Bananas and Broken Windows

A guy walks into his local grocery. Noting the price of bananas is 89 cents per pound, he complains that the grocery across the street sells bananas for 69 cents per pound. The grocer asks him why he didn’t buy bananas from the other grocery. “They are all out of bananas.” The grocer tells him, “When we’re all out, we sell them for 49 cents per pound.” 

It makes sense, doesn’t it? When Grocer A runs out of bananas, Grocer B can charge more. As the supply dwindles and he continues to raise his price, some customers will switch to oranges. Meanwhile, banana growers, realizing more profit, will produce more bananas. But now there are fewer customers because some converted to oranges, so grocers will lower the price to sell their bananas before they go bad. This shows that profits motivate sellers to adjust prices to meet changing supply and demand.

This is common sense economics, understood since people first began to trade. An “education” in basic economics just gives you the ability to draw graphs about prices, supply and demand. “Advanced economics” gives certain economists like Paul Krugman the ability to baffle the masses with more complicated graphs. We are led to believe that government intervention by politicians, justified by graph-makers, will cause more employment, abundant goods, stable prices, and a chicken in every pot. Common sense flies out the window. 

The economy is so complex that it’s impossible to determine all the effects of government intervention. A 19^th century economist, Frederic Bastiat wrote, “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” Bastiat went on to describe the “Broken Window Fallacy” to illustrate the point. Let’s go back to the grocery. 

While the grocer and customer haggle over bananas, a hoodlum throws a rock through the front window. A crowd gathers and begins to discuss the misfortune of the grocer who will have to pay $500 to have his window repaired. Eventually someone points out that the window repairman will have more money to buy bananas for his family. He’ll also buy a pane of glass, providing income for the glass manufacturer. The glass manufacturer will buy raw materials. Truck drivers will deliver these materials. This stimulus will ripple through the economy. When you consider these benefits, isn’t the hoodlum a hero? 

The broken window and the economic activity it will create are easily seen. What is not seen is what would have transpired had the window never been broken. Prior to the act of vandalism the grocer had a good window and $500. After the repair he only has a good window, but not the $500. What would he have done with the $500? Perhaps Christmas bonuses for his staff, a vacation for his family, a new credit card machine to improve service at the checkout register? The very grocer who earned that $500 gets none of the benefit of it! Five hundred dollars of his wealth has been destroyed. If this were truly an effective economic stimulus, the government could hire hoodlums to break windows everywhere!  

The Broken Window Fallacy has been thriving ever since people first began asking government to improve their lives. It’s all the rage today. A tax levied on one group of people to benefit another group has the same effect as throwing rocks through windows. 

Here are some examples of the Broken Window Fallacy:

• Economic development subsidies (see Gaylord Entertainment)
• Stimulus programs
• War-on-Poverty programs
• Government jobs programs

No economist or politician can tell you what would have been created if the tax was never collected.  But you know what you would have bought with the money. Even if you just buy bananas, it’s best left to the wisdom of individuals who own the money instead of government.

The Anti-Stimulus Program

Politicians often lack a foundation in basic economics, or we probably wouldn’t be facing the possibility of a financial collapse. The average individual has a better intuitive understanding of basic economics than many of our elected officials, or even famous economists. Humans, from the time they first began to trade, have understood supply and demand, pricing, and the use of scarce resources. Billions of people know how to balance spending against income. Our most famous economists, however, are so wrapped up in fallacy that they have forgotten the basics. And history. 

Nobel Prize winning economist Paul Krugman is leading the call for a new WPA-like program. The WPA (Works Progress Administration) was a depression era jobs program. In 1935, just when it appeared that the economy was turning around, President Roosevelt feared that it wouldn’t turn around fast enough. Even though his administration was spending tax money at an enormous rate on public works projects, he created the WPA to give jobs to even more people, lower the unemployment rate, and right the economy. This was a stimulus plan, featuring “shovel ready jobs.” 

Did it work? No. Even the government at the time counted WPA workers as unemployed. Since the private sector could not provide jobs for them, it’s obvious that the economy had not improved.

During the depression, the WPA faced several unanswerable questions that undoubtedly limited its effectiveness. A new WPA program would face similar questions in a more complex world. Nobody can know the right answers. 

1. What wage should be paid? The WPA had a limited budget. They could put more people to work by paying lower wages. But low wages puts downward pressure on wages in general. In the free market, that’s not a problem. Remember basic economics of supply and demand? Labor is a market good. If there are lots of workers available (lots of supply), wages will already be depressed. But government labor is not a free market. It is controlled by unions who spend billions of dollars to elect their bosses. An influx of cheap labor would be bad for unions. Union supported politicians are not likely to do anything to jeopardize union power. 

