The Broken Window Fallacy

I agree with the fact that government spending - when that government is in debt - will necessarily decrease the wealth of citizens, either directly through taxation or inflation.

What I don't agree with is the notion that government public works programs must stimulate an economy less than if that amount of money spent was not drawn to it through taxation/printing more money. Most people that are anxious about their economic situation are not going to go out and shop if some money comes to them; they're going to hang onto it in the bank or on-hand in cash.

Consider it this way: there is $1 million that can either be spent by the government or be placed in the hands of the people (through decreased taxation, say). If the people, on average, save about 20% of their income, only 800k is going to be used towards economic activity versus the $1 million that would be spent by the gov.

You can debate the ethics of the situation, but we're talking economics. The only way that government stimulus would be less efficient would be if their "inefficiency factor" exceeded the savings rate. I don't know much about the cost-per-job rates between government and private contractors, but I would assume the government is less efficient. I would also imagine, though, that people would choose to behave in an incredibly frugal manner (i.e not spending) during a recession.

 

Most people are pretty stupid then. Aren't they aware of the current devaluation of the dollar that's occurring right now? Do you actually believe that wealthy people are storing their value in dollars even though the value of the dollar (read: purchasing power) decreases on an almost daily basis?

People aren't saving their income in dollars unless they really are ignorant of the ever-decreasing value of the dollar.

Also, you're simply ignoring the unseen consequences. Think of all the bureaucratic red-tape that $1M has to go through...

Do you think charities are 100% efficient? If not, then why do you believe the government would be? They're not going to take any cut out of the goodness of their hearts? Puhhhleaaaasse.

The end justifies the means, right?

Incorrect. You're only thinking short-term. You're ignoring the unseen consequences of the long-term effects of the government stealing wealth from the general populace. When people save, they usually are doing it for a good reason. Taking their money by force is a nice short-term solution, but it is completely unethical and ignores the long-term consequences of such an action.

Do you think if the government came in and swept up everyone's savings, that would be good for the economy? The government will make everything better, right?

In your reply, please define exactly what you mean by savings. If I keep 50 pounds of silver under my bed, should the government come and take that because I'm somehow destroying the economy by not spending? I'm sorry, but this line of thinking is just mind-boggling for me to even contemplate, let alone try to understand.

Not everyone is behaving frugally in this recession. JP Morgan bought quite a lot of gold in the last quarter. I wonder what Goldman-Sachs is/was investing in...

 

Hey Mist,

really rational post but I'm gunna toss my pov on some of the things you said, I had similar beliefs at one time.

I won't go into a hypothetical about who will do what with what when giving whatever. But the last bit is where I'm gunna pinpoint.

If someone keeps all of their money on hand, it's not doing anything. Nothing is going to stop these people from keeping $25,000 in grandma's wedding dress in the attic. And yes, that money is doing nothing there. However, just putting money in a bank is doing something with your money. That's one of the ways the bank makes money. It takes all of the investments people make and then they reinvest it elsewhere.

You could think of that kind of like spreading the wealth. Only you still have your stake, your money is insured (granted by the Fed - big whoop) and the banks with higher returns on invested money would, logically I hope, get more customers.

I'm just saying that money in the bank is doing something. And because the banks would, ideally, compete for customers, they are incentivized to do good things with it, else they go out of business. Where government doesn't go out of business regardless, and I don't think anyone will argue that government is run by the smartest, most benevolent and qualified people.

Whether or not that is how it works is debatable, but a lack of competition in banking is more likely due to government legislation than to banking.

Well, that's still much better than government spending any money.

The auto bailouts are a perfect example of this.

If the auto companies were making cars people wanted, they'd be in business. Instead, they were subsidized.

I like Tesla, the car company. Kyle pointed this out to me a while ago - because we 'saved' two car companies with failed models companies that are actually providing what people want have to work even harder.

Government arbitrarily decided the auto industry was necessary and that despite millions of American consumers saying it wasn't important enough to spend their money on it, or they'd have bought those cars instead.

The point is, it was spent the way a few people in gov wanted it spent. Instead of how the millions of people who paid the taxes wanted it spent.

