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.

Economic FallaciesEconomic Fallacies

Has the spending because of Has the spending because of 9/11 helped the economy?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 FallacyThe 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 DestructionThe 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 TaxesPublic Works Mean Taxes

• Government spending is seen as the cure-all 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 ProductionTaxes 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 ProductionCredit 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 ProductionCredit 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 MachineryThe 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 SchemesSpread 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 SchemesSpread 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 SchemesSpread 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 Disbanding Troops and Firing BureaucratsBureaucrats

• 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 Disbanding Troops and Firing BureaucratsBureaucrats

• 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 Disbanding Troops and Firing BureaucratsBureaucrats

• 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 EmploymentThe 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 EmploymentThe 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?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?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 ExportsThe 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” PricesParity” 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 IndustrySaving 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 IndustrySaving 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 WorksHow the Price System Works

Stabilizing CommoditiesStabilizing 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 FixingGovernment 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 ControlRent Control

Minimum Wage LawsMinimum Wage Laws

The Function of ProfitsThe 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)