Donald J. Boudreaux: Deficit spending no free lunch
One of the most useful catchphrases in economics is “There ain't no such thing as a free lunch” — or “TANSTAAFL.”
This phrase highlights the fact that using resources to produce one good or service means that society gives up some other goods and services that could have been — but now won't be — produced with those same resources.
In short, everything has a cost.
Of course, that a good or service has a cost doesn't mean that that good or service is not worthwhile to produce. Constructing my house was costly. It consumed lots of labor and material. But I'm happy to pay my mortgage because the benefit to me of living in my house exceeds the cost to me of compensating the many suppliers who helped to build it.
Whether some output is worthwhile or not, though, it's important always to recognize that it has a cost — to recognize that nothing is free.
Unfortunately, when unemployment is high, many people assume that TANSTAAFL doesn't apply.
It's common during these times to suppose that more roads and bridges and corn and houses and widgets can be built costlessly. “After all” (the reasoning goes), “many resources are currently unemployed, so we sacrifice nothing by finding ways to employ these resources to produce more stuff.”
It's a short leap from this belief to the conclusion that government deficit spending in times of high unemployment is costless. If government borrows money to hire unemployed workers to build a new aircraft carrier, it appears that nothing is sacrificed. We seem to get additional guns without having to sacrifice any butter.
Proponents of deficit spending insist that failure to spend during slumps is failure to take advantage of the opportunity to get goods and services for free.
Many problems plague this case for deficit spending. One is that higher-than-average unemployment does not turn TANSTAAFL into TISATAAFL (“There is such thing as a free lunch”).
Everyone recognizes that even an economy at full employment has some unemployed workers and other resources. The “natural” rate of unemployment in the U.S. is considered to be just over 5 percent. That is, if America's unemployment rate were 5 percent, economists would call that “full employment.” All would then agree that increased spending to build a new aircraft carrier would divert resources from other uses — building houses, designing new word-processing software, supplying more butter.
So why suppose that matters are significantly different with unemployment at 8.1 percent (the August rate)? Even with today's high unemployment, well over 90 percent of workers remain employed.
It's illegitimate to assume that an unemployment rate a mere 3 percentage points higher than “full” means that we have such a superabundance of idle resources that increased production of goods and services is no longer costly.
As I'll explain in my next column, today's relatively high unemployment neither enables us to produce for free nor implies that the foundational truths of economics are inapplicable during recessions.
Donald J. Boudreaux is a professor of economics at George Mason University in Fairfax, Va. His column appears twice monthly.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Steelers must be creative in providing snaps for linebackers
- Penguins’ Maatta tests positive for mumps; Bortuzzo, Greiss negative
- Rossi: Brawl for ADs between Pitt and WVU
- Veteran tight end Miller’s blocking skill crucial to success to Steelers running game
- Toys for Tots fails to deliver; local charities scramble
- Fall from Hazelwood roof kills man
- Time is of essence for Pitt in finding football coach, athletic director
- Fleury’s career-best 6th shutout lifts Penguins over Avalanche in overtime
- Icy roads, cold causing school delays, wrecks in Western Pa.
- Analysis: Misunderstood Chryst served Pitt well
- Pennsylvania jobless rate drops to 5.1 percent