It’s difficult for me to believe that we still live in a time where taking money from some party and “transferring” it to another is somehow seen as beneficial to any society or economy in any measure whatsoever. It’s equally difficult for me to believe that we still live in a time where something of value accidentally or naturally destroyed can ever be seen as a net profit to society or any economy.



The Broken Window Fallacy

Frédéric Bastiat, The Parable of the Broken Window, from Ce qu’on voit et ce qu’on ne voit pas (That Which is Seen, and That Which is Not Seen), 1850—over 160 years ago.

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square 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.

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs; this is that which is seen. If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs; this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labour, is affected, whether windows are broken or not.

Now let us consider James B. himself. In the former supposition, that of the window being broken, he spends six francs, and has neither more nor less than he had before, the enjoyment of a window.

In the second, where we suppose the window not to have been broken, he would have spent six francs on shoes, and would have had at the same time the enjoyment of a pair of shoes and of a window.

Now, as James B. forms a part of society, we must come to the conclusion, that, taking it altogether, and making an estimate of its enjoyments and its labours, it has lost the value of the broken window.

When we arrive at this unexpected conclusion: “Society loses the value of things which are uselessly destroyed;” and we must assent to a maxim which will make the hair of protectionists stand on end – To break, to spoil, to waste, is not to encourage national labour; or, more briefly, “destruction is not profit.”

What will you say, Monsieur Industriel — what will you say, disciples of good M. F. Chamans, who has calculated with so much precision how much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?

I am sorry to disturb these ingenious calculations, as far as their spirit has been introduced into our legislation; but I beg him to begin them again, by taking into the account that which is not seen, and placing it alongside of that which is seen. The reader must take care to remember that there are not two persons only, but three concerned in the little scene which I have submitted to his attention. One of them, James B., represents the consumer, reduced, by an act of destruction, to one enjoyment instead of two. Another under the title of the glazier, shows us the producer, whose trade is encouraged by the accident. The third is the shoemaker (or some other tradesman), whose labour suffers proportionably by the same cause. It is this third person who is always kept in the shade, and who, personating that which is not seen, is a necessary element of the problem. It is he who shows us how absurd it is to think we see a profit in an act of destruction. It is he who will soon teach us that it is not less absurd to see a profit in a restriction, which is, after all, nothing else than a partial destruction. Therefore, if you will only go to the root of all the arguments which are adduced in its favour, all you will find will be the paraphrase of this vulgar saying – What would become of the glaziers, if nobody ever broke windows?

Now, a few words from a few of your current crop of leaders imbeciles…

Paul Krugman, September 11, 2001 terror attacks:

Ghastly as it may seem to say this, the terror attack — like the original day of infamy, which brought an end to the Great Depression — could even do some economic good…. First, the driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I’ve already indicated, the destruction isn’t big compared with the economy, but rebuilding will generate at least some increase in business spending.

The Economist, “Cash For Clunkers” program:

The boost in demand that the rebates have brought about is exactly the sort of stimulus that is urgently needed to escape what John Maynard Keynes called a “liquidity trap”. According to his theory, consumers may become so worried about the economy that they cling to as much liquid wealth as possible, cutting their spending sharply and thereby triggering precisely the slump they feared. Moreover, as stimulus policies go, cash-for-clunkers looks to be unusually effective.

C. Fred Bergsten, about the 2004 Indian Ocean earthquake and tsunami:

“Perverse as it seems, disasters of this type usually do have positive long-term effects. The reconstruction process itself requires a lot of new investment, some of it in this case financed by foreign assistance, but there will be new investment, that will create construction contracts, that will generate jobs, that will boost economic growth, in the short to medium run. Moreover, even for the longer run, the reconstruction may produce more efficient facilities and more extensive facilities … when they put down new resort hotels, they’ll be more more modern, they’ll be more attractive, they’ll probably bring in more people in the future. So again, though it seems perverse, the net effect of these things frequently is to boost economic activity, at least for the short to medium run, and to improve the underlying infrastructure and therefore the long-term prospects as well.” He continues with examples like Germany and Japan after World War II, and other wars and disasters.