The banks are another good example. If they had sound business models, they wouldn't have failed. If they'd have taken down our economy with them . . . how bad would that have been? There's still a demand for good banks. Good banks could have handled it. Instead, we paid a fuckton of money for continued failure.

You're right, ethically it is impossible to defend government spending. It's theft.

I understand what you are saying but you're arbitrarily setting the bar in a hypothetical situation and using an assumption to make your conclusion but I don't think it's that simple.

For example, every dollar spent on war or arms or military in general is wasted money. If the gov took that money and gave everyone in america a gem encrusted platinum dildo they'd be doing more good with the money.

But for sake of argument, I'll say you are right - though I disagree and it is only to make a point.

If, during a recession, government is better at stimulating the economy than a normal citizen, why don't we just increase the tax rate to 100% during a recession, print tons of money and spend it. Ethics aside, if I understand it correctly, I think you're saying government does it better during a recession. So, wouldn't it logically follow that we should let them spend all our money however they please?

 

Mist, even my state run macroeconomics class taught me that bigger government = lower respending rate. This lowers final economic output by a multiplicative amount.

I can't remember why exactly, but I would take a wild guess and say they are less efficient since they don't have to compete for their dollars -- they take them by force.

 

They don't have to spend it on anything that's actually needed either.

Greatest Marine to have ever lived:
THREE TITLES [3] for the PRICE OF ONE.

 

In our current situation, as in all economic situations, the value of savings cannot be marginalized. Since we both agree, at least to some extent, that taxation and inflation are harmful to an economy, let me address your comments about spending, rather than saving, $1 million. It sounds to me, though I could be wrong, that you believe that without consumption the economy stops working. Which is true. However, consumption must be harmonious, or as close to harmonious as possible, with two other economic factors. You must have capital and production in line with consumption if the economy is going to function properly.

If you do not have capital (savings) then you cannot have production. If you do not have production then you cannot have consumption. And if you do not have a stable medium of exchange (money) that facilitates the interaction of these three factors then you cannot have a prosperous economy at all. For an economy to grow you must have producers producing their goods and services for consumers to buy. However, for production to occur you must first save, forgoing consumption, in order to acquire the capital goods necessary for the creation of producer goods. Capital can only come from savings and it is with savings that you can fund the production of consumer goods. Said differently, without savings your economy will not grow.

Here's an example. You suddenly find yourself alone in a vast wilderness with abundant natural resources. You have nothing but some tools you brought with you... and clothes. It's cold where you are so you decide you need to build a fire to stay warm. Thus starts your economic activities. You cut some wood and set about building a fire. The fire is nice and warm and you are able to sleep in relative comfort during the night. The next day you decide you'd like to stay warm so you expend some labor cutting wood enough to last the day. Every day you wake up, cut enough wood to get you through that day and the rest of the night, and then go about your other business. Your job is the production of wood to keep you warm. In your economy you are consuming exactly what you produce. You are not richer or poorer. You just are. As time goes on you realize that it might be nice to have a house to keep the rain, snow and bugs off of you.

You realize that your will be better off, wealthier, if you build some shelter and you just happen to be in the wood cutting business. Now, in order to build this house you are going to have to do something very important: Save. Everyday you are going to have to set aside some wood so that you can build your shelter. If you consume (burn) exactly what you produce (the wood) your wealth will never increase. You will simply continue to live, essentially, paycheck to paycheck. But if you set aside some of the wood you cut down, or cut down even more wood and set the extra aside (your profit consequently) you will, in short order, have enough wood to build your shelter. Once you build your shelter something very important happens. You look around and realize that because of this house you are safer, cleaner, healthier and more importantly, wealthier. Your one person economy only grew when you set aside some capital (wood) to build your house. If you continued to burn what you produced then you would still be out in the woods with nothing but a fire to keep you warm. However because you saved you were able to invest that savings (the wood) into the production of shelter. It employed your labor for a time and now, after moving into the place, you realize just how much better off you are with some shelter. And you find you don't have to cut as much wood to stay warm. Your life is much better because of the capital (wood) that you saved. You have just increased your overall wealth.

My point of this illustration is that you can't just continue to consume. Eventually you are going to have to start sacrificing and save some of your money. If we want our economy to grow then savings has to go up and debts need to be paid off. We would get better long term results if we saved that $1 million rather than spent it. If we ever want to be wealthy again then the United States has to start saving more money than it spends and pay off its debts. Without capital the economy cannot produce and the whole system falls apart.

