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Wednesday, July 12, 2006

Broken Windows and Economics

Without referring to Bastiat by name, Dr. Walter Williams discusses "what is seen and what is not seen" regarding public policy. What is seen is the immediate result. What is not seen is the effect of that policy in other areas. Williams writes:

Under Social Security law, Congress forces workers to set aside a portion of their earnings for retirement. Take a 25-year-old -- let's call her "Mary" -- who earns $40,000 a year. Her Social Security tax is about $2,500. Here's my question to you: Was having $2,500 forcibly taken out of Mary's pay for retirement her best possible use of that money? Mary might have saved and invested several years to open a small business. She might have put it toward private schooling or music lessons for her child, or any number of things that might have made her, and possibly our nation, wealthier in the future.

How about Congress' mandate for more fuel-efficient cars? According to a National Research Council of the National Academies of Sciences 2002 report, delivered by Dr. Leonard Evans to the Washington-based Competitive Enterprise Institute, Corporate Average Fuel Economy (CAFE) standards have contributed to between 1,300 and 2,600 traffic deaths a year. Congress' mandate for higher gasoline mileage leads to the production of lighter, smaller and less crash-worthy cars, resulting in unnecessary deaths. Through technological innovation and natural market forces, cars were already becoming more fuel efficient before CAFE standards were mandated. But more important, how does Congress know whether this loss of life is worth the amount of fuel saved? Do they even know or care about the tradeoff?

Bastiat discussed the case of the vandal breaking a window at a baker's shop. A bystander we will call Dean says it is a good thing for the economy because now a glazier will be hired to replace the glass at $200. Bastiat analyzed how, had the window not been broken, that baker would still have his $200, still have a window and could buy a suit from the tailor and other goods from a number of other merchants. That is a net gain to the economy of $200 rather than a wash where the baker spends the $200 to get back to the starting point.

I would suggest that the baker hold back $25 and purchase Dean a few economics books. If Dean can digest those lessons, the gain to society would be immeasurable.

As Bastiat stated:

[T]he 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.

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