“The state is that great fiction by which everyone tries to live at the expense of everyone else.” Frederic Bastiat, 1848
One of the most basic principles of life is this: For someone to receive something they have not earned, someone else will not receive what they have earned. This is a universal truth that is often overlooked in discussions of economics. There are multiple ways this takes place daily at an individual level. When someone goes into a small store and shoplifts, the thief has received something they have not earned, while the store owner has lost something they have earned. The same is true for cases like fraud, embezzlement, armed robbery, carjackings, etc.
Not all cases of this truth are negative. This truth applies to voluntary activities like caring for the needs of a child, donating to charity, giving a gift, or buying a meal for a friend. The key for positive examples is that the action is voluntary.
While the principle is easy to understand at an individual level, people often lose track of this principle when it occurs on a macroscale. When the government offers “free” cell phones, “free” college, or “free” healthcare, the principle still applies. While it is easy to see who benefits, the question that must be asked for any of these “free” items is: who is not receiving what they have earned?
Typically, government uses three methods to pay for items:
- Taxes. This is easy to understand who is paying for the “free” item as the taxpayer has not received all their earnings.
- Borrowing. The money from lenders is used to pay for “free” items. Unfortunately, the money loaned to the government cannot also then be invested in useful activities like high-speed fiber, investing in plant equipment to improve efficiency, or other useful economic activities.
- Currency Devaluation/Money Printing. This becomes even more challenging to identify who is paying the bill but will be better defined below.
The recent flurry of “free” money during the COVID-19 pandemic is an example of currency devaluation. A trillion dollar+ quarterly surge in federal spending (Chart 1) was “paid for” by the Federal Reserve purchasing over a trillion dollars in U.S. government bonds (Chart 2). This almost immediately resulted in a devaluing of the currency as gold prices rose from less than $1600/oz in March 2020 to over $2000/oz by August 2020. On top of this, governments shuttered economic activity with lockdowns of businesses and individuals to significantly reduce the means of production. Similar actions were taken by multiple countries around the world which further limited trade as well.
Chart 1. Federal government expenditures reflecting spending spike during pandemic
Chart 2. U.S. Treasury Securities held by the Federal Reserve
So, who is not receiving what they earned from the “free” money people received to buy stuff during the pandemic? One group stands out above the others: retirees and widows with fixed incomes and savings from sources like annuities and defined benefit pensions. I have many friends I worked with over the years who are retired and have fixed pension checks they had earned as part of their employment. Because of the higher prices from devaluing the currency, their pension checks buy less than before. Their retirement savings were devalued. The items they can no longer purchase with their dollars were given to those who had not earned it.
Because of the scarcity of goods and services, there is never anything free – someone paid for it with their investment, work and effort. As Thomas Sowell so eloquently writes: “The first lesson in economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
