SuperStorm Sandy & the Broken-Window Fallacy

As an economics professor, it is disheartening to hear commentators try to find a silver lining in those masses of ugly clouds that accompanied “SuperStorm Sandy”. They have fallen prey to faulty logic that inspires suggestions that the cost of repairs might reduce unemployment & stimulate the economy was identified as the “broken-window fallacy” by Frédéric Bastiat, a French economist of the 19th Century.

Suppose that it will cost $50 billion to repair the damage from “SuperStorm Sandy”. That means that the disaster will pump $50 billion into various industries or activities relating to repairs, etc,
But while these are the obvious & direct effects of spending, no one would insist that it is a good thing for buildings to burn or to be swept away or for cranes to collapse or for there to be thousands of broken windows.

But economic growth & the NET creation of wealth is NOT a matter of increasing the circulation of money. What has happened with the post-storm spending is redistribution of existing wealth.

As it is, spending $50 billion on repairs means that the same amount will NOT be available to spend elsewhere or on other things. If a storm victim did not replace windowpanes or roofing tiles, the funds would have been spent on dining out or perhaps a new car or some clothing.

Extending Bastiat’s logic also makes it clear that the claims that WWII brought the end of Great Depression are misguided. Despite clear arguments & evidence presented by Bob Higgs, this economic canard is often repeated.

Are Betting Lines Better Predictor of Winner of US Presidential Election than Polls…?

It does appear that Romney has gained momentum, but it does not appear to be enough.

At least those that put their money where their mouth is do not think so. Forget the normal polls that are riddled with inaccuracies & biases.

For example, check out the Iowa Electronic Exchange’s (IEM) “Winner Take All” market. A contract for Mitt Romney sells for 34.5 cents meaning that traders believe there is a 34.5% probability that Romeny will win, up substantially from 18.6 cents–85% increase in price.

As such, Obama sells for 66 cents meaning that traders believe there is a 66% probability he will win popular vote.

Similar results can be found on InTrade & also at some overseas betting sites, like OddsCheckers.

It appears that the “smart money” puts the odds in favor of “Four More Years”.

More Wisdom from “Nobel” Laureates in Economics….

Joseph Stiglitz argues in his recent book, The Price of Inequality, that structural changes in inequality played a significant role in the ongoing economic turmoil.

He cites a “vicious cycle” whereby more inequality leads to lower aggregate demand that then leads to even more inequality.

Stiglitz depicts dynamic that is the result of the wealthiest 1% having a much higher savings rate than the middle class that tends to spend most of what it earns. Falling aggregate demand hits the middle class even harder, leading to a further drop in demand that harms the middle class more than the top 1%.

Yet this is incoherent, even if one accepts the macroeconomic fable about aggregate demand being the basis of economic growth. If as he supposes that there is worsening income inequality, it is not clear that it will dampen aggregate demand. It might merely mean that those earning less than the 1% must consume all of their earnings or perhaps dissave.

He might be making the case that aggregate demand might lag if the unemployment rate rises. However, in his belief system, a relatively small injection of government spending with its magical multiplier effects could swamp any slack in demand. Of course, the US government has followed this by extending unemployment insurance payments while also engaging in “stimulus” spending.

Stiglitz believes that much of the growth in the share of income going to the wealthiest 1% is due to inefficient and predatory activity that takes larger slices of the economic pie rather than creating more for everyone, i.e., “rent seeking.” He suggests that eliminating this type of economic activity would be of great benefit, while also improving the “crisis” in inequality.

However, he does not seem to understand the Public Choice theory behind “rent seeking” that points to the necessity of restraining the capacity of governments granting or propping up privileges!

(It may well be that “Professor” Irwin Corey, the World’s Greatest Authority, has a better understanding of economic processes than Joe Stiglitz!)

Economic Growth Should Precede Education

Few people dispute that pouring public education is good for economic growth.

Well, you just met one. It has always been my contention that case-and-effect are reversed, sic.: poor countries must grow richer so they afford to educate their people.

For countries that boosted average years of education by increasing spending between 1960’s & 1990’s, there was little if any correlation with improved economic performance.

What might be going on here challenges the notion that the provision of education must be controlled by government. Due to incentive problems, it is not surprising that public-sector provision & control of education tends to fail.

In all events, more important than making substantial investments in human capital is to open the economy so that specialization & division of labor can boost productivity.

Certainly, education matters for individuals. But if it allows individuals to improve their conditions, this weakens the argument for taxpayer funds to be used to support education.

Lies, Damn Lies & Official Consumer Price Data

Jon Williams at an alternate figure for U.S. Consumer Price Inflation (CPI) that he presents alongside the official rate based on the methodologies in use prior to 1980. September 2012 stats show current price inflation at just under 10% compared to 2% “official” inflation rate as measured by the official CPI. Using methodology of 1990, the rate is about 5%.

The Financial Crisis and the Free-Market Cure

Join an on-line book forum.

The Financial Crisis and the Free-Market Cure: Why Pure Capitalism Is the World Economy’s Only Hope
Wednesday, October 24, 6:00 p.m.

