Destruction is Not Profitable

March 15, 2011

You might recall the scene in The Social Network where the Winklevoss brothers take their case against Mark Zuckerberg to then Harvard president Larry Summers. In the scene, Summers is rude, arrogant, and dismissive, which by all accounts is exactly how he is in real life. Summers, who has also been Secretary of the Treasury under Clinton and Obama’s Director of the White House National Economic Council, is known for his confidence in his own great intellectual prowess.  In a recent interview on CNBC, Summers claimed that the devastation in Japan could actually temporarily boost the economy as rebuilding takes place.

Other economists have argued that the destruction will provide a long-term benefits:  “This is a Keynesian stimulus program that nobody can argue with: just rebuilding the city of Sendai,” said Marcus Noland, deputy director of the Peterson Institute for International Economics in Washington.” The Wall Street Journal reports that: “Some economists [unnamed] have argued that a quake could actually lift the economy in the long run.”

I find these predictions offensive. The suffering of the Japanese population is far beyond the experience of most of us. I wonder if Summers and Noland would consent to having their homes and hometowns destroyed in the name of stimulating the economy.

Last night I asked my 15-year-old children, sophomores in high school, whether they thought destruction could stimulate the economy? My daughter was puzzled, “Why would you even ask such a question?”

“How could it?” my son challenged. He correctly explained that resources going into rebuilding towns that were once perfectly usable are resources that would no longer be able to satisfy other needs. My son gets an A in my economics course; Summers and Noland earn Fs.

Of course, official GDP data may indeed show the stimulating effect of government spending; but this is simply how GDP is counted. Any money government spends is counted dollar for dollar in GDP. If government hires workers to dig holes and then fill the holes again, GDP may increase. But surely no one would argue that the economy has improved by such a measure. Having workers dig holes and fill them up again is not contributing anything to satisfy the urgent needs of consumers.

Currently in Japan, “evacuation centers have half a million people in centers and schools that don’t have water, electricity and oil”. Government efforts to resupply the population are of course necessary. Those efforts will cost more than the displaced population would ordinarily spend on their own food and shelter. GDP will thus increase, but in no real sense has the economy grown.

Similarly, government cleanup efforts in the failed nuclear reactors will cost far more than energy companies would’ve spent generating power. Again GDP may increase, but that is simply a problem with how this statistic is calculated.

In 1848, the great French economist Frédéric Bastiat first published his essay “What Is Seen and What Is Not Seen.” Bastiat distinguishes for us the bad economist from the good economist: “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

Next, Bastiat dismantles what has come to be known as the “broken-window fallacy”:

Have you ever been witness to the fury of that solid citizen, James Goodfellow, when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: “It’s an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?”

Now, this formula of condolence contains a whole theory that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions.

Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs’ worth of encouragement to the aforesaid industry, I agree. I do not contest it in any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.

But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.

It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.

Let us next consider industry in general. The window having been broken, the glass industry gets six francs’ worth of encouragement; that is what is seen.

If the window had not been broken, the shoe industry (or some other) would have received six francs’ worth of encouragement; that is what is not seen.

And if we were to take into consideration what is not seen, because it is a negative factor, as well as what is seen, because it is a positive factor, we should understand that there is no benefit to industry in general or to national employment as a whole, whether windows are broken or not broken.

Now let us consider James Goodfellow.

On the first hypothesis, that of the broken window, he spends six francs and has, neither more nor less than before, the enjoyment of one window.

On the second, that in which the accident did not happen, he would have spent six francs for new shoes and would have had the enjoyment of a pair of shoes as well as of a window.

Now, if James Goodfellow is part of society, we must conclude that society, considering its labors and its enjoyments, has lost the value of the broken window.

From which, by generalizing, we arrive at this unexpected conclusion: “Society loses the value of objects unnecessarily destroyed,” and at this aphorism, which will make the hair of the protectionists stand on end: “To break, to destroy, to dissipate is not to encourage national employment,” or more briefly: “Destruction is not profitable.”

“Destruction is not profitable.” What can be simpler to understand? Apparently it takes a keen intellect to think otherwise. But, by behaving badly, Larry Summers is doing us a great service. Through his prediction he is exposing the utter intellectual and moral vacuity that is behind Keynesian economics. In his world, governments need not be concerned about the effects of its policies on individual citizens or, for that matter, the real impact on the economy. All government needs to do is spend and say it has increased GDP. If the understanding of Summers and others like him is limited to measurable but problematic statistics, their understanding is shallow indeed.


