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The "No Free Lunch" Myth

Society is facing so many problems today — a shrinking job market, low wages, poor healthcare, gross inequalities of wealth...  Isn't it time to confront the root cause of all these inequities?!  I believe the root cause is the economic blinders we've carried forward from commodity-money days.  There continues to be this pervasive belief that "there's no free lunch" — allowing governments to continue to use that as an excuse for failing its prime responsibility — ensuring the welfare of its people.

A "free lunch" is available to EVERY monetary sovereign (which the US and UK are and the EU countries are not).  Monetary sovereigns are not constrained to spending only what they can raise through taxes and borrowing.  They can create money out of thin air — and that money need not create inflation!  That government cannot "afford..." is a tired and harmful belief that's causing the inequities we're experiencing. 

As an example, healthcare.  That monetary sovereigns are failing to provide quality healthcare as a human "right" is tragic.  In the U.S., simply move Medicare eligibility to birth (and drop the current 20% patient share).  Scrap the government's Medicare trust fund that's supposedly funding it and let the government pay the medical providers directly (simply creating whatever monies that may require).

Step back and look objectively at the result.  The price of medical care cannot rise (the definition of inflation) as Medicare has established the price it will pay for every medical procedure.  But won't the increased spending of the medical community (due to their greater earnings from more patients) cause inflation?  No! — no more than the greater earnings of some factory workers would cause inflation.  But won't the dollar's value fall on the currency-exchange market?  No! — it will rise because of the greater consumer consumption (which constitutes over 2/3 of GDP) of medical care.  But won't the medical community be overwhelmed by increased demand for healthcare?  No! — doctors are very capable, even today, to sorting their patients according to need — those most urgent getting immediate attention, those less urgent waiting a few days, those with routine needs waiting a bit longer, and those who have proven themselves to be pests even longer.  And seeing some overload would actually be helpful — forcing state licensing boards to free up some in the medical community (medical technicians, physician assistants, nurse practitioners, etc.) to provide medical care they're perfectly capable of.

But what about the extra money people will have as a result of their healthcare being paid for?  That money will either be spent (increasing the consumer-consumption portion of GDP) or saved (increasing the private investment portion of GDP or remaining available for future consumption).  The only question is whether it will significantly raise the demand for non-medical goods or services beyond business' ability to supply, hence raising their price.  (Keep in mind that a short-term inability to supply does not constitute inflation, but an opportunity for business to expand.)  Because of the way the extra money is spread (small amounts over an entire population and large amounts only in pockets of dire need) that seems unlikely.  (Even if fears of inflation are deemed rational, the program can be phased in, eg., dropping the eligibility age in steps, allowing time to measure the results.)

Must government first fix the prices of needed services before paying for them with created money?  No! — as an example, feeding the hungry.  In the U.S., the Supplemental Nutrition Assistance Program (SNAP) provides government-paid food-purchasing assistance via a specialized debit card system.  But these payments are debt-funded — recorded as Federal deficits, which scares people (how will we ever pay that money back?!) or incites them to anger (that's MY money they're taking!).  But those payments can safely be made with created money.

Again, step back and look objectively at the result.  Why would the prices of groceries rise?  Groceries are plentiful.  Hungry people will buy those groceries the instant credit is available on those debit cards.  But won't grocers raise their prices when they realize more people can afford them?  No! — they have competition down the road and if they raise their prices, their customers will just start shopping there. (And even if they don't have close competition, if they raise their prices, some young entrepreneur will see those heady profits and create that competition.)  No, they'll be very happy with their added sales (and so will their suppliers — the farmers and wholesalers — and our GDP will rise). 

So why not let the government spend created money for everything people want to buy?  Because that's when inflation can step in and start causing major problems.  As an example, consider housing the homeless.  Housing supply is not plentiful.  Housing is limited — the space for housing is limited — the capital for housing is limited.  Without external controls, landlords and builders would be able to raise prices at will.  That's not to say government could not devise a plan to pay for some form of housing for the homeless using created money without causing inflation — but it would obviously require much more thought and care (to avoid inflation) than the previous examples.

So government CAN dole out free money to those in need.  It's not government spending (of created money) that's the problem — it's HOW that money is spent.  As a general rule:

More customers => more demand => short supply => price increase (inflation)
More customers => more demand => plentiful supply => no price increase (nor inflation)

So how does government dole out that free money?  Simple bookkeeping, via the banking system — the same way it does all its spending!  The central bank credits the bank accounts of those the government wishes the money to go to.  And violà, there the money is for them to spend — via cash (withdrawal), check, debit card, pay phone...  Whether that money adds to the Federal debt is the choice of your legislators — and if you don't like their doing so, tell them it's so unnecessary — and point them to papers like the following (which are especially easy reading).

The Basics of Modern Money, Geoff Coventry
The Biggest Myths in Economics, Cullen Roche
Seven Deadly Innocent Frauds Of Economic Policy, Warren Mosler

For those worried about the cultural consequences of government spending for welfare purposes (encouraging sloth, laziness, indolence, etc.) — in this age of technology there are many provisioning alternatives — see, eg., our Job Guarantee program proposal.

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