Featuring the author John A. Allison, President, Cato Institute, and Former Chairman and CEO, BB&T Corporation. Moderated by David Boaz, Executive Vice President, Cato Institute.

About the event – Not only is free-market capitalism good for the economy, says John A. Allison, it is our only hope for recovery. As the nation’s longest-serving CEO of a top-25 financial institution, Allison has had a unique inside view of the events leading up to the financial crisis. In this provocative book, he discusses why regulation is bad for the market—and for the world—what we can do to promote a healthy free market, how we can help end unemployment in America, the truth about TARP and the bailouts, and how Washington keeps entrepreneurs from building a better future for everyone. With shrewd insight, alarming insider details, and practical advice for today’s leaders, this analysis is nothing less than a call to arms.

Free Enterprise & the Welfare of Future Generations

The mission statement of Universidad Francisco Marroquin (UFM) is:

to teach & disseminate the ethical, legal & economic aspects of a society of free & responsible individuals


To this end, students at UFM are presented with intellectual arguments in support of free enterprise as an instrument to promote human freedom, rather than as an end in itself. They learn that freedom has its limits, based on a principle of non-aggression where it is unjust & inappropriate to pursue one’s own interest at the expense of anyone else.

Arguments & evidence show how this is possible with voluntary exchange that allows all participants in such transactions to be made better off. Further, market interactions introduce “civilizing” effects into behavior whereby success depends upon treating strangers as friends & striving to behave in a cooperative manner that contributes to social harmony.

Therefore, it was encouraging that during the 2nd televised debate among the 2 leading candidates for US president that Barack Obama praised America’s free enterprise system.

Well, of course, all redistributionists love the free enterprises system since it produces the “golden eggs” that they take away from producers to hand out to their political supporters.

It is not clear that either of the candidates is truly committed to free enterprise whereby free & responsible individuals can live their own lives & fulfill their own purposes within a “rule of law“.

However, it appears that Mr. Obama does not understand that he is busy putting heat into the oven that is cooking the goose, thereby reducing overall wealth that would be shared by the community & future generations.

For their part, welfare statists & populists buy political support within a democratic framework by feeding “seed corn” to voters, thereby consuming capital & wealth that will make future generations less prosperous.

Competitive free enterprise allows individuals as consumers to exercise their preferences for goods & for individuals as producers to try to satisfy these preferences. On both of these transactions, there are incentives for people to economize so that they might be able to enjoy more in the future. As such, there is a tendency to provide for subsequent generations.

It ain’t perfect & results may confound or confuse many observers, especially paternalistic elites that have their own notion about what is good for others.

However, free enterprise is about unchaining human potential to discover & then provide what is useful to other members of their community, either as consumer goods or technological advancements or expressions of the Arts.

Whatever the high-mindedness behind their stated purposes, public policies that restrain voluntary exchange or inhibit entrepreneurial initiatives are inhumane since they curb human potentials.

Festschrift to Honor the Memory of Joseph Keckeissen

This is another call for papers & for proposals from anyone that would like to participate in a publication that will memorialize the life & work of Joseph Keckeissen, or “Don Joe” as he was affectionately known at Universidad Francisco Marroquin (UFM).

If you have an article of essay in either English (preferably) or Spanish that you would like to submit, please send a proposal to me for the consideration of the board of editors that includes Kurt Leube & Juan Carlos Cachanosky.

Pictured above is a bust commissioned as a reminder to the UFM family of one of our fallen heroes. It is on display at the Salon de Profesores, UFM–Guatemala.

Some Thoughts on the Perils of Public Funding of the “Arts”

Perhaps inspired by the fact that the 2012 recipients of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel were credited for their multi-disciplinary focus, I thought to offer some insights from my own publications.

As a life-long lover of most of the Classical Fine Arts, I have attended ballet, opera & concerts on most continents of the globe & am a frequent visitor to galleries & museums.

In my earlier years as an academic economist, I tried to add some spice to my interest in the “dismal science” by doing a bit of thinking about the economics of culture.

One avenue of exploration was some essays on the use of public-sector (taxpayer) funding for the Arts.

One point I made is that there is a strong possibility of arts agencies being “captured” by (rent seeking) interest groups. As such, the choice of which of the Arts or which artists might be supported is likely to become tainted by politics.

Another is that since government support is tax-based, increased public support for the Arts might lead to lower individual disposable income, thereby discouraging private giving. (The “I already gave at the office” argument.)

And then there are the failures associated with public-sector expenditures that implies that end results of subsidies for the Arts are likely to differ from their original objectives.

In all events, it is left to the discretion of a small group of elite to decide on whether or not a subsidy can or does create surplus value for the rest of the community.

For further reading:
Lingle,C. (1992). “Public Choice and Public Funding of the Arts.” Ruth Towse and Abdul Khakee (eds.). Cultural Economics. Berlin: Springer-Verlag: 21-30.

Lingle, C. (1991). “Interest Groups and Cultural Protectionism: Apartheid and Public Arts Policies”, International Journal of Social Economics, Vol. 18, Issue 4, pp.4 – 13.