by 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. • (1271 views)