Sunday, July 17, 2011

GOP Doesn't Understand "No Free Lunch"

The most important principle taught in the graduate business economics course I took at the University of Kansas is: "There is no free lunch."

Many wealthy Republicans either don't understand that "you can't get something for nothing" or don't understand how the value of their assets depends upon the federal government providing them with a safe and financially stable environment in which to make their fortunes.

The term "free lunch" comes from the practice of some nineteenth century bars placing a "free lunch" on the bar for those who purchased drinks that might have a higher price than at other bars or be watered down. The meats were usually heavily salted to protect against spoilage which could induce patrons to purchase more overpriced drinks.

The founding fathers recognized that a federal government was necessary to their economic well being. Modern Republicans don't understand the need for a financially healthy federal government.

Americans don't get rich solely through their own efforts, but by taking advantage of opportunities and protections within the economic system managed by government.

For example, the federal government helps finance new technology such as computers. Government protects companies that invest in new inventions by preventing competitors from copying the technology without payment.

Government provides businesses with educated employees and protects against foreign and domestic sources of violence.

One of the most important purely economic actions of the federal government is maintaining the integrity of the money supply. Effective commerce requires that everyone have confidence in whatever is used as "money" particularly when the "money" is stored in computers and transferred from computer to computer.

The federal deficit poses a major threat to the integrity of America's money. Wealthy anti-tax Republicans don't understand that a federal default would reduce their wealth more than a slight tax increase would. What is important is not the amount of dollars and other assets that one owns but the value of those dollars and other assets.

Allowing a default would be the equivalent of flushing money down the toilet or burning it in the fireplace.

Wealth lost through default would be gone forever. Money invested as taxes would eventually come back to those paying increased taxes.

For higher income individuals taxes are a form of investment. Individual businesses invest in government to finance those amenities such as roads and airports that all businesses share as well as financing other activities such as national defense. Businesses get a return on the investment by taking advantage of the economic environment provided by government.

Biologists talk about the food chain and how very small plants and animals become the food for small animals which are then food for increasingly larger animals. If something happens to the small life forms the larger animals will eventually have trouble finding food.

The economy has what might be called a money chain. Those at the bottom of the chain pay their money to individuals and businesses in exchange for goods and services. These individuals and businesses then purchase from those higher up on the money chain.

Some wealthy anti-tax Republicans don't understand that cutting Social Security payments to reduce the deficit would reduce their income. Most Social Security recipients spend everything they get. If their benefits are reduced they will buy less. Some companies they purchase goods and services from may have to lay people off to cut costs. The result would be less money moving up the money chain to those on top.

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