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Paying people to break windows

Steve Saville
Aug 10, 2009

The "Broken Window Fallacy" originally described by Bastiat in 1850 is well known in economics, thanks in large part to Henry Hazlitt's excellent book "Economics In One Lesson". Wikipedia provides the following explanation:

"The parable [of the broken window] describes a shopkeeper whose window is broken by a little boy. Everyone sympathizes with the man whose window was broken, but pretty soon they start to suggest that the broken window makes work for the glazier, who will then buy bread, benefiting the baker, who will then buy shoes, benefiting the cobbler, etc. Finally, the onlookers conclude that the little boy was not guilty of vandalism; instead he was a public benefactor, creating economic benefits for everyone in town."

"...The fallacy of the onlookers' argument is that they considered only the benefits of purchasing a new window, but they ignored the cost to the shopkeeper. As the shopkeeper was forced to spend his money on a new window, he could not spend it on something else. For example, the shopkeeper might have preferred to spend the money on bread and shoes for himself (thus enriching the baker and cobbler), but now cannot because he must fix his window.

"Thus, the child did not bring any net benefit to the town. Instead, he made the town poorer by at least the value of one window, if not more. His actions benefited the glazier, but at the expense not only of the shopkeeper, but the baker and cobbler as well."

The popular "Cash For Clunkers" program implemented by the US government is a great example of the "broken window fallacy" in action. Under this program the government pays people to destroy their old cars on the proviso that the money they receive is put towards a new car. The idea is that the additional spending on new cars will help support the auto industry and give the overall economy a boost.

"Cash For Clunkers" is akin to paying people to break windows. It gives a temporary boost to the makers of new cars in the same way that the breaking of a window gives the glazier in Bastiat's parable an immediate benefit, but it makes the overall economy poorer.

But let's put aside logic for a moment and assume, for the sake of argument, that "Cash For Clunkers" and programs like it actually offer a net benefit to the economy. The question then becomes: why stop at old cars? Few industries are in worse shape than the construction industry, so why not start giving people cash to have their old homes demolished on the condition that they use the cash for a down-payment on a new home? And for that matter, why stop at homes? Just imagine, for instance, how much new work could be generated for the construction industry by destroying an entire city or two.

Programs such as "Cash For Clunkers" make no economic sense, but it is not difficult to understand why they appeal to politicians. They are politically appealing because the economic positives (more jobs in a particular industry) can be seen and therefore pointed to when on the campaign trail, whereas the negatives will be unseen (the overall economy will be weaker, but it will be impossible to show that the weakness is partly attributable to the policy). In the specific case of "Cash For Clunkers", politicians can also claim that they are helping to save the planet by encouraging the replacement of old 'gas guzzlers' with the new fuel-efficient machines.

Steve Saville
email: sas888_hk@yahoo.com
Hong Kong

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