Economics

World War & Terrorism as Economic Stimulus? Hurricanes? Earthquakes? Calling Fred Bastiat!

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Great vid illustrating Bastiat's brilliant and all-too-easy-to-forget analysis of the broken-window fallacy, the idea that some sort of natural or man-made destructive act will act as an economic stimulus.

From Atlas Economic Research Foundation.

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  1. But…but…but…Krugman won a Noble Prize. He MUST be right, right?

  2. Wait, you mean the man-made disaster we euphemistically call the 2008 election hasn’t helped the economy?

  3. I don’t care what Bastiat says; I still think blowing up the Capitol during the State of the Union Address would have a hugely beneficial effect on the economy.

    1. I believe that is referred to as “creative destruction.”

      1. We had to destroy the congress in order to save it.

  4. The reason people fall for nonsense like “WWII helped the economy” is that they don’t envisage themselves as one of the millions of people worldwide who got massacred in the war, but as the guy who got a job in a US factory. In the Bastiat story, people always think they’ll be the glazier, not the tailor or baker. Think of all the Obama supporters; they think they’ll be getting free drugs and X-rays, not that they’ll be getting a big tax bill.

    1. Hey, when I was six do you think I thought about Santa leaving a bill for my parents? Unfortunately, we allow “six year olds” to vote in this country.

      1. And “three year olds” in Congress.

    2. I hold the view that we already ARE getting the tax bill and that bill will only get larger if we fail to provide health care for the common good. That bill comes in many forms. Most people wait until they are so sick they go to the emergency room (those costs come back to us in one form or another). A simple bronchitis turns to pneumonia and requires hospitalization; a patient with diabetes has a small infection lead to an amputation due to lack of care. People without adequate preventive and maintenance care end up on disability all the time, which we pay for. If they have children we end up paying for them too and on and on. With healthcare, MANY could & would remain productive tax-paying, contributing citizens. The costs associated with an unhealthy citizenry are enormous. I have a pre-existing condition. I have both paid for my own insurance & at other times shared the cost with an employer. I will gladly contribute my tax dollars toward the health of my fellow Americans who are in a different situation. I pay taxes for all sorts of things I don’t support. Healthcare is a good idea. The Bill needs tweaking but in the long run, it will help. The path we were on was headed straight to bankruptcy. Thanks for reading.

      1. The path we were on was headed straight to bankruptcy.

        And by obligating the government to spend even more on health care, we’ve certainly changed our course, haven’t we?

        If you want to contribute more money to paying other people’s health care costs, have at. Just don’t force the rest of us to do it.

        1. “If you want to contribute more money to paying other people’s health care costs, have at. Just don’t force the rest of us to do it.”

          You missed my point…we already are. I would add that much of that indigent healthcare I already pay for is directed towards veterans who are suffering repercussions from wars I also pay for and don’t support. Their coverage is crap and the mental health care is non-existant. Should I be allowed to not contribute to the military budget because I don’t agree with how it is spent?

          1. I notice that no one is answering my questions. I am asking them in sincerity. I’m not trying to get anyone to agree with me. I’m looking for differing views that can help me make informed choices. I’m curious as to why Health care in particular has been such a huge divisive issue. I would ask T and Jordan this:

            Which public services do you feel we should all contribute to? Any? How do you chose which have value? What do you as an individual base that on?

            1. Should I be allowed to not contribute to the military budget because I don’t agree with how it is spent?

              Uh … No?

            2. You’re asking questions that require more in depth answers than you’re going to get in a blog comment.

              Health care in particular is divisive because the federal gov’t, for the first time ever, is requiring private citizens to purchase a service from a private provider. It’s also divisive because in the form passed, it’s economically incoherent and has huge practical problems.

              Around here, it’s also rightly derided because it is not any business of the government. Either we live in a society where the government is constrained by our foundational documents or we don’t. If we don’t, the social compact as many of us understand it has been fundamentally altered by one side without our consent and that, for many reasons, is a huge issue.

              One can (and some here will) make the argument that the government should only be in the business of providing true “public goods”, and only some of those. Health care is not a public good in the economic sense and is therefore not a function of government.

