The broken window fallacy and an idiot

16 09 2009

The following is a word for word excerpt for Henry Hazlitt’s Economics in One Lesson:

A young hoodlum, say, heaves a brick through the window of a baker’s shop.  The shopkeeper runs out furious, but the boy is gone.  A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies.  After a while the crowd feels the need for philosophic reflection.  And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side.  It will make business for some glazier.  As they begin to think of this they elaborate upon it.  How much does a new plate glass window cost?  Two hundred and fifty dollars?  That will be quite a sun.  After all, if windows were never broken, what would happen to the glass business?  Then, of course, the thing is endless.  The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum.  The smashed window will go on providing money and employment in ever-widening circles.  The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look.   The crowd is at least right in its first conclusion.  This little act of vandalism will in the first instance mean more business for some glazier.  The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death.  But the shopkeeper will be out $250 that he was planning to spend for a new suit.  Because he has had to replace the window, he will have to go without the suit (or some equivalent need or luxury).  Instead of having a window and $250 he now has merely a window.  Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit.  If we think of him as part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business.  No new “employment” has been added.  The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier.  They had forgotten the potential third party involved, the tailor.  They forgot him precisely because he will not now enter the scene.  They will see the new window in the next day or two.  They will never see the extra suit, precisely because it will never be made.  They see only what is immediately visible to the eye.

The entire book is available here in plain text and PDF form.

It is one of my many totally unrealistic wishes that everyone in the world become familiar with this story and understand the implications for just about every government program in existence, especially the mother of all government programs – war. I bring this here because I recently read something absolutely horrible and idiotic on The Huffington Post. Thom Hartmann, who apparently has a nationally syndicated radio show, wrote a piece called Want to Stimulate the Economy? Lower the Retirement Age to 55 Now! Let’s get started:

One of the most powerful forms of stimulus we could apply to our economy right now would be to lower the current Social Security retirement age from the current 65-67 to 55, and increase the benefits back to where they were in inflation-adjusted 1960s dollars by raising them between 10 to 20 percent (so people could actually live, albeit modestly, on Social Security).

The right-wing reaction to this, of course, will be to say that with fewer people working and more people drawing benefits, it would bankrupt Social Security and destroy the economy. But history shows the exact reverse.

When I read drivel like this, I immediately think that anyone that isn’t too dumb to learn how to read will recognize instantly that the author is a moron who not only shouldn’t be listened to, but who really ought to be universally scorned for insulting the English-speaking world’s collective intelligence. Then I remember how much smarter I am than the average person. Fuck. Some people are pretty dumb. Some people are going to actually buy this horseshit. They might even like it so much that they begin to look forward to reading the next stinking turd this bonehead craps out. Bad ideas like this need to be destroyed before stupid people start believing them. I shall do my best. Tell all your friends.

The first thing to address is that the claim is beyond extraordinary and should be greeted with extreme skepticism. Then we must dismiss the man as a dipshit when he paints objection as right-wing, as if right-wing people are the only folks with at least a tiny bit of sense. Finally, he claims that history is on his side. Ridiculous. Let’s see how he supports his outlandish claims:

Instead, it would eliminate the problem of unemployment in the United States. All those Boomers retiring would make room in the labor market for all the recent high-school and college graduates who are now finding it so hard to find a job.

If enough Boomers left the job market, it would even flip the current dynamic of too-many-people-chasing-too-few-jobs upside down, and create a tight labor markets. Tight labor markets drive up wages.

And as wages go up, tax revenues — which are paying for Social Security (among other things) — would increase.

The first thing he completely ignores is productivity. Many of the most productive employees in out society are over 55. The young people who would replace them would not be nearly as capable of doing the same work. There are a handful of jobs that suit the young, but of course, these are not the jobs that would be opening up. Companies and entire industries with lots of people over 55 would be in a lot of trouble. Total wages would almost certainly fall along with productivity. It would almost always be stupid to pay a 22 year-old with no experience the same wage as someone with 30+ years experience. To put it another way, it’s foolish to presume that the wages of the newly employed would match the wages of the newly retired. It’s especially stupid to conclude that total wages would increase so much as to push up tax revenue high enough to cover massively increased cost of Social Security.

I wonder if this man has looked at the numbers he’s talking about? Does he have any idea how much this would increase the cost of Social Security? If I were to take a stab, I’d guess it’d be somewhere around double the current price tag which is nothing to sneeze at.

