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One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors. -- Plato (429-347 BC)

Thursday, October 27, 2016

What Policy Makers Should Learn from Broken Windows

by Art Carden: “Thanks to tariffs, we saved Bob’s job at the steel mill. Now he’s able to provide for his family.”

“Thanks to the minimum wage, Rob now earns higher wages.”

“Look at all the farm communities that are so vibrant because of subsidies!”

“War is clearly good for the economy—look at how many jobs we create building tanks and bombs and guns!”

To oppose tariffs, minimum wages, and agricultural subsidies—not to mention war—must mean you hate Bob, Rob, farmers, and the unemployed.

Well, not exactly. All these examples are instances of popular but fallacious reasoning. All emphasize the easy-to-see benefits without acknowledging the more opaque costs. The French economic journalist Frédéric Bastiat explored this almost two centuries ago in his essay “What Is Seen and What Is Not Seen,” and Henry Hazlitt turned Bastiat’s insight into his short classic Economics in One Lesson. The one lesson, in short: don’t stop the analysis at the merely visible effects.

Consider the thought experiment that made Bastiat famous, his Parable of the Broken Window, and consider further how he exposes the errors made by so many pundits and policymakers. Bastiat asks us to consider what happens when a young man breaks his father’s window. He notes how an observer might ask, “What would become of the glaziers if no one ever broke a window?” and so conclude that a shattered window does some social good by supporting the glass industry.

For Bastiat, however, the child who breaks a window is a social malefactor, not a benefactor, because he makes society poorer to the tune of one window, even though the glazier’s income rises because he replaces it. Had Bastiat’s protagonist James Goodfellow not had to pay to replace a window, he would have been able to “encourage the national labour” by spending the money on something else.

It seems blindingly obvious, but it’s an insight a lot of people fail to appreciate when we apply it to public policy. People are drawn to stories, and many stories are going to be more convincing if we can put names and faces to them. Too often, though, we act as if the names and faces are the arguments rather than just illustrations.

Consider Bob, Rob, farmers, and factories. It’s easy to see that Bob has a job in the steel mill and, owing to tariffs, higher wages than he might have otherwise. The rest of us bear the harder-to-see costs of a tariff. First, the rest of us are paying more for the steel, which means Bob’s higher wages are coming out of steel consumers’ pockets. The extra money I have to pay for steel and steel-produced goods is money I can’t spend on coffee or yard work or a kitchen remodel. We create an opportunity for Bob to earn money producing steel by destroying an opportunity for someone else to earn money doing other stuff. There is yet another cost, one that the economist Steve Landsburg never tires of pointing out. We aren’t just paying more for steel; because the price is higher, some people who would have bought steel before are no longer able to.

Similar logic applies when we consider Rob, the beneficiary of a higher minimum wage. We see that Rob earns higher wages. Good for Rob. His higher wages, however, come out of the pockets of his employers and their customers, and as those who buy goods produced by low-wage labor tend to be low-wage laborers themselves, the net redistribution is from some poor people to other poor people. Even if it comes out of “corporate profits,” think about to whom those profits accrue. Do you have a 401(K) or 403(B) or any stock whatsoever? Congratulations: Rob’s extra earnings are coming out of your pocket. It’s all well and good if you don’t mind and want to be charitable. Charity is a virtue. But do your fellow shareholders need you to exercise virtue on their behalf? Might it be possible that your fellow shareholders have goals and aspirations that are just as worthy as Rob’s?

That’s only part of the story. By raising the price of labor, minimum wages reduce the amount of labor people wish to hire. We raise Rob’s wages, but we might reduce the number of hours he is able to work or deprive someone else of his or her job entirely. Once again, this might not be obvious or immediate in that we might not be able to see someone literally getting fired because the minimum wage increased. The real employment cost can come from reductions in employment as people either do less business or substitute capital and high-skill labor for low-skill labor.

What about farm subsidies? Perhaps you’ve seen a bumper sticker that says “No Farms, No Food.” It’s a terrifying prospect: without farms, we wouldn’t have food to eat. Much better to have the subsidies that encourage farmers to produce and that thereby ensure we are able to remain well-fed, correct?

I’ll see this argument and raise it Bastiat and Hazlitt. The money for the subsidy comes out of taxpayers’ pockets. The chunk of money that comes out of my pocket is (once again) money I can’t spend remodeling my kitchen or paying for yard work or what have you. The farmers’ income is income that isn’t being earned by someone else.

As with tariffs and minimum wages, the story gets worse. It’s not just a transfer. When we subsidize, we are literally paying people to waste resources by producing corn or soybeans or what have you that are not worth to consumers what they cost to produce. It’s possible that the subsidy increases production of something for which there are spillover benefits, but this is a different argument from the one we’re considering here. In this case, we are subsidizing the “vitality” of farming communities by devitalizing other communities.

Finally, there might be very good reasons for going to war, but economic stimulus is not one of them, and for the same reasons we have explored above. It’s easy to see Rosie the Riveter making planes and tanks and bombs and guns and bullets. It’s a lot harder to see the refrigerators and cookware and other goods and services we give up because we’re using resources and Rosie’s labor for the production of war materiel. Again, there might be times when war is necessary, but we needn’t kid ourselves by thinking that we are making ourselves richer by making tanks with steel and labor that could have been used to make cars and refrigerators.

People often support tariffs, minimum wages, and subsidies with the best of intentions, but good intentions do not mean good policy, and just because we intend to help people doesn’t mean we actually do. Henry Hazlitt called Bastiat’s Parable of the Broken Window the “one lesson” of economics. It’s a lesson that, sadly, appears we have yet to learn.
-------------
Art Carden is Associate Professor of Economics at Samford University’s Brock School of Business.  H/T Intercollegiate Review (IR) who shared this article with the editor. IR is published by the Intercollegiate Studies Institute (ISI) and is dedicated to advancing the principles that make America free, virtuous, and prosperous.

Tags: Art Carden, Policy Makers, Broken Windows, Intercollegiate Review, Intercollegiate, Studies Institute, To share or post to your site, click on "Post Link". Please mention / link to the ARRA News Service. and "Like" Facebook Page - Thanks!
Posted by Bill Smith at 3:10 PM - Post Link

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