Sunday, January 17, 2010

People still believe 'no cost' actually means free

Published in The Tennessean, January 17, 2010

People still believe 'no cost' actually means free

by Richard J. Grant

Sign in a French hotel: "Breakfast is free." Sign in a German hotel: "You will pay for breakfast whether you eat it or not."

Regional differences in breakfast habits aside, both signs say the same thing. In both hotels the same person pays for breakfast: you, the customer.

That is what we must remember whenever the government offers us something "free." We must also be wary of promised cost savings. There are very few services that any government is able to offer more cheaply than could be done in the private market. In fact, we are lucky when a government can provide a service at only double the cost found in the private market.

Many voters still believe they're getting something for nothing — and for some this could be true. But it can never be true for everyone in total. The "something-for-nothing" mentality, especially when exhibited by voters, results in slower economic growth, fewer opportunities and less total wealth.

This will be the legacy of the current version of "health-care reform" if it passes Congress. The "price" of care might go down, but the real cost will not. Congress has never been able to impose efficiency by decree.

In this case, it will almost certainly have the opposite effect. Demand for medical services will rise, and so will the real costs, the resources that must be drawn into the provision of these services.

This is what happens to everything that the government subsidizes. It encourages the consumption of politically favored products by making them appear to be cheaper. In other words, it hides the costs.

Many people believe that solar panels and wind turbines are efficient generators of electrical energy. This illusion is maintained only with the help of government subsidies that cover large portions of the capital costs, and pay above-market rates for electricity directed into the grid.

The truth is that, with existing technology, these sources cost more than they produce in terms of both dollars and energy. They might be enjoyable for hobbyists, but they are not yet viable mass producers of energy.

The same is true with so-called "green jobs." Such jobs are found in companies that would almost certainly not exist, or would be much smaller, without significant subsidies from taxpayers. This means that each job "created" uses up more resources than it produces.

This is the effect we get from any such program whether we call it a "jobs bill" or a "stimulus package." The recent stimulus package is notorious for having spent more for each job supposedly saved than those jobs were worth. In economic terms, we all would have been better off if the government had simply handed out the cash to selected individuals. It would have caused less disruption to the economy.

During the latest financial crisis, the previous and current administrations believed that they could make it all go away by treating the symptoms. The Troubled Asset Relief Program (TARP) was touted as such a solution that would also make a profit. So far, it has lost taxpayers at least $70 billion.

Those who are fooled by the "stimulus" fallacy fail to ask the obvious: From where did the money come? It came from taxpayers and from lenders. More importantly, it came from people who would have used the money more productively had the government not pushed its way onto the scene.

In the past year, the U.S. government spent more than $3.5 trillion. That's over $400 million per hour.

For all this the Democratic vision for health-care reform is unpopular. The message from the people is blunt, but the recipients are obtuse. They push ahead behind closed doors in pursuit of this object of their obsession. Taxpayer-funded temptations are dangled before any susceptible congressman.

We all understand the electoral realities faced by our politicians. But must they run the Capitol like a French hotel that charges by the hour?


Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2010