              Shoudl you be allowed to opt out of taxes you don’t believe in? In my view, sure. But the flip side is the government gets to exclude you from service if you do.

          2. Their coverage is crap and the mental health care is non-existant.

            You mean the non-existent health care provided by the government ?

      2. This bill is more of the same. The path we’re on now is headed straight to bankruptcy at an accelerated rate.

      3. Anita, here are three facts that counter the misconceptions that underlie your comment:

        1. The uninsured cost much less than the insured do. Yes, even after you count all the anecdotal “this could have been treated earlier for less money”.

        2. When serious studies are done to see how much preventative care actually saves, there are very few ailments that end up costing less by being treated preventatively rather than on an acute basis, and even those cost only slightly less.

        3. Treating the uninsured in emergency rooms is the cheapest way to treat them. A mere $40 billion dollars is spent on all uncompensated care in the US in a year. $35 billion of that ends up paid for by the federal government. This is a trifle’s trifle compared to the costs of covering the uninsured in the recent legislation .

      4. There are rising costs in our current health care system, but a huge part of the problem is rising prices for many medical services that have become untethered from the actual cost of those services.

        The two big drivers of the severing of the relationship between cost and price are that (a) government pays the medical bills for large segments of the elderly population (about half of all medical payments BEFORE the recent bill passed), (b) employment-tied insurers pay most of the rest of the bills. Hardly anybody pays their own medical bills, not even for routine care. The actual consumer has no incentive to compare prices, to understand why prices are outrageous, or even to pay any attention to the prices.

        So, what does the recently-passed health care “reform” bill do: it takes that system with broken price-control incentives and vastly expands it.

        It is no good deed, no matter how well-intentioned, to grow a system that is known to be massively wasteful. In the end, the system won’t really be able to serve all those extra people. The money being spent on their health care will end up being wasted.

        1. Anita, to save time I’m going to guess what your response will be: a central authority can monitor and control outrageous prices, plus we can realize economies of scale by having everyone covered by a single, centralized health care system.

          Things for you to consider:
          * Those central authorities are subject to tons of lobbying from health insurance companies, pharmaceutical companies, unions, etc. They often have ties to those entities. They are not solely motivated by looking out for the public interest; look at the actual track record of how government-run health care has “managed” prices.
          * The central authorities have limited ability to gather and process information. It’s hard to impossible to centrally run everything and do a good job of it.
          * To realize economy of scale you need more than just scale. You need incentives to do the hard entrepreneurial work of figuring out how to squeeze economies out of that scale. Traditionally, that motivation comes from business competition; I’m not sure there’s any other good system of incentives. Without that drive to find the economies of scale, you just get large-scale waste.

          1. I appreciate the time you and others are giving me. I’m here to get informed by people who understand something differently than I do so I can make better policy choices and have more intelligent discussions with others. We’re all educated in different areas. Thanks 🙂

        2. From an interview with Gary Becker…

          Drafting a good bill would have been easy, he continues. Health savings accounts could have been expanded. Consumers could have been permitted to purchase insurance across state lines, which would have increased competition among insurers. The tax deductibility of health-care spending could have been extended from employers to individuals, giving the same tax treatment to all consumers. And incentives could have been put in place to prompt consumers to pay a larger portion of their health-care costs out of their own pockets.

          “Here in the United States,” Mr. Becker says, “we spend about 17% of our GDP on health care, but out-of-pocket expenses make up only about 12% of total health-care spending. In Switzerland, where they spend only 11% of GDP on health care, their out-of-pocket expenses equal about 31% of total spending. The difference between 12% and 31% is huge. Once people begin spending substantial sums from their own pockets, they become willing to shop around. Ordinary market incentives begin to operate. A good bill would have encouraged that.”

          1. You just described the bill I would have written. One thing, though, can the barriers to purchasing insurance across state lines be removed by legislation. I heard recently that they were erected as a result of a Supreme Court decision, as part of back room deal where the insurance companies were given immunity from anti-trust laws; need to learn more about that.

            1. Of course they can. The Commerce Clause was originally — and is still, of course — intended for exactly this: to remove barriers thrown up by states to thwart trade.

