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Thursday, August 13, 2009

Paying people to break windows ‎

Paying people to break windows

From the Silver Analyst, Steve Saville

The "Broken Window Fallacy" originally described by Bastiat in 1850 is well
known in economics, thanks in large part to Henry Hazlitt's excellent book
"Economics In One Lesson". Wikipedia
<http://en.wikipedia.org/wiki/Parable_of_the_broken_window> provides the
following explanation:

"The parable [of the broken window] describes a shopkeeper whose window is
broken by a little boy. Everyone sympathizes with the man whose window was
broken, but pretty soon they start to suggest that the broken window makes
work for the glazier, who will then buy bread, benefiting the baker, who
will then buy shoes, benefiting the cobbler, etc. Finally, the onlookers
conclude that the little boy was not guilty of vandalism; instead he was a
public benefactor, creating economic benefits for everyone in town."

"...The fallacy of the onlookers' argument is that they considered only the
benefits of purchasing a new window, but they ignored the cost to the
shopkeeper. As the shopkeeper was forced to spend his money on a new window,
he could not spend it on something else. For example, the shopkeeper might
have preferred to spend the money on bread and shoes for himself (thus
enriching the baker and cobbler), but now cannot because he must fix his
window.

Thus, the child did not bring any net benefit to the town. Instead, he made
the town poorer by at least the value of one window, if not more. His
actions benefited the glazier, but at the expense not only of the
shopkeeper, but the baker and cobbler as well."

The popular "Cash For Clunkers" program implemented by the US government is
a great example of the "broken window fallacy" in action. Under this program
the government pays people to destroy their old cars on the proviso that the
money they receive is put towards a new car. The idea is that the additional
spending on new cars will help support the auto industry and give the
overall economy a boost.

"Cash For Clunkers" is akin to paying people to break windows. It gives a
temporary boost to the makers of new cars in the same way that the breaking
of a window gives the glazier in Bastiat's parable an immediate benefit, but
it makes the overall economy poorer.

But let's put aside logic for a moment and assume, for the sake of argument,
that "Cash For Clunkers" and programs like it actually offer a net benefit
to the economy. The question then becomes: why stop at old cars? Few
industries are in worse shape than the construction industry, so why not
start giving people cash to have their old homes demolished on the condition
that they use the cash for a down-payment on a new home? And for that
matter, why stop at homes? Just imagine, for instance, how much new work
could be generated for the construction industry by destroying an entire
city or two.

Programs such as "Cash For Clunkers" make no economic sense, but it is not
difficult to understand why they appeal to politicians. They are politically
appealing because the economic positives (more jobs in a particular
industry) can be seen and therefore pointed to when on the campaign trail,
whereas the negatives will be unseen (the overall economy will be weaker,
but it will be impossible to show that the weakness is partly attributable
to the policy). In the specific case of "Cash For Clunkers", politicians can
also claim that they are helping to save the planet by encouraging the
replacement of old 'gas guzzlers' with the new fuel-efficient machines.

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