Here is a short piece by Henry Hazlitt from his book Economics in One Lesson called “The Broken Window” Maneuver :
A young hoodlum breaks the window of a bakery and the gathered crowd begins to philosophize about whether the hoodlum really harmed anyone at all since he, after all, created employment.
He created employment by having to force the baker to pay the $250 it costs to fix the window to the window repair man. The window repair man will then have an extra $250 to spend with other merchants and those merchants will have more money to spend elsewhere. This line of thinking can continue on forever.
If it weren’t for the broken window then the window repair man would have less money and employment and so would the merchants he would spend the money with and so on.
So, what do you think? Should we stimulate the US (indeed, world) economy, simply by arming our population with rocks and asking them to all go break windows?
OK, the window repair man ends up with an extra $250, but what about the baker? He ends up with $250 less.
All the “young hoodlum” has managed to do is force the transfer of $250 from one person who had presumably already earned it (the baker) to another person (the repair man).
I suppose one could argue that the repairs creates a “cascade” effect since the repair man has to buy the components to make the repairs, such as the new glass and he has to buy gas to drive his truck to deliver the glass, etc. But wouldn’t the baker’s own puchase(s) with that $250 do the same? Perhaps he was planning to buy a new oven or replace a cash register at his shop?
This argument only has value IF the Baker had no intention to spend the $250 and he wasn’t even intending to invest it (since investing the $250 would have ultimately allowed someone else to spend it in some fashion that would have resulted in economic activity.)
The fallacy of the broken window theory is in many economic textbooks.
Society is better off with intact assets (a window in this case) vs one that is destroyed and needs repair. This is the same reason why starting wars is not beneficial for the world economy …
(ignoring the fact the US did great coming out of WW II simply because the productive capacity in Europe was destroyed and the US got the benefit of being the world exporter – like China is today).
BTW, Economics in one lesson is a great read!
The real lesson behind the broken window is that of opportunity costs and hidden costs.
Although the government might not actually be breaking any windows and we only see the billboards advertising how many jobs were created by government spending, what we miss are the jobs and the wealth that were never created, and those who lost purchasing power due to taxes and inflation.
“This argument only has value IF the Baker had no intention to spend the $250”
So, was Fed’s stimulus package a good idea? No immediate economic benefit if you merely used the money to bolster your savings or pay down debt!
Dave Ramsey and Suze Orman as US traitors?!
Adrian, no, the money spent by our Government was not money well spent.First off lets look at how many jobs were actually (saved or created).By Our Governments own admission, this was in the low end about a Million or 2 .There were more than 15 Million who lost their jobs. so per person expenditures would be ridiculous.Second, I don’t feel personally, that Our Government should ever Give our money away to bail out companies without our personal consent. We were not even given the option to voice our discontent over this bail out. Bailing out companies who just about bankrupted the entire world only serves to encourage this type of mismanagement in the future.Its happened in the past,and now it will happen again.My personal opinion might not be every bodies, but I feel those companies should have been left for the grave yard.I could go into a long drawn out discussion about this,but if those banks had been left to fail,The FDIC would have stepped in,taken over the assets,sold the good assets to smaller (better managed )banks and those banks in turn would have grown into larger banks,taking up many of the lost employees from the failed banks.The way our system was designed to work in the first place.Finally, I am not convinced that the new regulations even cover the tip of the ice berg for these banks,so the system they run by remains broken.
>So, was Fed’s stimulus package a good >idea? No immediate economic benefit if you >merely used the money to bolster your >savings or pay down debt!
If the banks are doing their jobs- i.e. lending money to make a profit then bolstered savings does boost the economy. You don’t spend it but the bank lends it out and someone else can spend the lent money to purchase goods or services.
As for paying down debt- it also boosts the economy as long as the holder of the debt doesn’t hoard cash.
Was it a good idea? Very hard to say- how do you accurately measure the economic difference of any large policy change?
Personally I think the best economic stimulus is building useful infrastructure- roads, bridges, water mains, etc. as they could provide more good to the population than they cost.
“”Personally I think the best economic stimulus is building useful infrastructure- roads, bridges, water mains, etc. as they could provide more good to the population than they cost.””
Actually, this is not the best method as it is only a temp fix. It is useful,but a better Way to stimulate the economy is to lesson Government interference in Business(read less regulation) as too much taxation and regulation is stifling to business,and tends to make us less competitive in the world markets.
@Adrian: Actually, if you read the rest of the sentence you’ll see that I mentioned investing the money. I guess I tend to lump savings and paying down debt together with traditional investing, namely because I tend to look at paying down debt (beyond minimum payments) as a form of investment. The only difference is that rather than earning a profit from a stock or interest on savings, you are reducing your costs (interest payments) by reducing your debt faster than “necessary”.
About the only case where I could possibly even consider this argument to have some merit would be if the baker had intended to take the $250 home and stuff it in a mattress, or do something similar where the money would have dropped completely out of circulation. Even then, at some point he is likely to go spend it so we’re back to the original point that the broken glass has only forced money to be shifted around, it hasn’t actually created any value.
“I tend to look at paying down debt (beyond minimum payments) as a form of investment.”
@ Robert – I couldn’t agree more!
If he set the $250 on fire then what he did was burn some pieces of paper. $250 of real value has not left the economy. What has really happened is that the supply of money has decreased, and that purchasing power has been transferred elsewhere. If you hold dollars, you will find that they will be worth ever-so-slightly more.
“If you hold dollars, you will find that they will be worth ever-so-slightly more.”
@ Invest It Wisely – Presumably not your recommended wealth-building strategy for my One Page Competition (assuming that the downward force of inflation well and truly negates the slight upward force of keeping money in tight supply)?!
LOL. Well I was just making the point that even if he hoarded the dollars we are still not justified in breaking his window. 😉