Saturday, May 20, 2017

The Myth of the Free Lunch

In Form 1, my math teacher Mr. Iro would take our class out to have pizza and discuss philosophy. It was during these pizza limes that I learnt about the economist Milton Friedman, and his famous “free lunch myth”. According to Friedman the free lunch myth is the belief that “governments can spend money at nobody’s expense”. In reality Friedman argued, goods and services must be paid for, and the idea that governments can provide these at no cost to the persons receiving them, is a myth. Mr. Iro was a good teacher. Unfortunately he was also a pedophile and was arrested a year later. In hindsight I should have realized why he kept telling me, “Darryn free pizza is a myth”.

Successive governments have done a good job at convincing Trinbagonians that we can have a free lunch. Enjoy some free university tuition, free medication, state housing, make-work job programs, subsidized inter-island transport, and lower fuel, electricity and water prices. “Don’t worry, the bill is on us,” they say. “And if you’re a religious or race based group and feeling for a snack later, we’ll have room service send you up some juicy government grants”. In 2016, the government allocated $34.7 Billion to transfers and subsidies alone. That was equivalent to 52% of our total budget. Or 100 % of Shamfa Cudjoe’s phone bill after a month abroad.  

The problem with Government subsidies is that no matter how well intentioned they are, they always do more harm than good. And they always end up benefiting the well off more than the poor.  For example, the fuel subsidy drains resources that could otherwise be spent on alleviating poverty. The Government Assistance for Tuition Expenses (GATE) benefits mostly students who can pay their way through the UWI. Subsidized utilities like electricity and water always end up suffering from poor infrastructural development, hurting supplies to the most vulnerable.  And depending on which street you live on, programs like CEPEP only benefit either “community leaders” or “notorious gangsters”.

The main problem with subsidies is that they stifle economic innovation. Since 1999 the government‘s generous handouts have been possible due to taxes collected from the energy sector. The huge oil and natural gas revenues during this time did two things; it allowed the government to ramp up spending on programs to win over voters without taxing them. And killed off any incentives to diversify our economy. This week while being interviewed by Golda Bruce, Finance Minister Colm Imbert shrugged off questions about diversification by lamenting the “risk adverse” nature of private sector. But Minister Imbert is thinking along good politics, not good economics. Political parties in T&T know that to win elections, they must promise their supporters ‘things’. And if there is no money to collect to fund said ‘things’; politics in T&T might have to be about high ideas and stuff. Gross.

This is why despite the fall in energy prices and production, the government is talking about “stimulating the economy” via spending, and raising revenue via taxes. Dr. Rowley even said that without government spending the economy would “crash”. This is a fallacy as there is enough evidence to show that it is precisely government spending which retards economic growth.  Government spending results in increased taxation, which inhibits private investment and savings. This is known as “crowding out”.  Also there is a well-established correlation between the size of the state and economic growth.  Mr. Imbert may be right to slam the private sector for being “risk adverse”, but he should acknowledge how decades of government policy created that risk adverse environment in the first place. Because it’s like criticizing your screaming neighbors for making noise, after you just went and set fire to their house.    

To his credit, Mr. Imbert has signaled his intention to phase out the fuel subsidy, reform GATE, and close down failing state enterprises. But it is unclear how far his reforms will go. And he is unlikely to curb spending on the government’s social and make work programs, or implement real policies (like low taxation, rolling back the state etc.) to grow the private sector.  He appears to foolishly believe that finance ministers can predict which industries in the future will be successful and so may adopt the tried and trusted policy of many before him called “kick the can down the road”. And why not? Politicians know that at the end of the day, Trinbagonians believe in getting their free lunch.

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