The chairman of the president’s Council of Economic Advisers is a man named Gregory Mankiw. Recently he remarked, "There are no free lunches." He was speaking about the reform of the Social Security system, which is in financial straits. By 2018 the SS tax won’t cover the system’s expenses, and by 2042 the social security "trust fund," consisting of IOU’s, (what else?) will be exhausted.
Jack Kemp was unhappy with Mankiw’s remark, declaring it a "gaffe." What Mankiw said, in addition to his comment about the free lunch, was "The benefits now scheduled for future generations under current law are not sustainable given the projected path of payroll tax revenue. They are empty promises." That’s true enough, and has been true for decades, at least.
Still, my sympathies are with Kemp. Surely the chairman of the Council of Economic Advisers should know that, not only is there a free lunch, there’s a free breakfast and dinner, too. You simply "pay" by check.
If I took you and a group of your bests friends to lunch and gave the restaurant a check for the bill, plus tip, would it have cost me anything? Not at the time that I made that "payment." Eventually, the check would find its way to my bank, and my purchasing power would decline by the amount on the check. (Of course, if I weren’t planning to purchase anything else with those numbers, it wouldn’t make any immediate difference). But what if the check didn’t make it to the bank? Suppose the restaurateur endorsed the check over to one of his suppliers? Would that check have bought lunch? Yes, and some restaurant supplies, as well. And what if the supplier endorsed it, in turn, over to one of his employees, as compensation for services? Would I have spent anything on the lunch I bought you? No, and the check would have purchased, in addition to lunch, restaurant supplies, and services. If the employee then endorsed the check over to an electronics store to buy a DVD player, and the electronics store had endorsed it again, to pay the rent, etc. — then what?
Eventually, there’d be no room on the back of the check for additional endorsements. At that time, two possibilities would present themselves. Someone might point out that the check had performed so well as money that endorsements were superfluous. After all, who paid any attention to them? So one suggestion would be simply to use the check as money, despite the inconvenience that it was made out for 127.37. The other, less imaginative, suggestion would be to take the check to the bank for "payment." (Payment being different pieces of paper with numbers engraved, rather than written, on them, plus some metal tokens, totaling 127.37). Finally, in that event, I would end up "paying" for lunch.
If I were determined not to pay for lunch — or anything else, for that matter — I would have to devise a way to keep my IOUs from ever reaching the bank, or being payable if they were. It wouldn’t be hard. First, I would have to have them declared a "legal tender," so that those who refused them could have no claim upon anything else of mine. Secondly, I would issue them in set amounts, for convenience sake. (To leave a blank line on them, on which any amount could be written, might attract undesirable attention to the fact that the numbers stood for nothing). After that, all lunches would be free — for me! You, on the other hand, would have to do some kind of work to get my non-payable IOUs, but that’s only fair: if just anybody could create them, their worthlessness, as Keynes put it, would become apparent.
No free lunch? Hardly! For the creators of modern fiat, money is no object. Which, come to think of it, is exactly what it is.