There’s No Such Thing as a Free Lunch



Nelson-Atkins Museum of Art, Kansas City.  ID’d by Greg Morris and John Gammie.

We just returned from a six-day road trip through a lot of farm land and a few small cities in five other states—a real

The day before we left I had lunch with one of the “fellows” at the Oklahoma Council of Public Affairs, yes one I have referred to as a limited thinker in a couple of posts, and B J Ryan, CFO for Moore Public Schools who had ID’d my Thinker photo from Roswell, New Mexico.  It is a burden of thinking about all things economic that I realize my Social Security income is dependent on the ongoing productivity and good graces of those currently employed as well as many, I hope, not yet even born.  For that reason, I try to share my good fortune by buying lunch on occasion for those who are paying into the Social Security Trust Fund and supporting public and private programs that help children become productive adults.  You see, unlike the Oklahoma Teachers Retirement System Trust Fund that is as real as much of Warren Buffet’s investments, the Social Security Trust Fund is mostly a creative accounting entry on the books of the United States Treasury so that the future security of my “entitlement” income depends less on the amount in the Trust Fund than on the ability and willingness of current workers to keep paying in.

The father of American conservative economic thought Milton Friedman used the phrase “There’s No Such Thing as a Free Lunch” to remind us that government programs that provide free services, such as SNAP or food stamp benefits, to individuals, no matter how deserving, may appear “free” to the recipients, but to society or the economy represent a diversion of resources from some, through taxation or public debt, to others, and often result in perverse incentives that lower overall productivity and welfare, possibly even for those receiving the “free” benefit.  One of his many books even bears that title.

The economic principle behind the phrase is “opportunity cost” which refers to the fact that using a resource to do one thing precludes it being used to do something else which (the “something else”) is in effect the real “cost” of the choice that has been made.  The lunch we enjoyed was not free to me because, obviously, the money I spent on it is now not available for my preferred “something else”, such as theater tickets.  And truly the lunch was not free to my guests because they lost the opportunity to use their time doing something else and instead had to listen to my old man stories.  It can be fairly stressful to think like an economist.

It would be helpful though if more of our political leaders in Oklahoma would think like economists.  A Tulsa World article on June 2, 2017 quoted several Oklahoma lawmakers who have come to the realization that there are essential services provided by the state that should be funded and that recent tax cuts have deprived our state of sufficient revenue to provide those services, i.e. we have a revenue problem.  But one legislator from Broken Arrow, showing his disagreement with the obvious, “repeated a favorite quote from Winston Churchill about a state trying to tax itself into prosperity and said, ‘Government does not produce wealth. Government consumes wealth. You as taxpayers, you as business owners, create wealth. That’s what we need more of — not more government.’”

I don’t know if Winston Churchill really said that, but if he did it was likely taken out of context.  Here are a couple of excerpts from Wikipedia about Churchill:

“In 1909, he set up Labour Exchanges to help unemployed people find work.[79] He helped draft the first unemployment pension legislation, the National Insurance Act of 1911.[80]…Churchill also assisted in passing the People’s Budget,[82] becoming President of the Budget League, an organisation set up in response to the opposition’s Budget Protest League.[83] The budget included the introduction of new taxes on the wealthy to allow for the creation of new social welfare programmes. After the budget bill was passed by the Commons in 1909 it was vetoed by the House of Lords. The Liberals then fought and won two general elections in January and December 1910 to gain a mandate for their reforms. The budget was passed after the first election, and after the second election the Parliament Act 1911, for which Churchill also campaigned, was passed. In 1910, he was promoted to Home Secretary…The People’s Budget attempted to introduce a heavy tax on land value, inspired by the economist and philosopher Henry George.[84]  In 1909, Churchill made several speeches with strong Georgist rhetoric,[85] stating that land ownership is at the source of all monopoly.[86] Furthermore, Churchill emphasises the difference between productive investment in capital (which he supports) and land speculation which gains an unearned income and has only negative consequences to society at large (“an evil”).[87]”

I realize later Churchill may have had different views on such domestic policy matters than did early Churchill, but still I suspect Churchill’s views on government’s role in the economy were always much more nuanced than the simple quote “Government does not produce wealth; Government consumes wealth” suggests.  Wealth, as economists understand the term, refers to productive resources regardless of how they are owned.  Having just driven almost 2,000 miles on federal and state highways it is apparent that our economic prosperity is enhanced by the real wealth that is our highway system for vehicular transportation.  Yet these roads, which are an important component of our national wealth, are owned by governments—does that make them inherently wasteful or unproductive?  At the same time cigarette packaging machines and equipment are owned by private companies and are also part of our national wealth—does that make them inherently superior to government owned wealth like school buildings?

Examples of government owned and produced wealth that has enhanced our prosperity throughout history abound and refute an over-simplified understanding of Churchill’s quote.  Successful economies rely on smart production of wealth by government, whether it’s a national interstate highway system, Tulsa’s Spavinaw water project, the production of hydro-electric power in the northwest, or an aircraft carrier that maintains open commercial transit throughout the world’s oceans.  These are all examples of physical capital that are part of our nation’s wealth.  We also enjoy enormous human capital in the form of an educated, healthy and productive population, which further adds to our nation’s prosperity.  The quality of our human capital is partly due to smart government investments in education (public schools, G.I. Bill, etc.), food production (research at state universities), health care (medical research and various health insurance programs), and many other areas.

Because there’s no such thing as a free lunch when we choose to have government owned wealth and make smart government investment in education, health care, food and water supplies, energy production, etc., we must give up something else and we most often do so by paying taxes—duh.  Or we could do without those smart government investments and live in a country that would resemble any one of several nations on our planet that do not enjoy functioning governments able to produce the collective infrastructure wealth necessary for our economic prosperity.

As always lunch on me to the first to ID the location of the thinker in training photo above.




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