Free Lunch

There is an old saying that I remember first hearing back in my college days. I remember it from a funny looking word – TINSTAAFL. It is an acronym for “There is no such thing as a free lunch.” It originated long before I was around, but it is as true today as it was one hundred years ago. It deals with a fallacy that often distorts the decision making process of individuals, as well as political leaders.

If someone takes you out to lunch and pays the tab, the lunch was free to you, but it wasn’t free. Your friend bears the cost, rather than you. If the restaurant owner tells your friend that the meals are on the house, the meals are free to your friend, but they are still not free. The restaurant owner bears the cost instead of your friend. If the employees and suppliers donate their time and food, it is still not free. Now, they bear the cost. When real resources are used up, including time, there is a real cost that someone ultimately bears. They have eliminated the opportunity to use the resources for other valuable alternatives.

The concept applies to government programs as well as dinners out. Someone pays for everything. You may be getting a benefit, but if you are not bearing the cost, someone else is. Since government does not produce anything, whatever it gives out in benefits to someone, it necessarily takes from someone else involuntarily. That someone else is the present taxpayer, future taxpayers or all consumers when the tax takes the form of monetary inflation.

We are in the midst of the biggest free lunch program in the history of the world. Millions of businesses, municipalities, educational institutions, development projects and individuals will be getting lunch for free. The problem with it all is that they will be eating from someone else’s lunch bucket. That lunch is no longer available for the original lunch owner.

The multiple stimulus plans and bailout packages totaling trillions of dollars are based on the absurd notion that propping up prices and encouraging irresponsible consumption equals stimulus. For most of the past decade, consumers were ridiculed by moralists for their conspicuous consumption. The big screen TV and oversized mortgage payments were symbolic of the era. A question is begging for an answer from know-it-all politicians: if under-consumption is the root of today’s problems, then why didn’t the conspicuous consumption before the collapse keep the party going indefinitely?

A recession or depression only occurs, without exception, after an inflationary bubble. During a bubble, artificially low interest rates induced by monetary authorities fool entrepreneurs and investors into investing. New money from inflationary credit floods the market, making prices go up. Like a Ponzi scheme, the early profits draw more players into the game, but the available real resources don’t keep up.

New competitors use the cheap money to buy goods and services that do not expand with the money supply. Prices are bid up and, eventually, what looked like a profitable enterprise on paper becomes a big loser in real life. At the peak of the bubble, it becomes obvious that many assets, such as mortgages and financial assets are vastly overvalued. The prices are unsustainable. That is very apparent when an average wage of $50,000 supports the weight of a mortgage on an average $500,000 home. The bigger the bubble and the more overvalued the assets, the bigger the fall and the more pain that will be felt by those that made mistakes.

It is unfortunate when people have to pay the price of their mistakes, especially when the mistakes are induced by government authorities. It is far worse, however, when people who didn’t make the mistakes have to bear the price of the people who did. The free lunch mentality is contagious. It is quite obvious now that everyone is jumping on the something for nothing bandwagon. Taxpayers are forced to take over the losses of toxic bank assets so millionaire bankers can get their free lunch. Recent legislation gives trillions of dollars of free lunches to special interests and pork barrel project owners.

If you are one of the unfortunate ones who didn’t overspend and overextend, who counted the costs and the risks and who did the right thing to keep out of financial trouble, now you get your reward. You get to pay for all of the free lunches for everyone else. What a perverted sense of justice.

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