              That these barriers were originally erected by Congress or by courts with the complacency of Congress is all the more reason to believe Congress has the power to change them.

      5. I hold the view that we already ARE getting the tax bill and that bill will only get larger if we fail to provide health care for the common good.

        Anita, one of the main – if not the primary – reasons this bill is dumped in our laps already is because the government forces it in our laps. We have been forced to pay taxes for the health care of others for quite some time, whether on the federal level or the state/local level. Businesses in the health care industry have been forced to provide goods and services outside of voluntary market transactions. The libertarian complaint with the system is that legal coercion.

        When more coercion is piled on top of it, we get pissed.

        By the way, I’m entirely happy you are OK with giving an arbitrary portion of your income to be partially wasted as it passes through state bureaucracy in order to help others. That you are willing to do that, however, probably means others are willing as well. In which case, why impose a system on everyone else when it seems you should be seeking out charities and giving direct contributions to the needy themselves?

  5. Stossel and Nader debated at Vanderbilt on Wednesday, and I went to go see it. They each gave a 25-minute talk, and then there was a Q&A session.

    That’s when Nader really started in on Stossel. In a single sentence, he would create three different strawmen, or he would state an argument that required lots of time and background to deconstruct. Most of these were tied into the “seen and unseen” of Bastait.

    For example, Stossel called Medicare a “Ponzi scheme.” Nader replied with “well, do you think all those old, poor people think it’s a Ponzi scheme?” The crowd, an ostensibly highly-educated bunch, fell for it hook, line, and sinker. I could only shake my head in dismay.

    The broken window fallacy prevails because it’s very hard to refute in a spoken debate. A politician or pundit can say “look at the jobs that ‘x’ government program or disaster relief effort created!” and the person that has to refute that is left looking like a complete asshole because there’s just not enough time in a spoken debate to deconstruct an argument that is so superficially satisfying.

  6. ^The debate was Tuesday, not Wednesday. Argh!

  7. It’s also an EXCELLENT reminder of why Paul Krugman, Timothy Noah, and Nicholas Kristof are douchebags of the highest order.

  8. In all honesty, I still don’t understand how this disproves the notion that WWII got the US out of the Depression. In this narrative, the US *was* the glazier. Europe got blown to pieces, the US got rich off of supplying them. Obviously anyone who argues that WWII was good for the European economy is nuts, but what’s the counterargument to people who insist that selling weapons and other materials to Europeans got the US out of the Depression?

    1. Well, yeah, unless you consider the WORLD economy, you nationalist you!

    2. Building a bunch of things that subsequently get destroyed isn’t really a productive use of your time. Ask people if they think building houses just to burn them down is a good idea. All the resources that went into the house are now gone and can’t be utilized in some other, more productive, fashion.

      1. No, of course not – but that’s not what I’m asking. Building houses just to burn them back down and build them back up is economically ruinous for society as a whole. But for the builders (and burners!) it’s a windfall, albeit at everyone else’s expense. What I’m asking is why is it wrong to say that a sudden increase in European demand got the US out of the Depression?

        For the record, I don’t believe it did – I just don’t know what the other side is. And the corollary to that is, what DID get the US out of the Depression?

    3. I would agree with your statement, but disagree with the premise. My argument is that dollars alone are a poor measurement of prosperity. Had the money acquired (money isn’t “made”…well except by the mint which is a whole other discussion)been used to foster prosperity for all and advance the U.S.A. in ways that created a lasting foundation, then I might hold a different view. The wealth acquired through rebuilding Europe was relatively concentrated and has not contributed to a long-term overall prosperity for “the Country.” The U.S. was not the glazier. A handful of Corporations were the glaziers.

      1. The wealth acquired through rebuilding Europe was relatively concentrated and has not contributed to a long-term overall prosperity for “the Country.”

        And the only reason that we rebuilt Europe was to pre-emept a Communist takeover.

        We would have been perfectly willing to let the Germans fend for themselves.

  9. For example, Stossel called Medicare a “Ponzi scheme.” Nader replied with “well, do you think all those old, poor people think it’s a Ponzi scheme?”

