because wages don’t automatically increase. You see, wages increase when companies’ profit margins increase. Because companies are trying to maintain their profit margins they’re not investing in expansion or in raises to their employees.”
“What about the minimum wage. That’s an increase of wages,” said another researcher, obviously not an economist.
Dr. Edmunds rolled his eyes at the question before he could catch himself. Everyone in the room was more and more on edge.
“Again, the key term is artificial. When a governmental implements a policy, it tends to have an artificial influence on the market and what we call the business cycle. Let me use an example.
“Let’s say you own a pizza restaurant and you have four employees,” he said to one of the research assistants. “Your labor costs are fixed at $1600 per week. You can’t increase them unless you cut into your profit margin. However, if you do that, it affects your own income, the quality of your restaurant, or you have to borrow money to keep operating. Okay now, let’s say the government forces you to pay your people more. However, your revenues haven’t increased. That money has to come from somewhere.
“So now, instead of increasing your payroll, which you can’t really do, you have to fire one of your employees. You pay three people more money, but one of your employees has lost their job.”
The logic of the example cut through the room like a sword. However, there were still some doubters. One of them finally spoke up.
“Why do employers have to maintain their profit margins? I mean, how much is enough for them?”
Edmunds removed his glasses and rubbed his eyes. Bao could tell that he was about to blow a gasket. Edmunds took a long swallow from what must have been cold coffee and returned his gaze to his questioner.
“Have you ever owned a business or have you only worked for other people?”
“Other people,” the researcher replied, sheepishly.
Edmunds nodded, as if to say ‘that figures’.
“Well, you should ask some business owners that question. How much is too much money for you? I mean, if Mr. Varner here offered you a million dollars to do the same job, would you turn him down?”
There was no response to the obvious question.
“Let’s not question the motives of business owners. They’re human beings just like us,” Edmunds said calmly. “These are people who are acting out their dreams. They have children and mortgages and car payments. Also, while building their own dreams, they allow others to start to build theirs.
“While the kid who gets the job cooking the pizza isn’t living their dream, they’re making money to live while they’re working towards other goals, like schooling. This is the beauty of capitalism—everyone benefits… unless someone gets in their way, like governments.”
And with that, Dr. Edmunds sat in his chair. The eloquence of his words stunned the room. After a few moments of silence, Michael Varner stood.
“Thanks Dr. Edmunds. With that we’ll take an hour for lunch. When we return we’ll try to get through these other policy ideas.”
Charlie Henry did understand economics, but he also had goals. He knew that the policies he was implementing would lead to some misery, but that misery would be temporary. Prolonged economic misery in the United States was due to people holding on to capitalism. Hybrid economies—free market capitalism with only moderate governmental controls—could not work. Charlie’s plan was already working. In fact, they were a year ahead of his projections.
His goal was to establish redistributive welfare programs. This was only one or two steps away. In mid September there was an increase of personal and corporate income taxes. This, in combination with the minimum wage and restrictions on outside goods and labor, led to a greater slowdown of the economy. It was the series of policies enacted in the late fall that had the biggest impact, though. Just a week before Thanksgiving, the Blue Creek Council voted to begin printing money based on the total credits that were allotted to all of the Blue Creek residents. David Asher quickly signed it into law and then hit the news talk shows to explain the policy. He promised that the government wouldn’t print more money than was represented in the Blue Creek economy.
Patton Larsen quickly wrote a blog post that blasted the policy, noting that money printing always leads to inflation because governments can’t stop at the proper level of currency. He did note that the Great Depression was partially caused because the Federal Reserve didn’t print enough money to keep up with the economic growth of the Roaring Twenties. This led to deflation, which Patton noted was as bad, or worse, than inflation. He closed with a scathing accusation, writing “even if David Asher and his puppet master Charlie Henry could be trusted, which they cannot, giving this government the ability to print money is a disastrous development for this community. You’ve been warned.”
The city outsourced the printing of the money to a printing company in Salt Lake City. Patton pounded the Asher administration again, this time for hypocrisy. In another blog post, Patton wrote “I hope the Asher regime will pay its own fees for violating its own policy. I think the government should donate these penalties back to the Blue Creek residents that he stole the money from in the first place.”
The impact of the policy wasn’t immediate, but as the paper money began to reach Blue Creek residents, some residents started to feel nervous. No longer could you just use your credits card to purchase items at the store. People now had cash in their wallets. Some loved it, but some hated it. Most people, however, didn’t understand the danger that comes when a government owns a printing press.
Then a curious thing happened. Once people received cash, many went on a second spending spree. It was almost a Pavlovian response. There was a surge of economic activity, which, on the surface, was a good development after almost a year of near recession conditions. Of course David Asher, and some members of the Council, touted the development. However, the bad times would return at the end of the winter.
Just before Christmas, the negative impacts of the minimum wage and restrictions on outside goods and services began to take hold. Unemployment increased dramatically. Younger people, particularly teenagers, were impacted most because when employers lay off workers, they keep the most experienced workers. The tariff on outside goods drove up the cost of doing business. Business owners, in turn, raised their prices even further. Because wages were static, and most residents had already spent their cash reserves, spending throughout the economy decreased even more. This led to additional layoffs and a decrease in hours because profits were down.
In March, just after the government reached its first anniversary, the inevitable happened—the first family mortgaged their home. The story hit the TV news, the two newspapers, and the blogosphere. Soon after, Blue Creek’s two banks were flooded with requests. Simply put, most residents were accustomed to having house payments. Many wanted cash instead of full ownership of their homes. Following the flood of mortgages, there was another period of heavy economic activity and again, government officials touted the effectiveness of their policies.