Real Charity

December 24, 2009

Recently, I was deeply touched to learn of a practice at our local high school. There are students in this high school who have little either in terms of family support or financial security. The faculty quietly identifies those young people and collectively ensures that they have a Christmas. This is all done behind the scenes, with no fanfare, and without any official bodies getting involved. Importantly, these students feel that someone cares and that this caring is genuine and heartfelt.

This is the essence of real charity. Thomas Jefferson wrote of charity:

I deem it the duty of every man to devote a certain portion of his income for charitable purposes, and that it is his further duty to see it so applied to do the most good of which it is capable. This I believe to be best assured by keeping within the circle of his own inquiry and information the subjects of distress to whose relief his contribution shall be applied … The question, then, is whether this will be better done by each of us appropriating our whole contributions to the institutions within our reach, under our own eye, and over which we can exercise some useful control. Or would it be better that he shall divide the sum he could spare among all the institutions of the state, or that of the United States? Reason, … certainly decide in favor of the former practice.

As Jefferson tells us, even the smallest bit of reason tells us that our charitable giving is best deployed in areas of which we have direct knowledge. In the high school example I gave, there is no bureaucracy to drain away the money, no one-size-fits-all rules that create distortions and disincentives, and there are no applications to file. In the end, everyone—giver and receiver—is enriched by this kind of charity.

One can’t help but contrast this real charity with a story that arose during the debate on the health care bill passed by the Senate last night. Lindsey Graham, a Republican Senator from South Carolina, was incensed over the provision added to the bill which permanently exempts Nebraska from paying Medicaid costs that all other states must pay. This exemption was the price of getting the decisive 60th vote of Nebraska’s Senator Ben Nelson.

U.S. House Majority Whip Jim Clyburn, a Democrat from South Carolina, responded, “Rather than sitting here and carping about what Nelson got for Nebraska, I would say to my friends on the other side of the aisle: Let’s get together and see what we can get for South Carolina.” In other words, Clyburn’s remedy is to expand the circle of theft. This is not charity, this is not kindness, this is not compassion—real taxpayers pay for these backroom deals.

Clyburn is very familiar with the art of taking from taxpayers and giving to special interests– in Congress this is euphemistically known as earmarking. The Myrtle Beach Sun News ran an article that in tell us of some of Clyburn’s earmarks for special interests dear to his heart—his own family:

One is a grant to The African American Museum in Charleston, South Carolina, and the other was to a non-profit organization in Georgetown, South Carolina which was intended to find jobs for the poor.  Both of these earmarks for building projects in which the Congressman’s nephew was the designer. Even more problematic is a grant to the airport in Augusta, Georgia, to build an extension.  The lobbyist for the airport was William Clyburn, Jr., a cousin of Representative Clyburn.

For all I know, these may be worthwhile projects. But Jefferson’s advice is sound. Let, for example, the citizens of Charleston contribute to their own museum on a voluntary basis. If the project has regional or even national merit, voluntary fund-raising can be expanded.

The great 19th Century French economist Frédéric Bastiat wrote, “Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.” Even more troubling, especially during this Holiday season, is that this fiction pits brother against brother:  Nebraskans against the rest of the United States, the needs of Clyburn’s relatives against the needs of our own. I would imagine that Clyburn’s remedy would be to tell us to lobby for our own relatives. But what if we don’t want to? What if appropriating other people’s money for our own benefit violates our sense of right and wrong? What if we want to be left alone and contribute to the needs of those of whom we have direct knowledge as Jefferson advised and as common sense dictates?

This Christmas, the Clyburn’s of this world are on the ascendancy. And as they ascend, real charity shrinks and real suffering increases. But as the faculty of our local high school demonstrates, human decency will always be alive.


A Teachable Moment

August 6, 2009

This is a speech that, in some form, a future president of the United States will have to give if our freedoms are to be restored.

My fellow Americans,

I come to you tonight not just as your President but as a teacher and a fellow learner. All teachers need to learn too. How can I lead, how can I teach, if the principles that guide my behavior are not renewed in me every day? Over the coming months, I hope we will join together as a nation in conversation. A conversation, not just with empty promises—such as “unleash prosperity for everybody” that one of my predecessors gave in 2009—but  a conversation with great ideas. And the point of this conversation will be not just to study what somebody else had said, but to learn that, as a free people, we must understand these ideas for ourselves.

Our nation is bankrupt, and it is time to rebuild. But we can only rebuild upon the principles that promote freedom and prosperity. So tonight, I come to you to begin a national dialogue on these principles. This educational process will take many years.

How can we learn anew the value of something that we have deliberately thrown away?  Many of us learn by stories. A story can give rich meaning to a principle, and tonight, I start with one. One would’ve thought that a basic principle such as you can’t destroy your way to prosperity would have been obvious. Unfortunately, back in 2009, it wasn’t obvious to even some trained economists.

