Home » Articles, Not So Fast! \
Bastiat and Bailout Blunders
When President George W. Bush promised government aid to General Motors, Ford and Chrysler, no doubt he read the New York Times, which has given economic advice even as its own media empire threatens to collapse financially. Perhaps he read the Washington Post or other mainstream publications that demanded government print more money, fix the balance sheets of bankrupt companies, and go on a spending spree of its own.
Even the thoughtful Stephen Chapman of the Chicago Tribune has called for inflation as a way (temporarily) to boost the economy. (One expects such nonsense from Paul Krugman and cheerleaders for the state, but when libertarians join the inflation chorus, we know we a crisis exists.)
Yet, there is someone that President Bush or Krugman and others with political power or influence have not read, although his words are wiser than those of all the modern political pundits put together: Frederic Bastiat. Readers of The Freeman or the FEE webpage likely are familiar with this French statesman who wrote some of the best economic prose of the Nineteenth – or any other – Century. We revisit one of his great works: That Which is Seen and That Which is Not Seen, completed in 1850, shortly before his death.
Bastiat explains that economic analysis depends not only upon observing those things which are readily visible – domestic auto workers receiving paychecks instead of being laid off – but also those things which do not happen because of the original action, things that in the long run would be more economically (and socially) beneficial. He writes:
In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause – it is seen. The others unfold in succession – they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference – the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, – at the risk of a small present evil.
Indeed, the “bad” economists have advised short-sighted politicians (Dare I repeat myself?) to do the most visible things. The news cameras will show the autoworkers in Detroit going to work instead of being laid off. When Congress and the incoming presidential administration raise the minimum wage, the news cameras will record the life of a single mother who has received a raise.
The cameras, however, will not record those millions of people elsewhere who lose their jobs because resources are being diverted from productive uses to the political uses of propping up automobile companies that have been a rendition of the “living dead” for many years. The cameras will not record those thousands of single mothers who are thrown out of work because the increase in the minimum wage essentially priced them out of the labor market.
Over time, unfortunately, that which is not seen at first ultimately is seen in its full horror. Nearly 80 years ago, presidents Herbert Hoover and FDR tried to prop up the U.S. economy by forcing up real wages, bailing out failing firms, promoting labor unions (and the violence that inevitably accompanies their activities), and inflating the dollar. What ultimately was seen was a decade of high unemployment which ended in the horror of world warfare.
Instead, of reading Krugman and other “distinguished” economists, perhaps policymakers should discover Bastiat. What he wrote 150 years ago still is more cogent and relevant than the entirety of what the political classes and their media allies are telling us today.
Categories: 
I certainly agree, and feel that unfortunately the above mentioned occurances are not the only “broken window fallacies” being followed by both the current and forthcoming administration.
economicsfreedommatters.blogspot.com
More economic plans on the horizon but will the impacts create net benefits?
Aside from the central planning tendencies implicit in the desires of the forthcoming administration, it appears that much of the thought process for their economic recovery has been built upon a fallacy. President-elect Obama’s regurgitated notion that government “make-work” programs will steer the economy in the right direction is simply more “broken window fallacy”.
In Frederic Bastiat’s essay, That Which is Seen and That Which is Unseen, written in 1850, he describes the event of a shopkeeper who has his window broken by a little boy. It was perceived by the town people that the boy, as a result of putting a window glazier to work, created a net benefit for the town. The unseen, as Bastiat describes, is the loss of income by the shopkeeper that could have been spent on something else – possible more productive. The town, as a result, did not receive a net benefit from the broken window. Henry Hazlitt also greatly expounded upon this concept in his book, Economics in One Lesson.
The following government economic plan, as part of the American energy resolution scheme, represents a “broken window” fallacy:
“[W]e will launch a massive effort to make public buildings more energy-efficient. Our government now pays the highest energy bill in the world. We need to change that. We need to upgrade our federal buildings by replacing old heating systems and installing efficient light bulbs. That won’t just save you, the American taxpayer, billions of dollars each year. It will put people back to work.” (link)
The first problem with this economic plan is that spending more government money cannot possibly save, in net benefits, American taxpayer dollars. If the government would like to help us, those in charge will need to cut total spending and taxes (e.g. corporate tax, income tax, dividend tax) to spur private productivity. It would seem evident that if we reduce the size of government the American taxpayer will spend less in housing those employed by government.
The second problem, and congruent with the first, is the idea that “make-work” programs can spur economic growth. Again, we cannot achieve net benefits as a result of any government reallocation of resources. Increasing employment in one sector of the economy, at the expense of another – possibly more productive sector, is merely a transfer.
24 December 2008 at 12:10 pm