Reducing unemployment is not a free lunch

One of the basic texts of Econ 101 contains TANSTAAFL (pronounced “tan-stah-ful”) in short: “There is no such thing as free lunch.” Of course, this acronym is not just about lunch. This is an interesting way to explain the incompetence and universality of scarcity. If you pay for your lunch, you will have less money to spend elsewhere; Your ability to eat anything other than lunch decreases. But even if you don’t pay for your lunch, it’s not free; Someone pays for your lunch. Someone As a result of eating that lunch you eat less.

In other words, create your own luncheon using labor and other resources No. Creating some other output using the same labor hours and resources. This other, unproductive output could be an extra lunch available to someone else, or it could be something very different from food. Labor, land, transport vehicles, electricity, and other inputs can be used with proper training and engineering to provide you with lunch, instead of clothing, housing, medical services, education, entertainment – almost everything used to create. It follows that if you are very hungry and have two lunches, you or someone else will have to get even less with other products and services. In more general terms, if society produces more butter, it will certainly produce less guns.

TTANSTAAFL: Yes Really A free lunch is not such a thing. No economic lesson is more important.

But economists say this lesson should not be applied during periods of unemployment – and the party of central bankers and politicians. When the employment rate of labor is below the level considered “full”, many people declare the availability of free lunch – for nothing! Tisataafal: Yes Is Such a thing as a free lunch!

The reasoning behind this remarkable conclusion is simple. High unemployment I mean Lots of labor available willing to work but unable to find work. Therefore, if the government manages to increase the “collective demand” for these workers to work sufficiently through deficit spending or money creation – that is, if the government successfully reduces unemployment through prudent revenue or monetary policy – society will produce more without sacrifice. We produce more guns And More butter.

No TANSTAAFL escaping

High unemployment undoubtedly reduced total economic output, and made almost everyone, less than the unemployed, more prosperous than they had always been in full employment. But it is illegal to assume from this fact that government spending or money creation that reduces unemployment and creates free lunches.

Most obviously, unemployed workers give their leisure time some positive value (and because they are unemployed in the market they complete any household chores). We know this is true because most unemployed workers can find employment soon if they are willing to work for less than what they are currently seeking. The Baker Factory Technician who lost his job paying $ 35 per hour can probably find a new job immediately if he is willing to work as a cashier at McDonald’s for the minimum wage. However, considerations other than the value of his retirement may be effective in deterring him from seeking such an entry-level job, as he will probably agree to work as a cashier at McDonald’s if that restaurant pays him around $ 35 an hour, even such employment. His refusal to seek strongly suggests that he did indeed add some value to his retirement (although, of course, not enough to deter him from accepting a job at a sufficiently high wage).

The argument is No. This worker is lazy or losing his factory job is a camouflage blessing. The argument is simply that the average unemployed worker attaches some positive value to extra retirement. The fact that the cost of this vacation is lower – perhaps much lower – than the previous wage paid to the wage worker does not mean that the value of the vacation leave is zero. This value is positive for most unemployed workers. Therefore, when government stimulus is the ‘reason’ for re-employing these workers, one of the costs of the larger output of the economy is the lost retirement of these workers.

Although I understand why this argument strikes so many people as trendy, I think it makes sense. This argument makes it clear that unemployed workers are human beings, each with their own subjective preferences, experiences and expectations. Unemployed workers do not get unscrupulous, lifeless inputs for free, or like slaves, what Arnold Kling calls the “GDP factory”. Since the unemployment of these workers is caused to some extent by the own preferences, expectations and preferences of these workers, the above argument makes it clear that every worker has the value of opportunity while spending for work.

To dismiss the above argument as trivial is to ignore the humanity of the workers. This is to consider workers as inhumane inputs in GDP production – as individuals who have value and experience when they work to generate marketable output.

Expectations and political realities

However, there are additional reasons to emphasize that society does not get free lunch if ‘stimulus’ revenue and fiscal policies reduce unemployment. One such reason is almost completely ignored, yet at least the warrant mentions: every use of revenue or monetary policy by the government to increase overall demand reduces the likelihood of future unemployment reduction by reducing nominal prices and wages. Every effort by the government to ‘stimulate the economy’ raises the expectation of employers and workers that government-engineered sales and job losses will be reduced by increasing overall demand. Employees who may be willing to cut salaries as a way to keep their jobs today are less likely to do so as they come to expect government jobs to secure their jobs.

In short, prudent use of prudent fiscal and monetary policy makes prices and wages (according to economists) even more “sticky downward”. Because for the successful, productive integration of a large number of highly specialized producers nothing is as important as market-fixed prices and wages, policies that distort or slow down the functioning of the value system imposed on society. This distorts and slows down.

It is common today to claim that nominal wages are “downward” and to use this fact to justify stable, moderate inflation. Fixed, moderate inflation is now considered necessary to reduce the required wages – wage reduction by the inflation-induced reduction in the actual value of the nominal wage. But would the American economy be as it is today if the dollar had not depreciated so steadily and significantly since the creation of the Fed and the Kensian-inspired prudent fiscal policy had never been adopted? Could nominal prices and wages be more flexible going down? And can unemployment be more reliably kept to a minimum, not by politically motivated and poorly informed politicians and central bankers, but by information-rich private market forces, including nominal wage reductions in industries facing declining demand?

This summary of some of the ‘costs’ of discretionary fiscal and monetary policy ignores the additional concerns expressed by Austrian economists. One such additional concern is that, in reality, government stimulus to aggregate demand inevitably raises some prices and wages before others. This distortion of relative value undermines the market’s ability to accurately inform market participants about the best use of their assets.

A second, related additional concern is that government stimulus could suppress nominal interest rates and thus fuel excessive investment in projects that are not economically viable.

The above considerations do not prove that discretionary revenue and fiscal policies are not appropriate for their spending. Probably a factor as to why they’re doing so poorly. But these benefits are not free. Whether the benefits of such a policy are worth their cost is a separate, empirical question. This is a question that should be asked and answered. Unfortunately, however, this is a question that has been put off the table by the unreasonable habit of making unreasonable claims – and consequently increasing market output – a free lunch caused by prudent revenue and monetary policy. After all, there is no point in analyzing the cost-benefit of policies that are believed to produce benefits at no cost. This belief is, alas, unreasonable.

Donald J. Boudrox

Donald J.  Boudrox

Donald J. Boudroux is a Senior Fellow at the American Institute for Economic Research and with an Advanced Study of the FA Hayek Program in Philosophy, Politics, and Economics at George Mason University’s Mercatas Center; A Mercatus Center board member; And Professor of Economics and former chair of the Department of Economics at George Mason University. He is the author of books The Essential Hayek, Globalization, Hypocritical and half-wittedAnd his articles appear in such publications The Wall Street Journal, The New York Times, U.S. News & World Report As well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics Pittsburgh Tribune-Review. Boudreaux holds a PhD in economics from the University of Auburn and a law degree from the University of Virginia.

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