Broken Windows & Opportunities Lost: What the Big Spenders Forget

BrokenWindowThumbby Timothy Lane
Keynesian economics is based on the idea that one should spend more than one collects in hard times (and less than one collects in good times, though they often seem to forget that). The modern Keynesians (such as Joseph Stiglitz and Paul Krugman) seem to consider government spending, in and of itself, a panacea for the economy. The Obama stimulus bill (which I refer to as the SwindleUs, from a sign that Michelle Malkin once mentioned in a column), in particular, was based on this notion, and clearly has failed.

The reason takes us back to about 1850, when the French economist Frederic Bastiat was a member of the legislature and an opponent of government spending. Bastiat used a broken window as an analogy for the pork barrel. Basically, no one would seriously proclaim that the hoodlum who breaks someone’s window is a benefactor to society, even though replacing the window will provide business for the local glazier. The reason is that the money that goes to replace the window would instead have gone for some other purpose which would presumably have made the purchaser (or investor) better off instead of merely the same as he had been before the window was smashed.

But we don’t see what didn’t happen. So it is with government spending: we see whatever benefits there are (or are claimed to be), but not the costs of taking that money out of the economy in one form or another. As a result, the Keynesian notion has become known as the broken-window fallacy.

Politicians, especially those who love spending, are carefully unaware of the broken-window fallacy. Modern liberals even seem to be unaware of the basis for it. When Robert F. Kennedy gave a speech on the limitations of GNP in 1967, he noted that GNP isn’t reduced by the damage caused by riots (a major problem back then), but is increased by the cost of repairing all that damage. Yet less than 20 years ago, Labor Secretary Robert Reich smugly observed that massive midwestern floods would at least benefit the GDP because of the need for repairing the damage.

The broken-window fallacy is basically a microeconomic concept, known there as opportunity cost. Thus, the money you spend on a new car is money not spent on other purposes, or invested – in which case the long-term cost is not only the money (and any interest payments), but any investment income foregone. But microeconomics is little considered in Washington, DC. We see this also in their apparent ignorance (or more likely unconcern) for the concept of supply-and-demand, which indicates that minimum-wage laws will negatively affect employment among workers affected by it.

The concept also turns up in game theory. There are such things as zero-sum and non-zero-sum games. In the former, what one side wins the other loses; gains and losses must add up to zero. In the latter, both sides can gain (or for that matter lose). This is how the economy works, which is why we can have economic growth. By contrast, since government involves taking money from one person or group to give to another, it’s clearly a zero-sum game. • (1195 views)

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16 Responses to Broken Windows & Opportunities Lost: What the Big Spenders Forget

  1. Brad Nelson Brad Nelson says:

    I really really like this article. It takes one element of economics and makes it fairly understandable. You didn’t try to bit off more than you could chew. Maybe that’s why Thomas Sowell’s daunting book titled “Basic Economics” (generally regarded as a fantastic book) still sits unread on the shelf. 🙂

    The only thing I would add is that I don’t think it’s so much that these Keynesians don’t understand simple arithmetic. It’s that they don’t want to. Their beliefs reinforce their self-serving idea that government (and thus themselves) are the real engine of the economy.

    And that’s a heady idea. I takes a humble (I would say just “normal”) person to admit that the baker does more for us in pursuit of providing for himself (via making products such as bread and muffins) than all the narcissistic, conceited central planners who have delusions of adequacy.

    • MarkW says:

      I strongly encourage you to bite the bullet and read Dr. Sowell’s book. You can do it one chapter at a time if reading the whole thing is too daunting.

      • Brad Nelson Brad Nelson says:

        Thanks, Mark. I’ll try to lay my girly-man fears aside and do that. It’s on my Kindle now, so I have (had) every intention…

  2. MarkW says:

    Keynsians believe in a mythical pot of money that is sitting unused somewhere. They believe that when govt seizes this pot and spends it, that it can by definition, improve the economy, since they have put that money back into circulation.
    The problem is that like most mythical things, this pot of money does not exist.
    Even when corporations appear to be “sitting” on their cash, they are still depositing it in banks, which enables the banks to lend it to people who need it.
    The other aspect is how people (and companies) react when govt steps in to “seize” money that the govt believes they aren’t using properly.
    They either stop making money alltogether. Why make money if someone else is going to enjoy the fruits of your labor?
    Or they find a way to hide that money so that govt can’t get it’s hands on it.
    In either case, they are acting less economically efficiently than they would, absent govt interference.

