January 22, 2013

The broken window fallacy in Middle Earth

Filed under: Economics, Media — Tags: , , , — Nicholas @ 10:36

Yes, even in the Third Age, there were Keynsian apologists:

Over on the Guerrilla Economist blog, Ust Oldfield discusses the economic consequences of the dragon Smaug on Tolkien’s fictional universe, Middle Earth. He argues that the net effect on Middle Earth’s economy may well have been positive. Both Dwarves and dragons hoarded the gold, so there would have been no monetary shock from the rapid withdrawal of so much precious metal from the economy. The Dwarves were then forced to offer their labour and skills to the outside world as refugees, contributing to the economy at large.

Perhaps. But there is something wrong with this picture. Ust neglects to mention that much of the Dwarven kingdom of Erebor and nearby Dale were utterly destroyed. Thousands of years’ worth of accumulated physical, human (or should that be Dwarven?) and social capital incinerated. In order to have a net positive effect on the economy of Middle Earth, the Dwarves’ integration with the wider economy must outweigh this massive destruction of wealth. This is unlikely, to say the least. For a start, the human city of Dale existed because of its trade with Erebor. Therefore the Dwarves were already engaging in peaceful and mutually beneficial exchange with the rest of Middle Earth. The Dwarves’ actions as refugees can only have created less value if their highest-value, voluntary choices were forcibly eliminated.

October 30, 2012

Beginning to assess the damage

Filed under: USA — Tags: , , , — Nicholas @ 09:40

ESR posts a “we’re fine” report on Google+ and then points out the damage to New York City’s power grid may be incredibly expensive and difficult to repair quickly:

Reporting from a diner in Paoli, PA, near 40°02′27″N 75°29′24″W.

Power went out in Malvern about 2AM this morning. After sleep, we have fled to where there is power and light and steak and eggs.

It feels like aftermath. The NOAA seems to no longer be issuing track updates and the storm track has disappeared from the Google crisis map, suggesting that the anticipated conversion to a large but normally (un)structured nor’easter has completed.

This area got off lightly, especially compared to the ration of apocalypse-now the storm handed New York City. Exploding high-power transformers are very bad news — they tell us that all that tunnel flooding seriously damaged the downtown end of the Manhatten power grid. That kind of equipment is extremely expensive and difficult to replace, and the halogen compounds they use as insulators are hazmats when they get loose. The prompt repair costs are going to be a large fraction of a billion dollars.

But that isn’t the worst of it. Considering that this will have have paralyzed the largest node in the international financial system for some time, downstream economic losses could easily crack a trillion dollars. The impact will be global and manifest as higher prices for everything with cross-border supply chains, rippling all the way down to Third-World farmers buying fertilizer.

Update: In almost record-setting time, here’s the first example of the Broken Window Fallacy to make it past the editors:

Disasters can give the ailing construction sector a boost, and unleash smart reinvestment that actually improves stricken areas and the lives of those that survive intact. Ultimately, Americans, as they always seem to do, will emerge stronger in the wake of disaster and rebuild better-making a brighter future in the face of tragedy.

Sandy is unusual storm and complex to gauge. Coming late in the season and combining with cold fronts to the west and north, it is really a post-tropical cyclone and has the potential to deliver epic destruction. However, coming so soon after Irene in August 2011, the level of anticipation and preparedness demonstrated by federal and state officials is commendable and should mitigate some losses-especially loss of life.

[. . .]

However, rebuilding after Sandy, especially in an economy with high unemployment and underused resources in the construction industry, will unleash at least $15-$20 billion in new direct private spending — likely more as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive.

October 29, 2012

Twenty million broken windows

Filed under: Economics, Environment, Media — Tags: , , — Nicholas @ 09:03

At Forbes, Tim Worstall patiently explains that the damage from Hurricane Sandy (or any major storm) will appear to boost GDP, because it only measures money spent to repair damage, not the costs incurred or the opportunities foregone because of the damage:

We know very well that Hurricane (or Frankenstorm as some are calling it) Sandy will leave a trail of destruction across parts of the US today. There will almost certainly be deaths, as there have been in the hurricane’s passage across the Caribbean. And there will also be a boost to the US economy. Which is really evidence of quite how wrong we are in the way that we measure the economy.

