The Broken Window Fallacy

There is a lesson which, apparently, every new generation needs to relearn. The need for the lesson presents itself in ever new and updated guises, but it is still the same lesson. What is more, our ability to forget how to apply the lesson seems to afflict more and more of us faster and faster, with each successive generation.

This is how a meme (by analogy to "gene", a core idea or concept that forms a thread, running through the generations) which is essential to a free society can devolve, over time. Our forefathers had it so inbred into them that they did not even have to think about it. Put yourself back in 1789, in the role of an imaginary newspaper reporter asking the newly inaugurated President of the United States, "Mr. Washington, sir, what will be your administration's program to create jobs after the Revolutionary War for all those soldiers who have returned to the economy?"

In that context, the question shows its idiocy: it could never have been conceived as a question to ask President Washington, let alone conceive of a way that his mind could have grasped the premise inherent in it. "What -- the government create jobs? Are you daft, sir? That is not the proper function of government. Nor do I perceive any means -- even it if could be assigned that task -- by which it could accomplish such an impossibility."

The logic behind Washington's imaginary response to this imaginary question is irrefutable. The number of people which government requires to perform its proper functions is (or should be) fairly constant over time, on a per capita basis. (Jobs may increase to service more citizens as population increases, but jobs per capita should decrease with increasing productivity, as well.) Moreover, since government does not manufacture goods for commerce, the only new jobs it could "create" would be for people performing more government services. And in a declining economy, there is less and less need for more postal workers, or for more health and safety inspectors.

Even more important, the only way by which government could create new jobs out of thin air is by spending money. (For example, it could, as Napoleon suggested, put people "to work" by paying them to dig holes and then to fill them up again.) But think -- where does that money come from? From our taxes, of course -- which is to say, from our money. Once we have given it to the government, we have that much less to spend on the goods and services that keep everyone employed.

A private business uses its revenues to pay its employees, but those revenues come from selling goods and services that people value, and for which they are willing -- voluntarily -- to pay the prices which the business asks for them. The customers of the business then put those goods and services to use in their own lives.

Now think what it would be like if government operated that way. How much would you be willing to pay for that new aircraft carrier (suggested subscription price: $4,500.00, if at least one million people subscribe)? Oh, yes, that approach certainly would work as a means of providing for the common defense: "Try the next guy down the street; I'll pass, thank you." And that is why taxes are coerced, rather than voluntary.

These facts are obvious; one could scarcely believe that anyone needs to be instructed about them. But now listen to this excerpt from a recent column by Time magazine's Joe Klein, who is on a tour through middle America, sounding out its employed and unemployed:

Ten days into my cross-country road trip and I'm not finding much of the fist-shaking, Tea Party anger that you see on television. People are freaked out, though. They're frustrated and anxious. They're not too thrilled with Barack Obama's policies — although even his detractors see him as sincere and trying his best to turn things around — and they're not at all convinced that the Republicans are prepared to offer anything better, but the anti-incumbent, anti-Establishment mood is palpable. They can diagnose the problems, but they don't have any strong ideas about solutions. Most of the people at brunch say the government is spending too much, but when I ask whether they'd rather see the government closing the deficit or spending money to create jobs, most of them say jobs. There are ideological contradictions aplenty, which leads me to conclude that the notion of America as a conservative or moderate or liberal country is a fiction created by those of us who sit on top of Mount Opinion. More than a few voters I've met seem to be conservative, moderate and liberal all at once. Pat Moll, a police officer who doesn't like Obama at all, thinks the government should spend money to "put people to work in real jobs that last."

Note the false choice which the economically illiterate Mr. Klein put to his equally economically overwhelmed interviewees: should your Government spend less, or should it create jobs? That is like asking whether the government should stop Saturday mail deliveries, or spend more to put a chicken into everyone's pot. It is talk such as this that pervades the discussions of people who have been thrown out of work, and when the country is in a depression. The sentiment may be understandable, but it has to be shot down for what it is: terrible economics.

My imaginary reporter's interview with a new President, so inconceivable in the context of George Washington, would be much more believable if we shift the context to 1933, just after the election of Franklin Delano Roosevelt. For he actually believed that by spending more money, the government could put people back to work. As we all know in hindsight, he was dead wrong. Unemployment grew still worse in the 1930's despite massively increased government spending.

Some people (such as the economically illiterate Paul Krugman -- see below) say that it took World War II to take us out of the Great Depression, but that is not accurate, either. The War put people to work in factories, making bombs which blew things up, and planes and ships which only the government could use. People got paid, to be sure, but wartime goods were rationed, because they were so scarce. The economy did not return to normal until well after the war, when business was free to compete for labor and resources, and goods were plentiful once again.

The fallacy that government can put people to work by spending tax revenues (or, still worse, borrowed money) has a name that is convenient to remember, given to it long ago by economist Henry Hazlitt, in a chapter entitled "The Broken Window" in his classic book, Economics in One Lesson. Here is a graphic presentation of "The Broken Window Fallacy" (note the prominence of the New York Times's Paul Krugman, one of the leading advocates of the fallacy, at its outset):






Oh, and Henry Hazlitt's "One Lesson"? It is this:

"The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

"Economics is haunted by more fallacies than any other science known to man."
-- Henry Hazlitt in Economics in One Lesson

(H/T: FreedomKeys.com)