    • Brad Nelson Brad Nelson says:

      Great points. We can see this statist point of view in both parties. They share the exalted conceit that they know better what to do with our lives and resources than we do. And it’s a convenient conceit because it leads to them having more and more power.

      And one of the cynical, crafty, or just demonic aspects of statism as it is being practiced today is that statist policies (especially via government schools and welfare programs) tends to dumb-down the populace and leave them less able to make their own decisions. Whether this is self-conscioiusly planned or is the natural outcome of their arrogance hardly matters.

  3. RobL_V2 RobL_V2 says:

    When asked if it was moral to spend and incur a debt upon our grandchildren Keynes replied something like, ‘What does it matter, we’ll all be dead.’

    That’s all you need to know about Keynsian economics in my book.

    • Brad Nelson Brad Nelson says:

      Wow. Did he really say that? Indeed, that’s all you need to know. Great point.

      • Timothy Lane says:

        You may recall that the bad guys in Atlas Shrugged liked to say, when long-run considerations are brought up, “In the long run we’ll all be dead.” She got that from Keynes. I also recall seeing it used by a liberal (I think it was Hubert Humphrey) in the 60s.
        Incidentally, in microeconomics, the long run can be as little as a year. It’s fine with me if Krugman is gone that soon.

    • faba calculo says:

      It sounds like you’re thinking of his famous quote, “In the long-run, we’re all dead.” And it wasn’t an answer to the question about the morality of taking on debt. It was his rebuttal to the people who kept saying that the Depression would right itself “in the long run”. He was saying that, given how long the Depression had already gone on, it was too little to merely assure that in some “long-run” things would get better on their own.

  4. NAHALKIDES NAHALKIDES says:

    Good article. The economic ignorance of the Democratic Left is truly appalling, but then, they’re not interested in a strong economy, they’re interested in power. And the media being their cheerleaders fails every time to point out their ignorance. When Barack Obama repeated the Luddite notion from 150 years ago that technological progress puts people out of work (his remark that unemployment was high because of ATM machines), he should have been laughed out of office, and instead there was stone-dead silence.

    You’d think the failure of Obama’s stimulus to stimulate anything except government would finally nail the coffin shut on Keynesian economics, but then again deficit spending is the hallmark of the Welfare State, and it’s not going anywhere until we finally come to our senses and put an end to massive income redistribution.

    • faba calculo says:

      I don’t think that believing that the presence of ATMs (or, for that matter, online banking) will lead to their being fewer tellers makes one a Luddite.

      In fact, via both conversations with industry experts and econometric modeling, BLS is projecting that the number of tellers out there will increase by 1% over the next ten years, whereas employment in general will increase by 14%. And, in our conversations with the industry experts, technology is listed as a major reason (though the fact that the days of rapid expansion of the branch banking seem to over is also prominently mentioned).

      (Interestingly enough, though job growth for tellers looks poor, the availability of these positions to job-seekers remains good, as people who have these jobs tend to move relatively soon. So, looked at that way, while Obama’s comment might not make him a believer in Luddite myths, it does make what he said wrong.)

      • Kung Fu Zu says:

        This subject requires much more space than we can, probably, dedicate to it.

        It fact, technological progress does put some people out of work. The classic example used to show this is how the automobile put many farriers/etc out of work.

        The same is true today in manufacturing. There is no doubt advances in technology have reduced the work forces in manufacturing substantially, while productivity has risen. I have seen this around the world in my business.

        What must be taken into account is the number of new jobs created due to the creation of the new technology itself, as well as jobs created because the new technology facilitates action which would otherwise be too expensive or impossible to bring about.

        • Timothy Lane says:

          Overall, technology tends to increase productivity. This means that the same production requires fewer jobs, but in the long run it means more production without ultimately reducing jobs (though they may be reduced for other reasons).

        • faba calculo says:

          But what doesn’t take a lot of space is realizing that Obama probably wasn’t, even remotely, being a Luddite when he made his claims.

          There are sound places to be against the Obama agenda, and then there’s just coming down with a bad case of ODS ( Obama Derangement Syndrome).

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