Until he wrote this. Whelan is the latest example of a leading economist who evidently doesn’t know what people mean when they say “there is no free lunch.” You’d think that every economist would know exactly. And yet.
Whelan stands in prestigious company, alongside none other than Larry Summers and Brad De Long, who argued in 2012 for the existence of a “fiscal free lunch.” They were preceded in 2009 by the American and Swedish central bank researchers Christopher Erceg and Jesper Linde. The purported free lunch all of them were referring to was the benefit of fiscal stimulus at the zero lower bound.
Whelan staked his free-lunch claim while arguing with Hans-Werner Sinn, a stubbornly-as-a-mule nationalist German economist who seems to delight in demonstrating to proponents of European integration every last possible way the project could go wrong. And there are indeed a lot of those ways. Sinn’s latest is that the ECB plan to have Euro national central banks buy their governments’ bonds as monetary stimulus, so-called Euro QE, will put Euro governments at risk of some member defaulting on its bonds.
Whelan dismisses that point by arguing that QE is “close enough to a free lunch” to justify the risks. He makes a fairly cursory argument for QE’s benefits, but his gist is clear: with inflation as low and economic slack as high as they are, the benefits to stimulus are high and costs negligible. Which you can agree with or not – that’s not my point.
Summers and De Long and Erceg and Linde made more detailed arguments why fiscal stimulus at the zero bound is good policy with little or no costs. Which you can agree with or not – that’s not my point either.
My point is, there’s a very basic misunderstanding here of what the aphorism “there’s no free lunch” means. It doesn’t mean that there’s no such thing as good public policy.
Take universal public education, or any other public policy you like. Since you like it, you evidently think the benefits of that policy outweigh the costs. You might even think there are no costs to this policy at all, because it pays for itself. And you very well may be right. And that’s not a free lunch.
The point of the phrase “there’s no free lunch” is to remind people to always look at both sides of any policy. “There’s no free lunch” is a close relative of Newton’s third law, which says that for every action there’s an equal and opposite reaction. If somebody’s going to eat a lunch, somebody’s got to commit resources to make a lunch. Such laws of physics always hold true.
For an example, let’s model an absolutely ideal stimulus scenario. The government pays ten unemployed people owning ten unutilized plots of land to grow ten crops, and then sells the crops back to the ten in equal proportions for the same total amount paid. To make it even simpler, these ten people want no other products besides those ten crops, and those crops require no inputs they don’t have in unlimited supply.
In this model, the government pays only a small amount to the staff who plan and organize the program, and ten people who otherwise would have gone begging feed each other. Would that not be brilliant public policy? Sure it would be, though you know I’m not saying life’s that simple. Does anybody get a free lunch? No. Those ten people all work for their lunches.
All I’ve done is craft a model of government solving an organizational problem. My model takes for granted that the government’s ability to issue money makes it able to solve the problem where people on their own can’t. I haven’t presented any theory that purports to explain why that would be so. Nor have I tackled the tough question of whether those ten might have done something more productive for each other if government had left them alone.
That’s what the Keynesian theory in the Summers-De Long and Erceg-Linde papers is all about. It’s an argument that the government has a unique ability to solve organizational problems among unemployed people and owners of underutilized capital, which otherwise wouldn’t be solved soon enough to justify letting it be. Believe it or don’t. It’s not a free lunch.
What Whelan really means by saying QE is “close enough to a free lunch” is that he thinks its costs are minimal and its potential benefits large. As with the writers on fiscal stimulus, the benefits he assigns to QE are all about solving organizational problems.
But any policy that has an effect must have a cost. Even if the effect pays the cost, or the cost is just worth paying, the cost is always there. The only way Euro QE can have no cost is if Euro QE does nothing. Resources can’t be added in one place without being produced by work or subtracted from stocks somewhere else. There really is no free lunch.
So please: if what you mean is that something is good policy, say it’s good policy. Good policy is good policy. Free lunch is magic. Where do we go next from that, stories about legendary economists multiplying fish?
Personally I think Whelan’s enthusiasm for QE could only make sense if he’s hoping it will facilitate fiscal stimulus. I’m not an advocate of QE combined with fiscal expansion, also known as helicopter money. I think it’s potentially a hugely powerful and hugely risky combination. But I can also see that if it were managed very carefully it just might work like nothing else any advanced economy has tried since 2009, and I’m curious to see what would happen if some country did it. Preferably some smallish distant one.
But so far, the Euro Area has no plan for anything more than standalone QE, without fiscal expansion. And I think we have enough experience with standalone QE to know it doesn’t stimulate spending. All it does is devalue currency relative to assets, transferring resources from shorts to longs and from importers to exporters.
So I don’t see Whelan giving any real answer to Sinn. Sinn is looking at the euro currency union from a nationalist perspective, and seeing all sorts of risks his national government has taken on. You can disagree with his nation obsession, or be bored by his cataloguing of the various angles from which one can look at the same intra-Eurosystem risks. But there’s no denying the risks are real.
An international currency union with assets distributed across its members’ NCBs is inherently vulnerable to the risk of a member quitting and taking assets with it. Euro QE will balloon NCB balance sheets. That will balloon the potential losses from a euro exit.
On the other hand I can think of my own answer to Sinn. The euro devaluation is a big transfer of resources from the rest of Europe to Germany, as it’s by far the biggest exporter. NCB balance sheets probably won’t grow much bigger than they were in 2012, and since Greece probably won’t be allowed to play the Euro QE game, the extra risks of near-term euro exit are small.
Which might explain why the supposed hard-money hawks of the German establishment don’t seem so opposed to QE after all.
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