February 18, 2010

BROKEN WINDOWS

I think the broken windows fallacy makes perfect common sense once you hear it.  Frankly, I don't understand how one could argue against it.

So why do we continue to base policy on it?

The idea that government spending creates jobs makes sense only if you never ask where the government got the money. It didn’t fall from the sky. The only way Congress can inject spending into the economy is by first taxing or borrowing it out of the economy. No new demand is created; it’s a zero-sum transfer of existing demand.

The White House says the $300 billion spent from the stimulus thus far has financed as many as 2 million jobs. Maybe. However, the private sector now has $300 billion less to spend, which, by the same logic, means it must lose the same number of jobs, leaving a net employment impact of zero. But the White House’s single-entry bookkeeping simply ignores that side of the equation.

Even Washington’s transferring money from savers to spenders doesn’t create demand, since the financial system already converts one person’s savings into another person’s spending (as I detail here). A family might normally put its $10,000 savings in a CD at the local bank. The bank would then lend that $10,000 to the local hardware store, which would then recycle that spending around the town, supporting local jobs. Now suppose that the family instead buys a $10,000 government bond that funds the stimulus bill. Washington spends that $10,000 in a different town, supporting jobs there instead. The stimulus has not created new jobs. It has merely moved them to a new town.

Posted by: Sarah at 09:10 AM | Comments (4) | Add Comment
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1 The idea that government spending creates jobs makes sense only if you never ask where the government got the money.

We educators make sure that no one ever asks such questions. Question authority only when Republicans are in power!

It didn’t fall from the sky.

Of course not. The money comes from eeeevil rich people who won't share their wealth with you! Demand your fair share! Vote Democrat! (At least until Communists are on the ballot. Who keeps them off? McCarthyism lives - even in modern Omerica!)

The only way Congress can inject spending into the economy is by first taxing or borrowing it out of the economy.

But at least Congress is doing something, unlike the Republicans who can only say no, or the lazy libertarians who believe the economy runs itself - hah!

However, the private sector now has $300 billion less to spend

Good. The more money in government hands, the better. The government has collective wisdom lacking in unwise greedy individuals.

The stimulus has not created new jobs. It has merely moved them to a new town.

A more deserving town. Redistribution is righteous.

Posted by: kevin at February 18, 2010 01:46 PM (+nV09)

2

Well, as a business owner I agree completely that the accounting doesn't add up.  BUT!  It does have an affect on public opinion and empty statements like "we've created jobs" actually do help to improve people's spending habits.  

I've seen it first hand.  The whole thing doesn't make a lick of sense on a rational level, but it seems to be serving an emotional need.  I'm not educated enough on economics to understand what that emotional satisfaction is "worth" but it seems to be working from my (admittedly low-level) experience.

Posted by: the pinko at February 18, 2010 03:24 PM (wZ30l)

Posted by: david foster at February 18, 2010 05:57 PM (Gis4X)

4 The "jobs" being created are government jobs...expanding the empire. I just laugh when I hear the President or Biden or whomever bragging about job creation...it reminds me of what Romney said in one of his campaign stop talks...something about if the best hope for the future of job creation is in the government sector and not private enterprise, we're all in trouble...I agree!

Posted by: Nicole Namken at February 19, 2010 01:48 PM (es18+)

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