In my column for the September 7th, 2012, edition of the Pittsburgh Tribune-Review I did my best to debunk a popular myth about deficit spending by government. You can read my column in full beneath the fold.
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.
(NOTE: I just discovered that I seemingly never wrote the promised “next column.” The column after this one, which appeared on September 28th, 2012, does not do what this September 7th column promised. I have no recollection of avoiding writing the promised column; it must have slipped my mind. If I find the time within the next few weeks I might write this long-promised ‘column’ as a post here at Cafe Hayek.)