“There’s no such thing as a free lunch.” This colloquialism is arguably the one most frequently repeated in the economics space. Nothing’s free. Even the water you drink from the drinking fountain. Someone paid for that “public” water dispenser. Get it?
Though economists focus incessantly on consumption, their acknowledgement that “there’s no such thing as a free lunch” is a rather quiet admission that they sort of get Say’s Law. All “demand” or “consumption” is preceded by production. Nothing’s free. If you want food, clothing, shelter, and all manner of other material goods, you must produce something of market value first. Your work, or production, is what enables consumption. By extension, consumption is a consequence of economic growth as opposed to an instigator.
Some will respond that kids and other dependents get free lunches all the time. Yes they do, but someone, somewhere produced so that they could eat for free. It’s a reminder that what we don’t spend, as in what we save, hardly subtracts from consumption. Saving is merely a shift of consumptive power to others. This could be immediate family members who are handed the consumptive power for free, or distant individuals who pay workers a rate of interest for the consumptive power they have left over after meeting their own needs.
This is worth remembering as members of the left such as Jonathan Chait, Paul Krugman, and Derek Thompson advise President Biden and Congress to go big with their so-called “stimulus.” They put the cart before the horse. Economic growth is what enables government spending, as opposed to government spending enabling economic growth. Oh, but they so want their economic mysticism to be true! Claudia Sahm aims to make real what is fantasy.
In a recent piece for the New York Times, the former Fed researcher advised Biden to “Put Economic Relief on Autopilot.” “Go Big,” Sahm says. While the “price tag” for Biden’s proposed spending plan ($1.9 trillion) is “indeed big,” that’s “as it should be” in the eyes of Sahm. As she sees it, “This crisis demands it.”
But wait a second. “There’s no such thing as a free lunch.” Though economists, journalists and politicians sometimes act as though abundance can be decreed from the proverbial Commanding Heights, reality invariably intrudes. Just as children and dependents get “free” things from hardworking parents and grandparents willing to forego some of the rewards of production, and just as there are borrowers of dollars only insofar as there are savers of dollars, there are only recipients of government largess insofar as there are productive workers whose toil is to varying degrees owned by the U.S. Treasury.
In Sahm’s case, she wants to put government spending on a smart autopilot of sorts whereby the more difficult the economic circumstances are, the more “total dollars of relief” provided by Congress. If people are struggling, “Congress can bump up the generosity of their benefits.” OK, but these enhanced free lunches are but a consequence of economic growth that’s already occurred. Since nothing’s free, it’s a basic truth that Congress can only stimulate the depressed if it depresses the stimulated.
In the U.S., the above scenario invariably carries a high price tag because Americans are remarkably productive people. Rest assured that Peru’s political class can’t cobble up even a fraction of the aid that Congress is able to summon. This is true not because Peruvian politicians don’t want to spend trillions, but because there’s once again “no such thing as a free lunch.” Congress spends big because the U.S. Treasury once again owns a percentage of the work of some amazingly productive people.
Ideally these statements of the obvious help us all to understand that while the U.S. Treasury most certainly can extract trillions worth of private production that Congress can subsequently redistribute, none of this generosity with the money of others has anything to do with economic growth. Lest readers forget, production first, then consumption.
Sahm cites a paper she wrote while at the Fed that calls for “direct payments to people” during slowdowns that start “as soon as the unemployment rate starts to rise in a way that we know a recession has arrived.” Her analysis misses that “direct payments to people” are only a consequence of reduced payments to the individuals actually creating the wealth. Government’s ability to stimulate spending by the unemployed is a direct result of it reducing the spending of those who are employed. There’s no increase.
To which Sahm would likely reply that during recessions defined my high unemployment, consumption is the cure for what ails us. In that case, tax or borrow from those unlikely to consume all the fruits of their labor, and hand the proceeds to those who are light on funds, and who will spend the money right away.
Except that Sahm is calling for mass wealth redistribution “as the unemployment rate starts to rise.” This is problematic. For the unemployed. Think about it. Businesses and jobs can’t be decreed by economists and politicians any more than abundance can be. In truth, they’re a result of abstinence. Of those with wealth forgoing consumption in favor of savings and investment. Except that Sahm wants government to be a size spender during slowdowns. She’s entitled to her beliefs, but Sahm shouldn’t say that increasing spending during periods of rising unemployment will help push unemployment down. If it did, West Virginia would be fully employed perpetually! Back to reaity, only unspent wealth can author economic recovery, but Sahm’s focus is on making sure government has lots of “free lunches” to distribute. Yes, but they aren’t free!
All of which calls into question the very notion of Congress putting economic recovery on “autopilot.” It can do no such thing. Congress can only redistribute the fruits of growth that already occurred. Period.