Recent comments by politicians including a local mayor shows just how little our elected officials understand economics and just might point to why America is drowning in a sea of debt at every level of government.
Suggesting that the governor should issue an anti price gouging proclamation makes political sense but no economic sense. Letting prices rise encourages supplies to be replenished, encourages conservation and helps prevent hoarding. Capping prices does just the opposite and hurts far more people.
They continue to show their lack of economic sense by even suggesting that destruction either natural or man made has an upside. They believe it to be good because in the long run people have to rebuild and this creates jobs and has a multiplier effect.
Many economists, mainly those that subscribe to Keynes, suggest the same. Paul Krugman said after 9/11 the terrorist attack could “do some economic good.’’ We have to learn to look at the unseen and the unintended consequences instead of just the seen.
Speaking of the broken window fallacy my wife called me on her way home from work yesterday morning and said she has some bad news. She informed me while at work last night someone broke out the front passenger side window. Expecting much worse news by the way she said it I was relieved it was just a broken window. So I told her not to worry the money we pay to fix the window ($165) will stimulate the economy and will be multiplied numerous times and will ultimately benefit us by its multiplier effect .She wasn't buying it, she knew those new shoes would have to wait now.
Does it matter if that money comes out of my savings or if it is a part of our disposable income? No, not at all. My savings and your savings is someone else's spending. So that just means if it comes from savings there is $165 less that can be borrowed by someone else. Actually I guess with a fractional reserve system that amount would be much greater. Of course, if it comes from our disposable income that just means my favorite Mexican restaurant won’t see me for a few weeks and those new shoes will have to wait.
So what’s the overall net benefit? The Glassman certainly benefited. He got new unexpected income due to the destruction of our property but the others lost income they would have received if not for the broken window or someone else wasn't able to borrow the $165 taken out of my savings and spend on what they wanted.
It just might be time to admit that John Maynard Keynes didn’t know what he was talking about because the evidence is the financial reports issued by governments.