Economic fallacy even a progressive can understand

[Wiseone]

Sadly, few here who need to heed this message, will even bother.

If nothing else, it is good reference and goes in the record... I'm bookmarking this thread for future use as nose rubbing material.

I'd love look at this materials, but I hate to support snobbery.

 

[Slartibartfast]

The chart addresses it but does not refute the fallacy of it.

Care to back that up? I have already stated my reasoning behind my claim.

 

[Ockham]

The video makes a bogus assumption, that the stimulus would be used to repair the bakers window. Stimulus funds should be used to invest in our country, such a bridges and highways. This is what happened during the Eisenhower administration in the '50s.

I don't think that's a bad assumption. The American Recovery and Reinvestment Act was full of pork ... the assumption that stimulus would be used for such repairs is absolutely valid. I mean, when honeybee insurance is put into the bill... why wouldn't broken windows be included?

 

[Ockham]

Care to back that up? I have already stated my reasoning behind my claim.

Perhaps you can point it out because when I look at your chart - it doesn't refute the broken window fallacy - and I"ve already pointed out where your reasoning is based on an assumption that doesn't exist. You want me to back up something in your chart that doesn't exist?

 

[imagep]

yes! and all the money that you use for the stimulus comes from the Magic Money Tree, correct?

Actually, quite a bit of it will come back to the government in the form of taxes and savings from unemployement benefits. The remainder comes from the Magic Money Tree AKA The Federal Reserve.

 

[imagep]

Something else the OP's video sort of skips over is at the end. The baker says the community is out a window and a new suit because the money he spent to repair the window would have been spent on a new suit.

Except, the window repair man will spend the money he receives from the baker.

The money still goes into the economy, just via a different route.

EXACTLY!!! The economy is never "out" money, it just passes from one hand to the next. From a macroeconomic view, money does not disapear and can not be wasted. Only materials, labor, and energy can be wasted.

 

[Harry Guerrilla]

As are Friedman and the Chicago school.

That's why I'm more of an Austrian.

 

[washunut]

EXACTLY!!! The economy is never "out" money, it just passes from one hand to the next. From a macroeconomic view, money does not disapear and can not be wasted. Only materials, labor, and energy can be wasted.

Not sure that this is accurate. A reason why a recession caused by Financial problems versus a general economic cycle recession is different. We went through a banking ( financial) crisis. This lowered the capital in banks which in turn reduced the amount of money they can lend, contracting money supply.

 

[Slartibartfast]

Perhaps you can point it out because when I look at your chart - it doesn't refute the broken window fallacy - and I"ve already pointed out where your reasoning is based on an assumption that doesn't exist. You want me to back up something in your chart that doesn't exist?

Ok. Here is how I see it

Scenerio 1: Money is spent on something. Perhaps some groceries or a haircut whatever.
Scenerio 2: Same money is spent on repairing a washing machine.

Basically, a broken window scenerio. Repairing the washing machine carries an opportunity cost because that money could have been spent on a haircut or something.

What we do not know (and what was not mentioned in the video): Does the money spent on fixing a washing machine vs money spent on a haircut contain the same stimulative effect on the economy. In both cases does the money go as far through its various transactions beyond the initial spending? For this scenerio, we will probably never know as I am sure nobody has studied its effects. However, the essential issue is whether the economy reacts the same to all purchases.

I do not think it does, (this is the part where the chart comes in). Now again, on a domestic level, the difference in stimultive effect is probably nil since its a small amount of money (lets say $25 for a new drum belt vs a haircut).

When billions are spent, that difference in effect (again the chart comes in) becomes more obvious because the effects are magnified. At this point, we can know whether there is a profit for the economy as a whole or not. Also, at this point, the actual damage to infrastructure (broken washer) is no longer a consideration as nothing was broken. We did not damage infrastructure to make the stimulus happen, so the cost there is $0. All that is left is comparison between the opportunity cost of the taxation vs the effect of the spending (minus any administrative overhead, and I will go ahead and agree that there is plenty of that). It is by comparing those two things that we can know what is really happening to the greater economy. (again referring to the chart).

These are considerations that I feel are necessary to bring into this kind of discussion that I did not see the initial video raise and because those concerns were not addressed, it is making an invalid comparison. Ultimately it is a question of where the money is more useful. The answer to that last question depends on a whole lot of stuff and I am not going to bring up everything the stimulus spent money on. I think that in some cases, it would have been more useful to not tax in the first place and in others it would have been more useful to tax and spend.

Oh and here is the chart again for easy reference.

 

[Ockham]

Ok. Here is how I see it

Scenerio 1: Money is spent on something. Perhaps some groceries or a haircut whatever.
Scenerio 2: Same money is spent on repairing a washing machine.

Basically, a broken window scenerio. Repairing the washing machine carries an opportunity cost because that money could have been spent on a haircut or something.

What we do not know (and what was not mentioned in the video): Does the money spent on fixing a washing machine vs money spent on a haircut contain the same stimulative effect on the economy. In both cases does the money go as far through its various transactions beyond the initial spending? For this scenerio, we will probably never know as I am sure nobody has studied its effects. However, the essential issue is whether the economy reacts the same to all purchases.