[. . .]

The problem with this is that it is only true because of the way that we calculate GDP. In our working of the numbers we assume that it’s final consumption at market prices: that is, the value that consumers put on everything. However, this is not true of government spending. It’s very difficult indeed to work out what government spending is actually worth: for as we’ve not a choice in it then there’s no market price nor accurate valuation from the people who actually get whatever is produced. Some government spending is most certainly worth more than the actual amount spent. The court system say: a pre-requisite of our having a complex society at all. Other parts not so much: what is the true value of a diversity adviser for example? So what we actually do is value all government spending, for GDP purposes, at the cost of that actual spending. Government spends $100, GDP goes up by $100. That’s just how we define it. This can cause amusement in measuring the success of welfare programs for example. Even Census admits that some of the people who receive Medicaid, or food stamps, value what they receive at less than the cost of providing it.

[. . .]

Now imagine that Hurricane Sandy does $10 billion of damage to that wealth (for our purposes it doesn’t matter whether it’s $100 billion or $1 trillion. Although this obviously matters to everyone except for the purposes of this example). The US is now worth $99.990 Trillion. GDP might rise to $15.1 trillion as we repair that damage. But we’re not in fact any richer at all: despite the fact that GDP has gone up. What has actually happened is that some of our stock of wealth has been destroyed and we’re having to do more work in order to rebuild it. This is exactly the same as our pollution example. We’re measuring what we produce but not the capital stock of what we have (or had).

Yes, the rebound from Sandy may well provide a boost to the economy. But that’s a function of the way that we measure that economy, not a real boost in our general wealth.

June 27, 2011

Stephen Gordon: The “broken window” fallacy of “green” jobs

It’s always nice to see a reference to Frédéric Bastiat in a modern day setting:

But it is possible to oversell the green jobs theme. Job creation should not be a goal of environmental policy, no more than it should be a policy goal in the fields of health or national security. If, instead of hiring people, we could use magic to stop disease, crime and environmental degradation, we would. Pointing to jobs ‘created’ to fix these problems is an error that Frédéric Bastiat identified in his ‘parable of the broken window’. Broken windows generate work for glaziers, but that doesn’t mean that breaking windows will increase national income.

An often-quoted statistic goes something like this: “wind energy produces 27 per cent more jobs per kilowatt hour than coal plants and 66 per cent more jobs than natural gas plants”. This could well be true, but it is hardly a strong argument in favour of the employment opportunities that would be generated by investing in wind energy: hiring more people to produce less energy is not a strategy for prosperity. Similar gains in employment could be obtained by outlawing mechanical excavators so that all digging must be done by hand. It may make sense to encourage the development of wind power, but increased employment is most emphatically not one of the reasons for doing so.

May 17, 2011

Final legacy of the “Cash for Clunkers” program: higher used car prices

Filed under: Economics, Government, USA — Tags: , , — Nicholas @ 09:59

Remember the “Cash for Clunkers” program? It was supposed to give the auto industry a shot in the arm by buying up older vehicles, giving the owners vouchers toward (certain) new vehicles, then destroying the traded-in clunker. Even at the time, economists tried to point out that this was just an elaborate “broken window” fallacy.

Today, use car prices are indeed soaring:

As news outlets around the country are reporting, the price of used cars has lately soared to a modern-day record, with some cars commanding more used than they sold for when new. News accounts commonly finger the Japanese earthquake and high gas prices as reasons, but there are some problems fitting either reason to the case. While the earthquake affected the supply of new cars, it’s the previously driven kind that has scored the more impressive price jump. And while the rise in gas prices would explain a relative shift in buyer demand from SUVs and trucks toward smaller vehicles — which has indeed happened — the strength of the used-vehicle market lately has been such that even the thirstier vehicles have advanced in price, $4 gas or no.

