No, Paul, Wealth Transfers are NOT a "Free Lunch"

One of the first principles that supposedly is taught in formal economic study is the Law of Opportunity Cost, with the simple acronym being TANSTAFL: “There ain’t no such thing as a free lunch.” From that hallowed halls of Princeton University, the Land of Privilege, the view is different.

At Princeton University, economists (and probably people in all of the other departments) teach that government is magic, and that financial trickery is the same thing as creating wealth and bringing about legitimate economic growth. Or, to put it another way, Paul Krugman claims that at certain times (when the “lower bound” of interest rates is zero — the Keynesian “Liquidity Trap”), that financial tricks can create the “free lunch.” (Those are his words, not mine.)

In a recent blog post, Krugman once again claims that tricks can create the “free lunch,” which matches what he claims in his book, The Return of Depression Economics. (Once assigned the book as reading for my MBA students, and even many of them were able to see the holes in Krugman’s arguments. But, then, The Great One is not known for arguing, preferring the insult and the appeal to academic privilege instead.)

He lays out some scenarios, such as outright printing money or having the Treasury mint a three-trillion-dollar platinum coin and deposit it at the Federal Reserve System, but says they are not feasible? Why? There is a legal debt ceiling set by Congress, which I gather from this post is the only thing keeping these schemes from being realistic. He writes:

In reality, to pursue the thought further, the coin really would be as much a Federal debt as the T-bills the Fed owns, since eventually Treasury would want to buy it back. So this is all a gimmick — but since the debt ceiling itself is crazy, allowing Congress to tell the president to spend money then tell him that he can’t raise the money he’s supposed to spend, there’s a pretty good case for using whatever gimmicks come to hand.

Krugman’s next comment is even more puzzling, given what he has written in the past:

It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public.

But why should that matter, given Krugman’s earlier statements that (1) the Fed should be permitted to purchase short-term Treasury paper in the primary market, thus monetizing the federal debt directly, and (2) that public debt is not much of a problem, since “we owe it to ourselves.”

He goes on:

We are living in weird economic times, where many of the usual rules don’t apply and there are big free lunches to be had. But not everything is a free lunch, even now.

 ’Tis true, we are in weird times. But those times are better explained by the Austrian Business Cycle Theory than the contradictory madness that comes from Krugman who apparently was for printing money before he was against it.

The vast pull-the-rabbit-out-of-the-hat schemes by the Fed in the end are little more than naked wealth transfers. By propping up the financial institutions that made bad decisions, the Fed is disregarding price signals and rewarding the people who made bad decisions at the expense of those that didn’t. Wealth transfers might perform political miracles — the last election proved that point — but they are not free lunches. Indeed, they are very expensive lunches, much more costly than should be the case.