Economics

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Why Government Stimulus Doesn’t Work

August 3, 2010 in Economics by Greg | 1 comment

The broken window fallacy helps explain the unintended consequences of government stimulus. In 1850, French political economist Frédéric Bastiat wrote about this misconception in an essay entitled Ce qu’on voit et ce qu’on ne voit pas or “That Which Is Seen, and That Which Is Not Seen.”¹ Below is a short video that explains this fallacy.

In 1946, noted economic journalist Henry Hazlitt wrote about the seeming “benefits” of this type of destruction:

So we have finished with the broken window. An elementary fallacy. Anybody, one would think, would be able to avoid it after a few moments’ thought. Yet the broken window fallacy, under a hundred disguises, is the most persistent in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, by chambers of commerce, by labor union leaders, by editorial writers and newspaper columnists and radio commentators, by learned statisticians using the most refined techniques, by professors of economics in our best universities. In their various ways they all dilate upon the advantages of destruction.

Though some of them would disdain to say that there are net benefits in small acts of destruction, they see almost endless benefits in enormous acts of destruction. They tell us how much better off economically we all are in war than in peace.²

Some 64 years later, the illusion of the broken window continues to be used in government public relations.

Sources:

“The Broken Window”. Ludwig von Mises Institute. 2 Nov 2009.↩
Economics in One Lesson. New York: Pocket Books, 1952.↩

Tea Parties

February 21, 2010 in Economics by Greg | 1 comment

Recently, former Alaska Governor Sarah Palin spoke to the “tea-party movement’s rank and file” in Arkansas. According to CBS,

Asked what her advice would be to conservatives as the November elections approach, Palin first lavished praise on the Tea Party movement, calling it “a grand movement” and adding, “I love it because it’s all about the people.”

But she quickly pivoted to the broader question of whether the Tea Party movement might successfully field its own candidates in national elections, and on that point she sounded far from convinced.

“Now the smart thing will be for independents who are such a part of this Tea Party movement to, I guess, kind of start picking a party,” Palin said. “Which party reflects how that smaller, smarter government steps to be taken? Which party will best fit you? And then because the Tea Party movement is not a party, and we have a two-party system, they’re going to have to pick a party and run one or the other: ‘R’ or ‘D’.”¹

Of course the first tea party – the Boston Tea Party – was not organized along political parties. It was formed as a consequence of a series of actions by King George III and the British government to recoup war costs of the French and Indian War that concluded in 1763. These actions included the Stamp Act of 1765, the Townsend Acts of 1767, and the Boston Massacre of 1770, all of which strained relations between the colonists and the Crown and eventually led to The Boston Tea Party of 1773.

Though the modern “Tea Party movement is working to halt the creation of dangerous precedents” such as the “’ratchet effect’ – that is, once government expands its power and new bureaucracies are in place, it’s difficult to undo them”, some have noted troubling differences. For example,

Tea Parties »»

Conroy, Scott. “Palin: Tea Partiers ‘Have to Pick a Party’”. 17 Feb 2010. CBS News. 21 Feb 2010.↩

Keynes and Hayek Rap Video

January 27, 2010 in Economics by Greg | 1 comment

This is a great little rap video parody featuring the government intervention policies promoted by Lord John Maynard Keynes versus the free market policies advocated by Friedrich A. von Hayek and Austrian Economics.

Created by Russell Roberts, Professor of Economics at George Mason University, and John Papola, an Executive Producer/Director at SpikeTV, the video features Billy Scafuri as “Grand Master” Keynes and Adam Lustick as F. A. Hayek (Billy and Adam).

In order to put this into some context, according to one writer:

As Hayek has shown, economic crises of boom and bust are created by governments that expand credit through central banks, creating unsustainable bubbles that ultimately crash. Unfortunately, based on Keynes’s theories, governments have foolishly then further intervened with bailouts and “stimulus” spending measures of pork and war that only prolong the recovery (e.g., Great Depression as well as the current economic malaise).¹

Lyrics:

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

[Keynes Sings:]

John Maynard Keynes, wrote the book on modern macro
The man you need when the economy’s off track, [whoa]
Depression, recession now your question’s in session
Have a seat and I’ll school you in one simple lesson

BOOM, 1929 the big crash
We didn’t bounce back—economy’s in the trash
Persistent unemployment, the result of sticky wages
Waiting for recovery? Seriously? That’s outrageous!

I had a real plan any fool can understand
The advice, real simple—boost aggregate demand!
C, I, G, all together gets to Y
Make sure the total’s growing, watch the economy fly

Keynes and Hayek Rap Video »»

Theroux, David. “‘Fear the Boom and Bust’: Hayek vs. Keynes Rap Video. 26 Jan 2010. The Independent Institute. 27 Jan 2010.↩

Great Depression and Current Recession Compared

October 9, 2009 in Economics by Greg | 1 comment

Earlier this week, Robert Higgs, Senior Fellow in Political Economy at The Independent Institute, spoke about the similarities and differences between the Great Depression and the current recession at the Economic Liberty lecture series. Although he finds considerable differences between the two events, he feels there are only a few similarities between the Great Depression and the current recession.

Below are my notes of his presentation.

There are some similarities as well as differences.

The media and journalists have rushed to see these similarities.

I was shocked.

The Great Depression was so much more horrible, devastating, than the current recession.

They were using this talk to sell some type of policy to the people who look to the government for answers.

I don’t feel the two events are fully comparable.

People would be much happier living through today’s recession than during the Great Depression.

Read the rest of this entry »

Minimum Wage Increase

July 27, 2009 in Economics by Greg | 1 comment

Last week, the minimum wage increased from $6.55 an hour to $7.25 an hour. From a strictly economic point of view this is troublesome. For example,

Anyone who has taken an introductory economics course is familiar with the idea that a minimum wage leads to a reduction in the demand for labor and an increase in the supply of labor in the relevant market — usually, the market for low-skill workers. The minimum wage removes the ability of some workers to compete by accepting lower wages and shuts them out of the labor force. As a result, it reduces job opportunities for these workers. A minimum wage breaks the hinges on the door of opportunity.

However, there are additional, hidden costs of these interventions, which are more difficult to detect but perhaps more insidious. For example, one effect of a minimum wage is to reduce the availability of on-the-job training, since more resources are required simply to hire and retain a workforce. And further interventions in the labor market (for example, safety regulations and payroll taxes) make it still more costly to employ labor. These burdens together reduce a firm’s willingness to hire laborers and — in the long run — must reduce the number of opportunities for those laborers to acquire valuable job skills. Far from increasing opportunities for the working poor, a minimum wage actually restricts their mobility.¹

Speaking from personal experience, George Mason University Economics Professor Walter E. Williams taught about the impact minimum wage laws have on society in the following video.