The Economics of Free Money

Free money generally isn't. Understand why and you might find something free that is worth more than you pay for it. Embrace too much positive thinking and prepare to get ripped off.

There are shady offers out there: short-term loans at astoundingly high interest rates, gambling sites, day trading systems of dubious merit, and more. Let us consider the trading systems. Do you really think it is easy to outwit the PhD mathematicians who do this for a living? Could there really be a system to do so available for a few hundred dollars? If such a system existed, the creator could make far more applying the system than selling the secret online.

Then there are the somewhat more legitimate offers. Yes, you can get paid to take surveys. But look at the payments. Is it really worth your while to answer 20 questions just to make 15 cents? This money is not free; it is tedious work for less than the minimum wage.

Your challenge extends beyond mere shady characters. Giving out free money is hard to do. Suppose a billionaire wanted to make his ten billion dollar fortune available. There are over 300 million people in the United States. That comes out to about $33 each if everyone participates. This is hardly significant, so philanthropists put conditions on the money they give out. That means applying for grants, which is not a trivial effort. Then you have to do whatever you propose to do in your grant application. The money is thus not free. (For comparison, note that McDonald's gives out grants to teenagers to flip hamburgers.)

The government can afford to be more generous with its largesse, but even with the government the money is not entirely free. Think back to the early attempts at welfare. The government gave out money to poor single mothers to help support their children. What could be wrong with that? For women who already were poor single mothers, these programs were wonderful help. Alas, with such enticing money available, others began to "work" for it. Teenage girls would choose to get pregnant in order to qualify for funds. Poor couples would opt not to get married in order to qualify. Even for the original poor single mothers, the money came with a price: get married and you lose the benefits. Welfare alleviated and extended poverty at the same time.

How about government programs to help you get ahead? Some of them are useful. If you are college material and are willing to study, government provided grants and loans are indeed to your benefit. Yet even there we some negative side effects. With more people able to afford a college education, a college degree is not worth as much as it used to be. Even a law degree is no longer the guaranteed path to prosperity it once was. Furthermore, with all this government money available, colleges have been ramping up tuition.

Free money from the government is close to being free under two circumstances. First, if the government benefit, grant, or tax credit is for something you are going to do anyway, such as go to college or install a geothermal heat pump, then the money is free save for the application headaches. Second, if the money is truly unconditional, if there is nothing you can do to affect whether you qualify, then the money is free.

Unlike our aforementioned philanthropist, the government has trillions of dollars to work with. Were it to replace the current maze of grants, benefits, loan guarantees, and tax breaks with unconditional money, every citizen could receive a nontrivial sum each month, with little paperwork required.

at 5:24 PM
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