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TTANSTAAFL (There Truly Ain’t No Such Thing As A Free Lunch)

In my latest column for AIER, I explain that, even starting with significant unemployment, increases in employment and output resulting from discretionary fiscal and monetary policies are not costless. Here’s my conclusion:

This summary of some of the ‘costs’ of discretionary fiscal and monetary policies ignores additional concerns expressed by Austrian economists. One such additional concern is the fact that, in practice, government stimulation of aggregate demand unavoidably raises some prices and wages before it raises others. This distortion of relative prices disrupts the market’s ability to accurately inform market participants of the best uses of their resources.

A second, related additional concern is that government stimulus can suppress nominal interest rates and thereby fuel excessive investment in projects that aren’t economically sustainable.

The above considerations don’t prove that discretionary fiscal and monetary policies aren’t worth their costs. Perhaps they are, for to the extent that these policies reduce unemployment, they yield real benefits. But these benefits are not cost-free. Whether the benefits of such policies are worth their costs is a separate, empirical question. It is a question that ought to be asked and answered. Unfortunately, however, it is a question that is thoughtlessly swept and kept off the table by the careless habit of asserting that reductions in unemployment – and the resulting increases in market outputs – brought about by discretionary fiscal and monetary policies are a free lunch. After all, there’s no point in doing a cost-benefit analysis of policies that are believed to produce benefits without costs. This belief, alas, is unwarranted.