How do bailouts & foreign aid hurt the lower classes?
It’s because of the Cantillon Effect.
The flow of money through a system matters, as those who receive the funds first benefit most.
When new money is printed for bailouts or foreign aid, wealth is redistributed FROM the lower and middle classes and given to the upper class.
This happens slowly so it’s not evident at first.
It sounds logical that adding more money the economy give people more money to spend, and ultimately benefit everyone, but that’s not how it works.
Here’s a simple example to explain The Cantillon Effect:
Let’s say you live in a small, remote village that is self-sufficient.
One day you wake up to find $500,000 buried in your yard, which is more than you earn in 10 years.
This new wealth means you can buy a lot of cool stuff, so you go out and buy a new house, a luxury car, a TV, and a bunch of fancy dinners.
You have more spending power to buy “resources”.
In addition, you buy “assets” like stocks and real estate that are income producing.
The businesses where you spent money turn around and buy goods and services using that money.
The new money is flowing through your village economy.
This new money means that other people also have more available to buy additional resources, but the amount of resources is the same.
The producers of products haven’t been able to make more stuff yet, so more money is now chasing the same amount of goods.
This causes prices to increase (inflation).
However, this just happened so workers are still receiving the same salary but now have to pay more for the same resources.
The net result is the people who got the money FIRST were able to buy resources before inflation hit.
The people who had to wait for the money to flow through the economy have less purchasing power.
For those who had to wait, it feels like they benefitted from the new money, but the net result is they less able to buy fewer resources than they were before.
1 – This could be minimized in a bailout situation by giving the money to everyone at the same time, but generally the bulk of new money initially goes to those groups CLOSEST to the source of the money (PPP loans).
2 – This also applies to foreign aid when the wealthy in a struggling country are given a large sum of money. This benefits the wealthy and hurts the lower classes.
The key point of the Cantillon effect is that the FLOW of money matters, and those who receive the new money FIRST benefit the most.