2. What kind of work should they do? Again, we see a conflict with the unions. They will object strenuously to the government hiring non-union workers to compete with them at their skilled jobs. The WPA jobs will have to be low skilled, or workers will have to be unionized. Republican politicians who are rarely the beneficiaries of contributions from unions are not likely to let union power expand through government spending.  

3. How do you evaluate worker performance? Private sector workers must create value for their employers. The primary purpose of WPA jobs will be to lower unemployment. The longer it takes to complete a particular project, the more employment is created. If creating employment is the goal, the least efficient projects will be the most successful. In the private sector, that’s called waste. In this case, it’s a waste of our tax money. 

4. Who should get the jobs? If the goal is to reduce suffering caused by unemployment, it makes sense to hire the neediest people. Those people may have the fewest work skills. Hiring the least capable workers leads to even more inefficiency. This is more waste of our tax dollars. 

5. The program is ripe for corruption. During the depression, more WPA money went to districts with politicians that supported Roosevelt. WPA workers were pressured to register and vote as democrats and campaign for democrats.  

Now the biggest questions. Who has the wisdom to administer it? How big should it be? How long should it last? The Obama administration told us that the stimulus package would keep unemployment below 8%. They were very wrong. But government has a long history of throwing more money at failed programs. A new WPA would be another example.

The Spending Crisis

Breathe a sigh of relief – the debt ceiling has been raised. 

By and large, it’s pointless. Both parties have raised the debt ceiling time after time.  Its purpose is to limit the national debt, but since it always gets raised, it limits nothing. Often it has been merely a procedural vote – little debate, no Pomp and Circumstance, just a couple of votes, a quick signature, and more debt. 

Let’s talk about the real crisis – spending. The runaway federal spending is cause for concern from both parties. It’s a concern for everyone except President Obama, who wants to raise the debt ceiling so he can continue buying votes with our money, and the money of generations that have yet to exist. Obama wants to raise the limit by $2.7 trillion dollars.  He’s calculating that $2.7 trillion in new debt will last until after the 2012 elections. He doesn’t want to have this debate again before asking for your vote. 

Think about that. It’s 15 months until the election. From 1776 until now, our nation has accumulated $14.3 trillion in debt.  Obama wants authority to borrow and spend 1/5 of that in 15 months. Despite his rhetoric, he has offered no plan to reduce the debt or deficit. Republicans insist that the additional debt limit be matched by spending cuts over the next 10 years. The federal government will be borrowing something like $180 billion each month, and reducing spending only $22.5 billion per month. The spending cuts may not happen at all or may be reversed by future congresses. 

The debt ceiling will be raised. Even so, we still face the very real possibility that our debt will be downgraded. It was threatened before the debt limit debate, not because of a possibility of immediate default, but because of a potential future default. If our economy collapses under the extraordinary spending and debt, America will not be able to pay its obligations. That is the real crisis.

The Strawman Cometh 

I always cheer up immensely if an attack is particularly wounding because I think, well, if they attack one personally, it means they have not a single political argument left. Margaret Thatcher 

I am honored that Senator Lois Tochtrop responded to my columns about unemployment insurance (UI) (go here and here for my articles). Although she called my writings inaccurate, she never actually refuted anything I wrote. She prefers to mislead us with strawman arguments.

She tells us that employers would not forego hiring to avoid paying a payroll tax of $3.29 per week. But that’s per employee. $3.29 times 95 employees is enough to provide a job that’s substantially more than the average $125 per week unemployment benefit. One in five youths (who might like to work for minimum wage) is unemployed. They are sitting by idly while others accrue unemployment benefits. 

Tochtrop states that the Federal Reserve Board says “unemployment benefits are not important factors in the increase of unemployment or the length of unemployment.” I never argued that it does. Quite the contrary, UI is a disincentive to layoffs. If there are additional costs for layoffs, an employer thinks twice before hiring. 

She tells us that unemployment benefits creates more economic stimulus than tax credits for corporations. I’m not certain where tax credits came in to this discussion. I fear that Tochtrop believes that money is something government allows individuals and businesses to keep. She also seems unaware of what truly drives economic expansion and creates jobs – capital investment. An entrepreneur nearly always has to invest money to start or expand a business. This comes from some sort of savings. 

Tochtrop and her colleagues passed a law last year (HB 1128) that “will guarantee the long-term solvency of the Unemployment Insurance program.” Tochtrop is at best misleading. 1128 merely alters the manner in which higher unemployment taxes will be confiscated. Government programs will always be solvent as long as government is willing to extract money from citizens by force.