The point is not how does the spending effects the economy - but the individual. Yes there's an expansion effect but the crux of the fallacy is understanding what "is not seen". The baker could have had the window + the suit, in the example, he only has the window which is what he had before it was broken - to the individual it's a loss. The fallacy is that spending on the loss (broken window) stimulates spending and stimulates the economy - but it does not. Somehow that fact is being either ignored or excluded in favor of the downstream effects.

I do not think it does, (this is the part where the chart comes in). Now again, on a domestic level, the difference in stimultive effect is probably nil since its a small amount of money (lets say $25 for a new drum belt vs a haircut).

When billions are spent, that difference in effect (again the chart comes in) becomes more obvious because the effects are magnified. At this point, we can know whether there is a profit for the economy as a whole or not.

Billions are spent --- you're comparing an individual event to a consolidated set of events. You're right in that the inviddual event effect is nil, however, this country is made up of hundreds of millions of individuals - therefore the effect is not nil, but probably is not measured. For example, small businesses like the bakery in the video would and do have a cumulative effect and growth or lackthereof is attributed to those small businesses not being able to stay in business or not being able to keep employees employed.

Also, at this point, the actual damage to infrastructure (broken washer) is no longer a consideration as nothing was broken. We did not damage infrastructure to make the stimulus happen, so the cost there is $0. All that is left is comparison between the opportunity cost of the taxation vs the effect of the spending (minus any administrative overhead, and I will go ahead and agree that there is plenty of that). It is by comparing those two things that we can know what is really happening to the greater economy. (again referring to the chart).

Infrastructure has an initial cost. The cost of the initial building or construction carries a cost - the depreciation of that infrastructure therefore also has a cost as it then has to be repaired. Infrastructure doesn't grow on trees and it's not free. By keeping infrastructure (and not destroying it - with also carries a cost btw), it continues to carry a cost. Therefore your view that cost is $0 is never correct. Costs are carried over, and existing costs and depreciation occur and continue to occur.

These are considerations that I feel are necessary to bring into this kind of discussion that I did not see the initial video raise and because those concerns were not addressed, it is making an invalid comparison. Ultimately it is a question of where the money is more useful. The answer to that last question depends on a whole lot of stuff and I am not going to bring up everything the stimulus spent money on. I think that in some cases, it would have been more useful to not tax in the first place and in others it would have been more useful to tax and spend.

The answer to where the money is most useful is: With the individual or with the small business... like the bakery. I am not arguing that NO dollars need to be spent for roads, signs, etc... money does have to be spent. But, when that money is spent, for example: like on perfectly good highways near my home which are NOT in need of repair but are being ripped out and replaced because the money is designated to the State and the State must use it or lose it to someone else - the State takes the money for construction in order to temporarily create jobs. That money is not paid for but is added to a deficit of future tax money needed to be paid... Therefore, the broken window is the fallacy that spending such money stimulates the economy -- when if the money was never spent - the people using the road would have still been able to travel them without hardship, and that those individuals would be better off stimulating the economy by KEEPING that money and spending it, instead of being forced to pay for temporary jobs, to fix roads which do not need fixing.

Oh and here is the chart again for easy reference.

When the premise is flawed and wrong, the chart won't save it.

 

[Slartibartfast]

As far as I can tell, I have already addressed the points you bring up, except for maintenance cost to infrastructure. You are right on that point.

 

[Harry Guerrilla]

This is by far a better way to learn about the Broken window fallacy.
It also credits it's creator.

"Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

"Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions."

"Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen."

"But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."

"It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented."

Parable of the broken window - Wikipedia, the free encyclopedia

 

[Khayembii Communique]

The broken window fallacy has nothing to do with the point the morons that made the video were trying to prove, so why are we talking about it still after 7 pages?

 

[Renae]

The broken window fallacy has nothing to do with the point the morons that made the video were trying to prove, so why are we talking about it still after 7 pages?

It has everything to do with their point, and the FUNNIEST PART IS, you are the exact type of person they are calling out.

 

[Khayembii Communique]

It has everything to do with their point

No it doesn't.

 

[imagep]

Not sure that this is accurate. A reason why a recession caused by Financial problems versus a general economic cycle recession is different. We went through a banking ( financial) crisis. This lowered the capital in banks which in turn reduced the amount of money they can lend, contracting money supply.

It's my understanding that banks suffered great losses (negative profits) due to bad loans, but I don't think that people pulled money out of bank accounts. I am under the impression banks still had lots of (other peoples) money to lend, just none of their own money to pay their operating costs or meet minimimum reserve requirements. They did however reduce the amount of lending that they were doing because they were afraid of the economy and afraid that good lending desisions could easily turn into bad lending situations (with everyones income source at risk).

Like you said, I am not sure that my impression is accurate. Do you have any evidence to the contrary (like a link to a chart or table showing just how much money was deposited in banks at various time points)?