Transcript Economic Falacies

Economic Fallacies
Has the spending because of
9/11 helped the economy?
• Economists after 9-11 said that the
increased spending for security and
rebuilding would help bring us out of the
recession.
• Is this true?
• New York’s tax revenue dropped $1.5 billion, or about
6.4 percent between fiscal years 2001 and 2002
• Personal income tax revenues dropped $1.2 billion, or
about 26 percent over the same period.
• New Yorkers lost $2.8 billion in wages.
• Eighty percent of jobs lost due to 9/11 have returned
to the city, but the unemployment rate remains above
pre 9/11 levels.
• According to the city's tourism bureau, in 2003 more
visitors came to New York than ever before, even as
the number of international visitors was the lowest
number since records have been kept.
•
http://www.gothamgazette.com/article/issueoftheweek/20040906/200/1102
The Broken Window Fallacy
• The fallacy is that by destroying something
that must be replaced the economy grows.
• Why is this wrong?
• Is any more money spent than would have
been spent or invested before?
The Blessing of Destruction
• This is the foundation of the belief that war
is good for the economy.
• But this is just a large scale version of the
broken window fallacy.
• “What is harmful or disastrous to an
individual must be equally harmful or
disastrous to the collection of individuals
that make up the nation.” – Hazlitt
Public Works Mean Taxes
• Government spending is seen as the cureall for economic ills. “Is there
unemployment? Is industry sagging?
Have the Gov make up the deficiency.”
• This comes from the ideas of Keynes.
• But how is this spending paid for?
– Taxes
– Inflation
– Debt (future taxes + interest)
Taxes Discourage Production
• If you lose $1 of every dollar you lose, but
keep only 60¢ of every dollar you make,
how interested will you be in risking your
capital?
• If taxes are high, people will hide their
money to keep it safe from the
government. This is counter productive to
the economy.
Credit Diverts Production
• If the government grants direct credit or
guarantees private loans to ‘encourage’
investment, what is the effect?
• What is credit?
– Is Credit something given by the bank to a man?
– Or is it something the man already has because
of other assets or to proof of his character?
• Who should get credit?
Credit Diverts Production
• “The proposal is frequently made that the
government ought to assume the risks that
are “too great for private industry.” This
means that bureaucrats should be
permitted to take risks with the taxpayer’s
money that no one is willing to take with
his own.” – Hazllitt
• This just forces the taxpayer to subsidize
bad business.
The Curse of Machinery
• The fallacy is that machines, robotics,
automated factories displace workers and
this causes unemployment. Therefore we
should limit machines which replace
workers.
• What is wrong with this idea?
– If cost is decreased the extra profits are spent
– The machinery had to be produced with labor
– Not all machinery is labor saving in nature
Spread the Work Schemes
• The idea here is that there is a fixed
amount of work to be done so we should
spread it around to as many people as
possible.
• Does arbitrary subdivision of labor cause a
net gain to the economy?
Spread the Work Schemes
• How about changing the working week?
• If we make it shorter, then more people will
have to be employed to do the same work.
• Two options here:
– The workers get a cut in pay with the reduced
hours
– The workers get paid the same.
Spread the Work Schemes
• The root to the this fallacy is that there is a
fixed amount of work to be done.
• “There is no limit to the amount of work to
be done as long as any human need or
wish that work could fill remains
unsatisfied.” – Hazlitt
Disbanding Troops and Firing
Bureaucrats
• After a war, it is feared that at the return of
the forces there will not be enough jobs
and there will be high unemployment.
• This will certainly be a short term issue if
many troops return at once. But would it
be better to keep the men as soldiers, paid
by the Gov (and thus by our taxes)?
Disbanding Troops and Firing
Bureaucrats
• Soldiers are paid by our taxes.
• When they move to private industry, they
will no longer be supported by the Gov.
• The Gov will no longer need the taxes to
pay the soldiers so you and I will have
more money.
• With this additional money, we will
increase spending or saving which will
increase demand and create jobs.
Disbanding Troops and Firing
Bureaucrats
• The situation for bureaucrats is the same.
• “When your money is taken by a thief, you
get nothing in return. When your money is
taken through taxes to support needless
bureaucrats, precisely the same situation
exists.” – Hazlitt
The Fetish of Full Employment
• Economic progress is getting more
production with less effort.
• A country may seek to maximize
production. Full production cannot be had
without full employment. But full
employment doesn’t mean full production.
• Full employment is a myth chased by those
who thinks everyone must have a job
The Fetish of Full Employment
• “The progress of civilization has meant the
reduction of employment, not its increase.
… The real question is not how many
millions of jobs there will be in America ten
years from now, but how much shall we
produce, and what, in consequence, will
be our standard of living? The problem of
distribution on which all the stress is being
put today, is after all more easily solved
the more there is to distribute.” – Hazlitt
Who’s “Protected” by Tariffs?
• “In every country it always is and must be
the interest of the great body of the people
to buy whatever they want of those who
sell it cheapest.” – Adam Smith
• If say, a computer manufacturer in the
U.S. produces a PC for $500 but a
producer from Taiwan can make it for
$450. The U.S. guy asks the Gov for a
$50 duty to import the foreign good. Is this
a good thing?
Who’s “Protected” by Tariffs?
• How about if there wasn’t a duty on a good
that was only produced out of country.
Would it be good to introduce a tariff to
create a new industry in America?
• Who does a tariff benefit? Can it benefit
everyone? Or is the government just
playing favorites?
The Drive for Exports
• Remember the Mercantilists?
• Without imports there can be no exports
because of currency exchange.
• Should we loan to countries which have a
high chance of defaulting so that they
import our goods (increasing our exports)?
“Parity” Prices
• We ought to subsidize (or set price floors
for) the farmers because their incomes
have fallen and they don’t have the
purchasing power to maintain their
standard of living.
• How does this impact the city buyer?
Industry in general?
Saving the X Industry
• “The X industry is sick. The X industry is
dying. It must be saved. It can be saved only
by a tariff, by higher prices, or by subsidy. If it
is allowed to die, workers will be thrown on
the streets. Their landlords, grocers, butchers,
clothing stores, and local motion pictures will
lose business, and depression will spread in
ever-widening circles. But if the X industry, by
prompt action of Congress is saved – ah
then!” – Hazlitt
Saving the X Industry
• “Paradoxical as it may seem to some, it is
just as necessary to the health of a
dynamic economy that dying industries be
allowed to die as that growing industries
be allowed to grow. The first process is
essential to the second.” – Hazlitt
How the Price System Works
Stabilizing Commodities
• Price of some commodity is falling and we
must hold it up or the producer will go out
of business and then prices will skyrocket.
• The farmers and the speculators
• This leads to
– scarcity as producers hold items off market
– drop in exports as price rises
– stockpiles of the commodity built up
Government Price Fixing
• Why are the prices rising that you need to
hold them down?
• What happens when prices are held below
the level the market would set for them?
Rent Control
Minimum Wage Laws
The Function of Profits
• To channel the factors of production so
that items demanded are produced.
• To force businesses to increase efficiency
• To encourage men to take risks with
capital (start new businesses)