Lawrence Summers, March 2011 Japan earthquake:

Friday’s massive earthquake is yet another challenge to Japan’s recovery but it may provide a jolt to the economy over the short term, Lawrence Summers, president emeritus of Harvard University and former director of the White House National Economic Council, told CNBC. The biggest earthquake in 140 years hit Japan Friday, triggering 10-meter high tsunami waves. “If you look, this is clearly going to add complexity to Japan’s challenge of economic recovery,” Summers said. “It may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place.” After the Kobe earthquake in 1995 Japan actually gained some economic strength due to the process of reconstruction, he added.

Just a final thought.



BIG DIFFERENCE

So most of this dealt with so-called “creative destruction” and its “stimulus” effect. How about “transfers?”

In economics, a transfer payment (or government transfer or simply transfer) is a redistribution of income in the market system. These payments are considered to be exhaustive because they do not directly absorb resources or create output. In other words, the transfer is made without any exchange of goods or services. Examples of certain transfer payments include welfare (financial aid), social security, and government making subsidies for certain businesses (firms). [emphasis added]

In other words, if the State takes $100 you were going to spend on groceries (goods) or a concert (services) and gives it to someone else who spends it on goods and/or services, nothing has happened in economic terms. You’re just a cog in the machine. So let’s examine a different sort of transfer, one that’s not included in the parable, above, but in fact makes it much worse if integrated and considered.

All of this “creative destruction” and “stimulus” the government oversees comes at significant overhead. All figures from the US Census Bureau, 2011 data.

Total federal, state and local employees: 22,267,206 (that’s Million with an ‘M’)

(that’s Million with an ‘M’) Total federal, state, and local employee monthly payroll: $86,496,208,598 (that’s Billion with a ‘B’)

(that’s Billion with a ‘B’) Total federal, state, and local employee annual payroll: $1,037,954,503,176 (that’s Trillion with a ‘T’)

(that’s Trillion with a ‘T’) Total US Population: 314 Million

Share of monthly payroll attributable to each man, woman, child and infant: $275.47

Share of annual payroll attributable to each man, woman, child and infant: $3,305.59

What a family of 4 pays annually for federal, state and local government payroll: $13,222.36

OK, just so we’re clear here, that 13K is only for the payroll. It’s not for the buildings, cars, trucks, equipment, procurements, maintenance, upkeep, INTEREST PAYMENTS ON THE $16 TRILLION WITH A ‘T’ NATIONAL DEBT, or PENSIONS… et cetera, et cetera.

Let’s not quibble over what portion of that represents things you’d need or want to buy in terms of services anyway. The difference is that for one, it’s your choice to buy such services or take your chances. Second, you would be buying from a competitive marketplace where cost control is paramount and turning a profit over time mandatory. Go ahead, tell me about fire, police, courts and military. How often does the average person actually use these services? Three thousand or 13 thousand per year, year in and year out?

…Or, in terms of the glazier, this was a direct payment of 6 francs from James B. to the glazier, presuming that other glaziers would have offered comparable prices and quality of service. But it could have been worse. In a world of government transfers, James B. has to make 9 francs, because 3 francs go to Uncle Sam. And the glazier doesn’t actually get 6 francs, but only 4.5.

So in reality, James B. is 9 francs worse off—as well as being worse off for not having new shoes—the glazier only 4 francs better off, the shoemaker is 6 francs worse off and the agent of transfers (Uncle Sam) is 8 francs better off (he’ll get his 3 franks from the shoemaker one way or another).

So there, if you’ve read and understood this, I proclaim you smarter than Paul Krugman (proof that the Nobel Prize for anything but the hard sciences is a joke), The Economist, C. Fred Bergsten, and Lawrence Summers.

Now go forth and prosper in spite of it all, because nobody gets out alive, and time is short.