Broken Windows, Fractured Logic

Amazingly, people are beginning to ask if the hurricane is a stimulus, is an enhancement of the economy. They act as if Bastiat and the Broken Window Fallacy never existed.

In essence, the Broken Window Fallacy shows that money from the shopkeeper goes to benefit the glazier and only restores the status quo versus the scenario where the shopkeeper pays the glazier for something new that enhances the status quo. The Broken Window Fallacy is nothing more than wealth shifting.


Bastiat’s original parable of the broken window from Ce qu’on voit et ce qu’on ne voit pas (1850):

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son has happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—”It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”
Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

A Formula Dangerously Easy for Politicians

gdp=consumer spending+investments+government spending+(exports-imports)

What about this formula is peculiar? This formula is how we judge our economic success yet it has a strange quality: Aside from exports, it measures spending, not production. Any money spent is inherently positive for the sacred GDP. So if the consumer or the government just borrows like crazy and spends the money on doughnuts, that raises GDP. Not to disparage doughnuts; they are wonderful. And certainly the money spent on them will percolate down through the doughnut industry for the betterment of all. But this does raise a point: Is some spending better than others? Is money saved and spent better than money borrowed and spent? Is money spent on small start up companies better than money spent on swampland in Florida? Is the money spent raising a building the same as money spent razing one?

Are all money and all spending created equal?

Japan, Nihilarians and The Biggest Bastiat Broken Window in History

One of the weaknesses in the modern cultural infrastructure is the notion that action is inherently valuable. Perhaps it is an unfortunate hangover from the choice-obsessed existential period but it permeates everything, chilling common sense and often building mountains out of molehills. So crazy Gaddafi gets a military response from the entire Western World, water pistols are outlawed in kindergartens, building codes have more prohibitions than the Torah. Now editorials are proclaiming the advantages of the destruction of Japan: It will allow for building and growth.

Could any statement be more unreasonable? Should the Japanese provide the GDP coup de grace and finish off what is still standing? On a broader level, is this the subtle reason countries go to war, to be defeated and destroyed so the can beat their enemy by their subsequent great postwar growth? Should each country have a Bureau of Growth that selectively destroys areas of high productivity in the country so it can eventually be reclaimed? One wonders if the muted charitable response to the unfortunate Japanese does not spring from this weird belief that they are an able people and, in rebuilding, will be better off.

Symbolic work is Sisyphus; economic work is productive, creative, and meaningful to more than the individual. Economic work is of benefit to all. Symbolic work might keep you off the street, might distract you from your ailments, make you a better person. But symbolic work will not benefit the economic community. Building a house, tearing it down, rebuilding the house, tearing it down for generation upon generation is meaningless, worthless and distracting. Trying to make it valuable is insane.

There are illnesses where the afflicted repeat physical acts that have meaning to only them, pulling out invisible drawers, hanging invisible pictures. A wonderful scene in the movie Blow Up had the lead character, in his final surrender to fantasy, join a tennis game played without a ball. It's doubtful that this nihiliarian movement is pathological, it's probably just easier than hard analysis and difficult choices.

It's easier than honest thought.

In the Land of the Blind....

There is a notion about that all of America's problems are more than self-inflicted, they are purposeful. The question is the motive.

Michael Moore, proving the democratic principle that any man may speak, stated that Wisconsin was not going broke--despite its increasingly negative balance sheet--because there was wealth in the state that could be confiscated. Confiscated, like some foundationless third world soundtruck democracy. E.J. Dionne wrote in the Washington Post that the "We're broke" phrase that has been used recently is simply false. Interest rates are low so we can borrow and there are a number of "tools" that can be used like "taxes, layoffs, spending cuts, debt shifting". But who is willing to bell the cat with these tools? Romer has already said there is a direct correlation between raising taxes and decline in both GDP and employment. ( http://steeleydock.blogspot.com/2011/03/obamas-rock-and-hard-place.html) And who gets laid off? And whose projects are cut with the spending cuts? With the deficit in the trillions, the current Congress, both parties, can't seem to cut much. And of course there is the promise of the mysterious government "investment." We'll be able to see "government investment" in action soon in Japan, rapidly becoming the world's largest imaginable application of the "broken window theory."

According to Dionne, the motive for this "We're broke" talk is to decrease taxes for the rich. This seems pretty thin, especially with so much at stake. One would expect much more evil than tax breaks for friends if the economy is going to be crippled by nefarious manipulation. But maybe it is true. Maybe these people are easy to compromise, even over big topics. Maybe even as crooks they have a small vision.

