Download There Ain`t No Such Thing As A Free Lunch

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Abbas P. Grammy
Professor of Economics
[email protected]
Economic Research Center
www.csub.edu/kej
April 9, 2012
There Ain't No Such Thing As A Free Lunch
There ain't no such thing as a free lunch (TANSTAAFL)! You have heard it from a
preaching grandparent or an economics professor. It is a cliché implying everything has
a cost. It warns you to be suspicious of anything that appears to be free. When given
something, you are expected to give something back or to do something in return.
In economics, TANSTAAFL came about in response to the libertarian views of Henry
Wallace, the United States Vice-President (1941-45). In an article published in The
Atlantic Monthly, Wallace suggested a post-war economic regime offering "minimum
standards of food, clothing and shelter" for people throughout the world. He asserted,
"If we can afford tremendous sums of money to win the war, we can afford to invest
whatever amount it takes to win the peace." Paul Mallon, a journalist, responded to
Wallace's proposition that "Mr. Wallace neglects the fact that such a thing as a 'free'
lunch never existed. Until man acquires the power of creation, someone will always
have to pay for a free lunch.” 1
Milton Friedman, a Nobel laureate, popularized the phrase by using it as the title of his
1975 book. Greg Mankiw of Harvard University uses TANSTAAFL to demonstrate
opportunity cost, "To get one thing that we like, we usually have to give up another
thing that we like. Making decisions requires trading off one goal against another." 2 If
an individual or a group gets something at no cost, someone else ends up paying for it. If
there appears to be no direct cost to any single individual, there is a social cost.
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2
Wikipedia, http://en.wikipedia.org/wiki/There_ain%27t_no_such_thing_as_a_free_lunch
Ibid.
1
There ain’t no such thing as a free lunch! Of course, it is not exactly true. In the United
States, nearly 50 million children attend public schools free. At the average per pupil
spending of $9,870 per school year, the foregone tuition payments total $494 billion. 3
In addition, the federal school nutrition programs provide more than five billion meals
served to nearly 31 million students. Annual spending on all nutrition programs adds to
more than $12 billion. 4
Guess what? We pay for costs of public education and free/reduced lunches with our
taxes. I almost break into tears looking at the list of deductions in my monthly paystub:
federal income tax withholding, state income tax withholding, Medicare taxes, and
Social Security taxes. April 15 is not a day of celebration either; I usually make extra
federal and state tax payments, not to mention paying $400-plus to an accountant to
prepare and file my tax returns. In addition to on-going disbursement of sales and excise
taxes, paying annual property taxes makes me go for a brisk walk to recover from it.
Government spending ain’t a free lunch either! Governments are apt to deficit-spend
on the assumption that each dollar spent would create additional dollars of income.
This concept known as “the multiplier effect” is the rationale for massive government
spending to stimulate the economy out of a recession. The government spending
multiplier for the United States economy is believed to be 1.4, indicating that an
additional dollar spent creates an extra $1.40 of income over a span of 4 to 6 months.
Robert Barro of Harvard University has challenged the “multiplier effect” of government
spending. 5 If the multiplier were 1.0, an increase of $1.00 in government purchases
would lead to an increase of $1.00 in the Gross Domestic Product (GDP). Thus, the
added public goods are essentially free to society. When the government buys a new
airplane or constructs a bridge, the economy's total output expands by exactly the same
amount. He points out, “The explanation for this magic is that idle resources -unemployed labor and capital -- are put to work to produce the added goods and
services.”
If the multiplier were greater than 1.0, the GDP rises by more than the increase in
government purchases. Thus, in addition to the free airplane or bridge, we have more
goods and services left over to raise private consumption or investment. In this scenario,
the added government spending is a good idea. However, if the multiplier were zero,
3
Professor Mark Perry calculates public school per pupil spending at $9,620 per year in 2004, which I have
adjusted for inflation. See ”Private School Tuition 1/3 to 1/2 Less Than Publics,” CARPE DIEM, October 28,
2007, http://mjperry.blogspot.com/2007/10/private-school-tuition-13-to-12-less.html
4
“National School Lunch Program,” United States Department of Agriculture, October 2011
5
Barro, R. J., “Government Spending Is No Free Lunch: Now the Democrats are Peddling Voodoo
Economics,” The Wall Street Journal, January 22, 2009,
http://online.wsj.com/article/SB123258618204604599.html
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increased government spending requires an equal fall in consumption or investment. In
this case, the social cost of $1.00 of additional government purchases is $1.00.
To measure the “multiplier effect,” Barro refers to the shared view that the World War II
fiscal expansion provided the needed stimulus that finally got the United States out of
the Great Depression. He estimates that the war raised defense expenditures by $540
billion (in 1996 dollars) per year at the peak in 1943-44. He also estimates that war
expenditures raised the GDP by $430 billion per year in 1943-44. Thus, the multiplier for
defense spending is $430/$540 = 0.80. This number being less than 1.0 asserts that the
war lowered the GDP aside from military purchases. The main declines were in private
investment, non-military government purchases, and net exports. Accordingly,
“Wartime production siphoned off resources from other economic uses -- there was a
dampener, rather than a multiplier.” 6
Barro offers three reasons for the wartime multiplier of less than 1.0:
•
•
•
Households and firms expected the added wartime outlays to be partly
temporary
The use of the military draft in wartime had a direct, coercive effect on total
employment.
The United States economy was already growing rapidly after 1933 (aside
from the 1938 recession), and it is probably unfair to ascribe all of the rapid
GDP growth from 1941 to 1945 to the added military outlays.
Similarly, for other wartime episodes (i.e., World War I, the Korean War, and the
Vietnam War), Barro calculates a government spending multiplier close to 0.80.
Interestingly, Barro finds that the wartime multiplier overstates the effect of peacetime
government purchases. He estimates that the “multiplier effect” of peacetime
government purchases is close to zero.
Barro’s prescription for economic recovery is to avoid massive government spending
based on the notion of the “multiplier effect.” He refers to the fundamentals of marketorientation to illuminate a path to recovery:
•
•
•
•
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Create incentives for households and firms to work, invest, and produce.
Avoid programs that throw money at households and firms.
Emphasize reductions in the marginal income-tax rates.
Undertake public-works projects that pass the test of cost-benefit analysis.
Ibid.
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