    “I dunno, Mr. Nader. Do you think all of Bernie Madoff’s investors thought he was running a Ponzi scheme? Regardless of what they thought, he was, wasn’t he? Well, wasn’t he?”

    1. A good retort, but Nader’s too slippery for that one. Nader had already brought up the example of Madoff as an example of the need for more government intervention and regulation.

      Nader’s retort could have been “Madoff provided nothing for his customers. Medicare saves and prolongs lives.”

      Explaining why Medicare is bad to people who’ve never even considered such an idea necessitates explaining how it drives up costs, and how if there was no Medicare and instead you diverted AARP’s lobbying and advertising funds ($20 million/year, roughly) towards helping their more needy members with their expenses, it would go a long way towards lowering costs for everyone.

      But you could write some very long books on that. Condensing it into a spoken rebuttal is difficult, if not impossible.

      1. “if there was no Medicare and instead you diverted AARP’s lobbying and advertising funds ($20 million/year, roughly) towards helping their more needy members with their expenses, it would go a long way towards lowering costs for everyone.”

        Dream big baby! I’m all for it, so what would need to happen to create that shift?

      2. Nader’s retort could have been “Madoff provided nothing for his customers. Medicare saves and prolongs lives.”

        My reply:

        “You’re wrong, Ralph. Many of Madoff’s clients actually did very well. Perhaps you aren’t familiar with Ponzi schemes, which basically operate to transfer money from newer “investors” to older ones. What makes them fraudulent is their inherent unsustainability. Analogous, one might say, to Medicare, which operates to transfer money from younger citizens to older ones, under an inherently unsustainable benefit plan.”

  10. So, Adam, since building up the military and rebuilding Europe and Japan after WWII got us out of the Great Depression, should Obama propose that we drastically enlarge our military, destroy a big chunk of the world’s productive capacity with it, and then offer to rebuild it?

    Query: Was Europe better off in 1938, or 1948?

    1. ^ That’s similar to my favorite example from Henry Hazlitt’s “Economics in One Lesson.” 🙂

    2. Here’s a novel idea…how about moving forward instead of backward? Our imaginations have become shriveled and atrophied. We can be so much more than what we are. This idea that I LOSE something if you GAIN something is rubbish and it is promoted by those who profit from keeping others fearful and tired. What’s wrong with using our collective (Oooooo I said a bad word) intelligence and resources to foster global well being? Who drew the lines around the Countries anyway? Why is it we can only envision more of the same?

        1. Hee hee, nope, I have come about my twisted hopey changey thinking all on my own – but I digress. What’s wrong with a global community? Why we can’t have one?

          1. What’s wrong with a global community? Why we can’t have one?

            As long as it doesn’t try to dig into my pocket or tell me what to do, why not?

          2. We do have one.

      1. Here’s a novel idea…how about moving forward instead of backward?

        I say … live it, or live with it.

        1. FST – what do you mean?

      2. This idea that I LOSE something if you GAIN something is rubbish and it is promoted by those who profit from keeping others fearful and tired. What’s wrong with using our collective (Oooooo I said a bad word) intelligence and resources to foster global well being? Who drew the lines around the Countries anyway?

        What you describe here is called “free trade” and “free migration”, or, more generally, “freedom”.

        It’s kind of the way most people around here think things should be.

    3. Guys, please, calm down. I’m not ARGUING anything here, I’m just asking a question to which I don’t know the answer. And my question focuses solely on the US, not Europe. If the US played the role of the man who gets paid to fix the window or rebuild the burning building, why is someone else’s war still bad for the US economy? Doesn’t the glazier come out ahead in the broken window story (again, at everyone else’s expense)? I’m not looking for a fight, I’m asking to be enlightened.

      1. Adam, I agree The glazier comes out ahead, but WE are not the glazier. I think the problem lies in confusing A handful of corporations and families with “The U.S. economy” Personally, I think this confusion has hijacked the the U.S. economy.

        1. Anita, please don’t take offense to this, but you have a lot to learn about economics.

          Yes, there is a lot of crony capitalism in the United States. But the wealth is not exclusively in the hands of a few families.

          This is an honest question: do you understand how publicly-traded corporations work, and how to go about purchasing shares of them?