The other side of the aisle sees the left's behavior over the last years more simply: It's treason. The idea is to overload the system with debt until it collapses so they can rebuild it to their liking. While this sounds totally insane it has had some traction because of the left's persisting association with old people with homicidal revolutionary pasts, like Ayers, who continue to float about the periphery like Polansky at a film event, staining everyone in sight.

Recently Glenn Beck set aside part of his show to attack the conservative darling James O'Keefe and his NPR "sting" operation because he thought it was dishonest. In the national debate with these other people, he sounds like Lincoln.

Government Spending: Y Oh Y?

GDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X - M).

Y = C + I + G + (X − M)

This is the basic economic equation that appears in every debate over private and public economic activity. Consumption (and exports) are a proxy for production. One can see the inherent relationship between consumption and production; if a society consumes more than it produces, imports (M) increase, net exports (X) decrease and the GDP drops. Thus consumption, itself, cannot keep a society going. Savings, here, could be seen as a threat if it is removed from the economy and goes under the mattress but is a boon if it goes into investment. But investment itself might fail, produce nothing to consume or export, take that money from consumption and be a negative. So consumption could be a negative, investment could be a negative and the import-export balance could be a negative. For some reason we never look at the government spending in the same light.

The key point is, unlike the other factors, government spending (G) is not a proxy for production. The government might build a school for 600 kids grade 1 through 4. That seems like a good place for money to go. But what if the school has only 30 kids show up, or what if each floor has a their own electron accelerator? That will still show up as a positive contribution towards GDP. If the government builds the school for 1200 kids, the contribution to GDP will be double, even though there will be no more use for it than for the school built for 600. If the government realizes its mistake and tears the school down, that expense is more government spending and more contribution to GDP. So the building and then the destruction of a school are both positive contributors to GDP; that is clearly unreasonable. Had a private school made the same investment it would report losses that would accurately reflect the circumstances. It might even go out of business and become fertilizer for the next economic planting. More, the government takes money in taxes to pay for the useless school that could have gone elsewhere, consumption or investment, that would have also contributes to the GDP and might have had the additional advantage of stimulating further investment.

The unused school will never show up in the equation accurately. Government always takes money that might be used otherwise as a real contributor to the economic community and puts that money in areas that are open-ended, that are never judged economically. Moreover, as government spending always counts towards GDP, it is--by definition--productive regardless of how inefficient or costly. Wars are always "productive" but terribly inefficient and inflationary because the government pays for things that blow up on purpose. It would be like building refrigerators that automatically stopped working in 3 months--or building schools to tear them down.

The TARP program is winding down; it is a temporary economic stimulus and its time is up. However, there is an infrastructure of 17,000 employees and they will not be going away. So the purpose of the bureaucracy has ended but the bureaucracy has not. That expense will be counted as a positive for the GDP. There is no negative for government spending. Ever.

Until we are able to look at government spending clearly, not as an absolute number but as a contributor or a threat to GDP, we will never make progress with our economic problems.

War and Inflation

A look at any debt graph from the last century will reveal a truth of life: Inflation follows war. In fact war is the ultimate example of "the broken window" theory where production is gratuitous and does not contribute to the growth of the society. At war the whole county is devoted to producing things that blow up. What economic model could possibly be worse. Every war the Americans have fought in the last century resulted in inflation and this effort in The Middle East will too.
But this has not always been true. War has been--for the winners--a very successful national investment. History is filled with examples of war as a tool for expansion and expropriation. For the more primitive, the enemy's fields feed the troops and the victims allow the soldiers sporting diversion. The more sophisticated extort from the defeated in reparations. But sometimes warriors hit the lottery: One Roman emperor found so much silver on a foray into eastern Europe that it alone supported the military and domestic efforts of Rome for the next generation. The conquistadors were a gold mine for Spain. But the Americans have broken new ground with war: They don't steal things from the defeated. In fact they usually give things to them. While the Russians were dismantling every plant in East Germany and sending it home to Mother Russia, the Americans were Marshalling money to rebuild West Germany into a shining example of the west and, incidentally, a fine economic competitor. Ditto the Japanese' cultural U-turn.
This is a new concept and the Americans are consistent. They invaded Kuwait, saved the Saudis (who hate them), rescued the Kuwaitis (who hate them) and saved the country's oil fields from the Iraqi sabotage and, as well, saved the planet from their smouldering pollution. In spite of their slavish almost pathological relationship with petroleum, the Americans stole not one drop but cheerfully returned it to their rightful owners, the nomadic tribe that happened to be there when it was discovered. They are now in an endless campaign against an enemy with the GDP of the Tutsi.
There must be some explanation for this behavior. Perhaps it is the American respect for private property. My advice is: Do not attack and kill people unless you are willing to steal from them.