 

Great find!!
Basically, the rich get richer; the poor get poorer..unless something changes.

 

My grasp on economics is flimsy so correct me if im wrong here. Is this a fallacy? If a local government building was vandalized, and the criminal escapes, the building would pay taxpayer dollars back to taxpayers to fix it. AND the police force can use their tax $$ to search for a REAL criminal! OR this is a radical stoner theory.

 

the fallacy is the notion that destruction creates wealth. in your example the destruction of the government building and subsequent rebuilding comes after the destruction of the taxpayers wealth (in the form of taxes). it's getting paid with your own coin.

try this: take money from yourself, then pay it back to yourself. at the end of it have you really gained any ground? in fact you are worse off than you were to begin with, you have lost wealth if even only in the form of your time.

 

I dont see how the situation is similar because I dont get money back from buildings like court houses. My point is this, we already paid for the building, subsequent funds go to the court in the form of fines, and average taxpayer gets none. If vandalized, the court would invest tax dollars back into the economy in the form of repairs. Average taxpayer receives tax dollars he otherwise never wouldve seen.

Call it a local stimulus package

 

[quote name='iliekweed']I dont see how the situation is similar because I dont get money back from buildings like court houses. My point is this, we already paid for the building, subsequent funds go to the court in the form of fines, and average taxpayer gets none. If vandalized, the court would invest tax dollars back into the economy in the form of repairs. Average taxpayer receives tax dollars he otherwise never wouldve seen.

Call it a local stimulus package[/QUOTE]

but you would if you were the person contracted for the repairs (to use your example). this is exactly "getting paid with their own coin". cut out the middle man and not pay the effing taxes in the first place, it would be better for everyone.....except the parasitic government.

 

I agree about the whole fuck taxes deal. Sadly tax evasion is difficult for some. Assuming the contractor pays taxes, he's getting back money that wouldve continued to fuel the government and investing it back into the economy. Something the courts rarely have to do.

Every taxpayer and person forced to pay fines for unjust laws is guilty of funding this bullshit, the ultimate trap. Would vandalism of courts generate economic activity with money that otherwise would continue to enforce unjust laws?

edit: I agree with the paying with your own coin statement, but Id rather pay for other shit than what our govt has to offer

 

oh. i get what yer saying. but still if they have to pay for repairs they will just tax more. no matter how much you smash, the "fascism" part of the government duties will always get funded.

 

The fallacy is that wealth can be created through governmental action. This is an entirely false premise. Government cannot create wealth because government is directly involved in the destruction of wealth. First, the government has stolen money from the taxpayers to build the court house. That money could have been used to create productive jobs. "But lots of people have jobs at the court house" one might say. True, but they are not productive jobs. They do not give back to the economy because the wages court house employees are paid are taken from taxpayers with no real benefit to the economy. The taxes taken to build and support the court represent real losses to our productive economy.

Second, in order to replace the window still MORE tax dollars are going to be used to buy the window and have it installed. That represents more money taken out of the productive economy and wasted in the unproductive economy.

Third, the average taxpayer does not "receive tax dollars he otherwise wouldn't have seen." The taxpayer is robbed again for the repairs to the window. The net effect on the economy is really a loss as productive workers are robbed of their income so that it can be wasted in unproductive ways.

 

At least we'd know for sure our taxes were stimulating local economies! Im still waiting for proof those bailouts worked.

 

oh, they worked perfectly for the banks that received them.

 

The cycle continues haha.

@kingmonkey: I understand the money shouldnt go to them in the first place. BUT this acts more as a transfer of wealth from govt to the average working citizen. Whats more unproductive than imprisoning people who smoke weed? Why not at least make sure they invest tax dollars, into some form lf job production? Im sure at some point we'd put a dent in excess funds judges and LEO's could pocket.

 

But it hasn't stimulated the economy. All you've done is take X amount of dollars from Mr. Citizen and transferred it to the glass installer, minus the cost of the materials etc. While you've provided some benefit to the glass guy you have depressed the economic situation of the taxpayer. There is no gain.