          1. Dan, I don’t take offense and I understand a little, not a lot and I have purchased some stock etc. I really am here for dialogue & education so thanks for taking the time to engage me.

            Here’s why I used the term “few” including families and corporations. I like to look things up, especially when I get conflicting facts handed to me. It seems that everytime I dig deeply, I see the same names over & over again in the decision making bodies at nearly every level, public and private. I’m not anti-capitalism but here’s just one example of stats that concern me:
            (see the whole article at http://sociology.ucsc.edu/whor…..ealth.html )

            In the United States, wealth is highly concentrated in a relatively few hands. As of 2007, the top 1% of households (the upper class) owned 34.6% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 50.5%, which means that just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers). In terms of financial wealth (total net worth minus the value of one’s home), the top 1% of households had an even greater share: 42.7%.

            1. Alright, this is going to take more time than I’ve got at the moment. E-mail me: dcdorset ~at~ gmail.com and I’ll tell you how I went from basically saying the same things you’re saying now to achieving a greater understanding of how national economies work.

              1. Thank you very much Dan, I appreciate your offer and I will.

      2. Just as an aside, have you ever read the original Bastiat where the broken window comes from?

        If Europe isn’t rebuilding their wrecked infrastructure, they’re producing things that we might want to buy. Given how comparative advantage works, we’re probably better off if they’re doing that than buying stuff from us to rebuild.

        Plus, by destroying physical capital, you reduce the amount of capital available. Given the way trade works, the benefits of that capital will sooner or later come back to the US in some form.

  11. So what got the US out of the Depression? Educate me, because I in all sincerity I don’t know and I’d like to have something to say when someone throws that at me.

    1. The main point here is to recognize that economic well being is measured not by what is produced, but by what is consumed, and that an economy is successful to the extent that it matches production to meet demands of consumption.

      Well, it is a lot easier to plan for and meet the production demands of a thousand generals and admirals with a single goal than it is to plan for and meet the production demands of tens of millions of people with tens of millions of disparate goals. Thus wartime economies appear at the factories to be prosperous. Yet in the homes where people live you find no new cars, rationed gas and meat, victory gardens; you find people who are not as well off as the GNP numbers presumably imply. That’s because all those valuable things go overseas, never to be seen again.

      The War should be seen as five more years of the Depression: prosperity did not return to the homes of America during that time. But what the War did do was capture the focus of the government from trying to fix the economy with idiotic New Deal policies and effectively push a giant reset button on the private economy. Because consumer demand had been unsatisfied for so many years, it was much more predictable after the war was over, and factories that had turned out war materiel could change their focus to meet those demands.

    2. The best treatments of this topic I know of are from Robert Higgs. From what might be the most on topic of them…

      Which brings us to what may be the most important factor of all: the performance of the war economy, despite its command-and-control character, broke the back of the pessimistic expectations almost everybody had come to hold during the seemingly endless Depression. In the long decade of the 1930s, especially its latter half, many people had come to believe that the economic machine was irreparably broken. The frenetic activity of war production?never mind that it was just a lot of guns and ammunition?dispelled the hopelessness. People began to think: if we can produce all these planes, ships, and bombs, we can also turn out prodigious quantities of cars and refrigerators.

      When the controls began to come off and the war ended more quickly than anticipated in 1945, consumers and producers launched eagerly into carrying out plans based on rosy forecasts and, by so doing, made their expectations a reality. Of course, the ability to draw on the accumulations of financial assets built up by “forced saving” during the war was important, especially in conjunction with the Federal Reserve’s continued support of bond prices. But the liquidation of those assets alone could not have turned the trick?if such tricks were possible, a government could produce prosperity simply by cranking the money presses.

  12. I’ve always questioned Bastiat’s theory at the macro level. It’s obvious on a micro level, but so many things either don’t hold true in the macro or in Hayek fashion become so complex in the macro that absolutely saying a micro level model transfers to the macro strikes me as pretty Keynesian in its arrogance.

  13. I’ve always questioned Bastiat’s theory at the macro level.

    It seems to me that what Bastiat is saying is that there is no way, at any level, that destroying a perfectly good asset, and then replacing it, makes you better off. You are left with an asset that you had before, less the cost of replacing it (which, at a minimum, is an opportunity cost).