*googles*

Ah, I found state-by-state data here which show that in Arizona in 2000, there were 442,372 people aged from 55 to 64, and 465,062 were 65 and over, so the population of people eligible for Social Security retirement benefits would nearly double and increasing the benefits by just 10% would be more than enough to double the costs of the program. Now, Arizona might be an odd exception, but I seriously doubt it. Like Florida and Texas, we have more than our share of old people in this state. Can anyone take this idea seriously now? 2008 Social Security spending was $608 Billion and expected to rise rapidly in the next several years. Can anyone imagine how new tax revenues from newly employed young people could possible begin to cover this? It’s pretty much a mathematic impossibility. Yes, I understand that “tightening the labor market” would put upward pressure on wages, but that could never begin to have that great of an effect, and I further understand that a massive drop in productivity would limit the ability of many employers to pay higher wages. In fact, I would predict that several businesses would fail and we might not be much better off in terms of employment.

Moving on:

Additionally, these new-into-the-workforce people can then pay off student loans, buy new houses and cars, and otherwise drive the economy from the bottom up. Which will further increase tax revenues further strengthening the Social Security system.

Need I introduce Say’s law? Though it defies common nonsense, consumer spending does not drive an economy. It is only through production that we are able to maintain and improve our living standards, aka real income.

To further tighten the job market and drive up wages (and tax revenues), modify the Fair Labor Standards Act of 1938 — which tightened the labor market and reduced unemployment by establishing the 40-hour work week – to include all hours worked by a person. We could also, like in France, drop the 40-hour maximum-workweek threshold to 35 hours (used by the Mitterrand government to successfully lower unemployment and stimulate the French economy). A final step would be to emulate the rest of the developed world and require by law that every worker get at least two to four weeks a year of paid vacation — further tightening the labor market. (emphasis added)

I don’t understand what exactly the part in bold means. Anyway, I’m sure this is great news to employers and would-be employers. I would like to have a business of my own someday with employees, but the heavily restricted labor market scares me. I think I’d rather go to a country with more economic freedom. I can’t be alone in my thinking. France has been having labor issues for quite some time. Overall unemployment is a bit over %8, but unemployment among those under 25 has been more than 20% for the great majority of the last 15 years. France is a horrible model to emulate, but Thom gets even better:

In Uganda, Joseph Okwakoi gets it. He’s the president of the National Youth Council in that nation, a group that has considerable political power (and an affiliated Member of Parliament, the Central Youth Party’s Joseph Kasozi).

Earlier this month, Okwakoi called on Parliament and President Museveni to lower the age of retirement for government workers (the country’s largest employer) from the current 60 years of age to 55. This single act would instantly create about 15,000 job openings in the country, which could be filled by currently unemployed young people.

President Museveni replied that he’d consider it seriously, pointing out that, “The retirement age was actually 55 when we came but because of manpower shortage we put it at 60.” Now that the manpower shortage has eased, wages are falling, and unemployment is rising, he noted, “We shall study it.”

What Joseph Okwakoi understands is that there is a marketplace for labor. When the supply of labor exceeds demand, the price of labor (“wages”) falls. On the other hand, when the demand for labor is at or greater than the supply of labor, the price of labor – wages – increases.

Yes folks, we need to be more like Uganda where half the population earns less than $1.25 per day. Please pay special attention to the fact that the government is the largest employer.

I must admit that one of my dream jobs is to host a radio talk show and it’s severely annoying that idiots like this guy are the ones who actually have this job. I like the talk radio format, but I don’t actually know of a single host who’s currently on that I would actually like to listen to.

After Uganda, he starts talking about US labor history. I see nothing interesting until the end:

Then we can begin to bring our manufacturing jobs back home from China and the other important steps (Medicare For All and Card-Check for unionization) to restore the strength and integrity our nation and national economy once had. (emphasis added)

Once upon a time, US labor law was simply the First Amendment – free association. People were free to form and join unions as they wished or negotiate the terms of their employment on their own. Employers were free to fire workers for striking or joining unions and they were also free to make exclusive employment contracts with a single union or contract with multiple unions. Even without their modern legal privileges, unions in some industries were quite powerful. Currently, a union is formed when a majority of workers vote to create one by secret ballot and all workers are forced to join whether they want to or not. The vote is held when a certain threshold of workers sign a card indicating that they want the vote to happen. The card is not secret. There is move going on to change the law so that if a majority of workers sign a card, the union is automagically born. There is no secret ballot, meaning there is no privacy, meaning union thugs know who to blame when they don’t get the union they want. The history of organized labor in the US is filled with violence. Civilized people should be offended by this idea.

Yeah, I’m basically anti-union. Educate yourself.

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One response

17 09 2009
billy-jay

Ignorance of economics is a huge problem in the United States and very few people even know it.

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