You may recall the so-called “cash for clunkers” program. That program paid a person $4500 to trade in an old car for a new car. The government then required the dealer to destroy the old car. Not even the engine or the tires could be salvaged.

Famous economists, such as Alan Blinder, supported the bill as a good stimulus for the economy. Many politicians claimed the bill was good for the environment. Many in the public, their powers to reason having atrophied, based their opinions on the thirty-second bites they heard on the news.

But what could we have been thinking? The idea that we can create prosperity through destruction was proven to be a fallacy in 1850 by the French economist Frederic Bastiat in his essay “What is Seen and What is Not Seen.”

What is seen is that there is a new car sale that may not have occurred otherwise. What is unseen is the effect that the money would have had had it been saved or spent on something else. What is unseen is that there are fewer used cars for poor families. What is unseen is that the supply of used engines is reduced. What is unseen is that the environment is damaged by all of these cars that have been destroyed.

At one time in our history, logic was part of the curriculum in our schools. Reductio ad absurdum means to refute an argument by showing the logically absurd consequences of the argument. If cash for clunkers was a good idea, would it not have been even better to bulldoze old houses and give those families cash to buy a new house? Any school boy who had studied the logic of Bastiat’s essay could have pointed out that we would have been poorer, not richer, had we done so.

Didn’t Congress and the President know better?  A fair assessment is that most Congressmen and the President were illiterate about economics. But their ignorance was an effect, not a cause of the terrible policies that were passed early in the 21st Century. The real cause was that the public was ignorant and content to be so.

And so we begin this national journey to learn anew our lost heritage. The role of these national conversations, which I will lead, will be not only to teach, but to inspire. But your inspiration will come not by cheering at platitudes but by your earnest study. This is the price that must be paid to once again be a free people. Only a people who understand the principles of liberty will elect politicians who support these principles. Thomas Jefferson understood the power of education:  “I know no safe depositary of the ultimate powers of the society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them, but to inform their discretion by education. This is the true correction of abuses of constitutional power.”


Destroying Our Way to Prosperity?

February 2, 2009

Last spring I sold my 1993 Toyota Camry with only 77,000 miles to CarMax for $1700. CarMax sold it to another dealer, who then sold it to an immigrant family in the Washington DC area. I know the sales chain, because we received a phone call from the immigrant family over a duplicate registration issue.

After the various markups, I imagine that for about $3000 the family purchased my reliable, scrupulously maintained, and very low-mileage car. For that family it may have been a blessing to be able to buy a reliable car for that sum of money. That’s what makes a marketplace—both parties in a voluntary transaction believe they will be made better off.

Would the country have been better off if I would have destroyed my Camry in exchange for a tax credit? Apparently some of our dedicated public servants in Congress think doing exactly that will stimulate the economy. CNNMoney reports that:

Under a bill introduced by Sen. Dianne Feinstein, D.-Calif., owners of older cars would get vouchers worth thousands of dollars toward the purchase of newer, more fuel-efficient vehicle. For the customer to get that cash, the car dealer would have to certify that the trade-in was getting scrapped and not resold. The car’s vehicle identification number (VIN) would be tracked to make sure it never shows up on a vehicle registration again.

I assume the family bought my Camry because they could not afford a new car. Perhaps they needed money for basics such as food or clothing and were satisfied with a used car. Or, perhaps they valued a private education for their children. Or, perhaps they were saving for a trip to their home country or a down payment on a house. Unfortunately, politicians like Feinstein think they know better how others should spend their money

Let’s make no mistake—destroying used cars harms the nation’s wealth and it makes us worse off. Feinstein may be chauffeured around in a limousine, but for some families the alternative to buying my used Camry is going without a car. Many of the Feinstein-type thinkers of the world are OK with this outcome too—they dream of a world where the masses are forced into public transportation and the roads are wide open for themselves. Sort of like the former Soviet Union or today’s North Korea where broad and empty boulevards whisk the Commissars around.

The idea that destruction can improve an economy was debunked in the 19th Century by the French economist Frederic Bastiat in his classic essay “What is Seen and What is Not Seen.” The essay, first published in 1848, demonstrated how a “society loses the value of objects unnecessarily destroyed.” Bastiat wrote: “To break, to destroy, to dissipate is not to encourage national employment, or more briefly: Destruction is not profitable.”

Is it too much to expect our lawmakers to research, rediscover, and put to use knowledge that mankind had already developed by 1848? Apparently so—pathetic ignorance is not a disqualification for serving in Congress.


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