    How does this stop being true at a macro level?

    1. That makes sense and it’s very easy to see on a small scale. When you enter more and more variables I wonder exactly how easy it is to see the loss and measure it effectively as a loss against other gains. The assumption that the loss doesn’t spur some other variable to act in the macro, and not just the loss of another good compared to the window seems to be lost. Again it assumes you are able to measure all impacts of that single loss in the context of a a macro economy or market, which seems awfully arrogant.

      It seems like a lot of micro level theories struggle at the macro level as you assume more and more assumptions held constant to make them work while the variables increase.

      I completely agree and I’m nowhere near smart enough to argue this to any great extent, it just seems somewhat counter intuitive to move most micro theories to macro without some sort of qualification.

      1. Bullshit

        Arguing in this context that the macro level is somehow fundamentally different than the micro level is equivalent to saying “My ankles hurt when I jumped down five feet to the pavement, but there is no reason to assume that jumping from 500 feet will also hurt.”

        Destruction of an asset with a net value* is a loss.

        (*Note: Net value. Tearing down a building to make way for another building is not a loss. The existing building’s value impairs the value of the land it occupies relative to the land’s more valuable use as a site for the new building. The real value of the land and existing building is less than the value of the land alone, therefore no net value is lost in demolishing the existing building. {I will qualify this slightly by pointing out this assumes the new building is a good investment.})

        1. The ability to prove it is a net loss in the macro is exactly what I was questioning.

          Your analogy is a little mystifying in that the only thing changing is the magnitude of one variable and not the number of variables.

        2. You also seem to be arguing in accounting terms and not economic terms of profit and loss.

    2. There is one consideration to Bastiat that needs to be taken into account, and that is technological progress.

      A gross example: Baker has a leaky window that let’s cold air out in the summer. Window gets broken. Baker replaces the window with an energy efficient model. The resulting energy savings cover the cost of the window.

      I know that this argument opens a can of worms, however Bastiat only holds up (in the micro-example) if the broken window is replaced with an item of equal economic value. If, however, technology has progressed to the point that the replacement window has a much higher economic value, the equation changes.

      This is in no way to be interpreted as a justification for eminent domain, condemnation, etc…, but I think it is worth pondering simply because any Progressive with an ounce of intelligence would use this argument against Bastiat.

      1. Aresen beat me to it. These threaded comments drive me nuts.

      2. Bastiat only holds up (in the micro-example) if the broken window is replaced with an item of equal economic value.

        No. Bastiat holds up so long as the broken window is replaced with an window with installation and continuing costs that are greater than the continuing costs of the old window.

        If, however, technology has progressed to the point that the replacement window has a much higher economic value, the equation changes.

        If the equation has changed to the point where it is better for the baker to have a new window, the baker will replace it himself — without waiting for it to be broken.

        1. No. Bastiat holds up so long as the broken window is replaced with an window with installation and continuing costs that are greater than the continuing costs of the old window.

          Better said. My intention was the same, wording was poor.

          If the equation has changed to the point where it is better for the baker to have a new window, the baker will replace it himself — without waiting for it to be broken.

          Not necessarily. There are many exceptions to this. The baker has to expect a payback within a reasonable amount of time (say less than expected period he expects to be occupying the facility). The baker may not even consider replacement because he’s too busy baking. Human nature and limited knowledge play a part.

          1. There are indeed exceptions, most notably the baker’s expertise or attention in determining the costs and benefits of his window choices.

            Nonetheless, I would contend that, on average, he is significantly worse off having the window broken. He certainly on average knows more about his windows and energy costs than a legislator or bureaucrat in Washington knows.

  14. “You’re wrong, Ralph. Many of Madoff’s clients actually did very well. Perhaps you aren’t familiar with Ponzi schemes, which basically operate to transfer money from newer “investors” to older ones. What makes them fraudulent is their inherent unsustainability. Analogous, one might say, to Medicare, which operates to transfer money from younger citizens to older ones, under an inherently unsustainable benefit plan.”

    Thanks, R C.

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