No doubt there are multiple reasons for the price spike, including the severe general slump in new-auto sales in recent years, which has reduced the volume of newer cars coming onto the resale market. But — as Washington scrambles to take undeserved credit for whatever passes for normalization in the auto business these days — it’s worth remembering that an artificial scarcity of used cars isn’t just bad for the poor as a group: it’s bad in particular for the upwardly mobile poor, since in most of the country landing a job means needing to line up transportation to get to that job. When it suddenly costs $6,000 instead of $3,000 to get wheels, the move from unemployment to a paying job faces a new and discouraging barrier.

March 6, 2011

The economics of urinal cakes

Filed under: Economics, Humour — Tags: , , — Nicholas @ 11:34

Tim Harford uses Bastiat’s “broken window fallacy” to explain the economics of urinal cakes:

Dear Massimo,
When I read the first sentence of your letter, I was wondering where you were going with this. Not to worry: your question is easily answered. The 19th century French economist and essayist Frédéric Bastiat anticipated it with his famous “broken window fallacy”. A broken window seems good for the economy because it creates work for the glazier. But Bastiat pointed out that the money that the window-owner pays to the glazier is money he can’t spent on something else. The glazier is richer, but the tailor or the restaurateur or the escort girl is poorer. The broken window hasn’t stimulated the economy at all.
In short, don’t think you’re doing anyone a favour by aiming squarely at the urinal cake in front of you. And don’t even think about aiming at the urinal cake in front of someone else.

May 1, 2010

Call out the inspectors

Filed under: Bureaucracy, Health, USA — Tags: , , , , , — Nicholas @ 07:50

A busybody manages to create a lot of new jobs in San Diego County with one little phone call:

On Tuesday, we were surprised inspected by the San Diego County Department of Environmental Health. The two inspectors were sent out to visit our facilities (and other breweries in San Diego) as a patron had lodged a complaint about local tasting rooms. So I’d like to take a moment to thank that one person who felt it was important to lodge a complaint about brewery tasting rooms all over San Diego. Apparently they were concerned that we didn’t have a GIANT BLUE “A” on our cold boxes!

Thank you from the bottom of my heart.

You see, my fellow brewers and brewery owners are now having our hands forced (in the name of public safety) to go through the plan check and approval phase so that all of us can earn Health Permits for our tasting rooms.

What’s even better and the reason we’re all so thankful for your efforts today is that Port Brewing and The Lost Abbey has been issued a cease and desist for the sampling of beer in our tasting room. Because, as we all know, beer is a public nuisance laced with nasty things that can kill you!

I personally want to extend my gratitude to that consumer who felt this industry needed more regulatory agencies knocking on our doors. (The Health Department has never been interested in us before this call) Muchas Gracias Amigo (or Amiga) wherever you might be. There are breweries all over the City of San Diego who are now going to have to spend thousands of dollars on repairs that at best are “marginally justified.”

What follows is a long list of local businesses that will be seeing more income from San Diego breweries, as they all scramble to get into compliance with regulations they didn’t have to worry about until now. Before you consider this is a good thing, make sure you read up on the broken window fallacy (scroll down to paragraph 1.6).

August 10, 2009

QotD: “the federal government is unsurpassed at two things”

Filed under: Politics, Quotations — Tags: , , — Nicholas @ 12:22

Cash for Clunkers has been a thrilling moment for advocates of expanded government, who say it proves what we can accomplish when our leaders put their minds to it. They are absolutely right. The program proves the federal government is unsurpassed at two things: dispersing money and destroying things.

Of course, it already proved that in Iraq. But for sheer rapidity of confirmation, this program is hard to beat. Cash for Clunkers managed to go through a billion dollars in about four days, vaporizing a fund that was supposed to last until Halloween.

Steve Chapman, “The Real Clunkers in this Deal: Why ‘cash for clunkers’ is a terrible idea”, Reason Online, 2009-08-10

At the intersection of Unsound Policy and Political Expediency

Filed under: Politics, USA — Tags: , , — Nicholas @ 12:16

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