• Tag Archives economics
  • Beware the Broken Window Fallacy

    On Friday morning, with Hurricane Irma having wrecked the islands of Saint Martin and Barbuda, CNBC published a story cheerily laying out the silver lining embedded in the tropical disasters:

    Hurricanes Harvey and Irma actually will lead to increased economic activity over the long run, New York Fed President William Dudley said in an interview.

    Speaking just as Irma is about to start battering Florida as a Category 4 storm, Dudley said the initial impact in both human and economic costs will be harmful. But in the long run, economies tend to snap back from such major events.

    “Those effects tend to be pretty transitory,” Dudley said. . . . “The long-run effect . . . is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms.”

    A few days earlier, Euronews had run a similar story: “Hurricane Harvey pushes up petrol prices, but ‘economic outlook positive.’” Over at Yahoo Finance, a roundup of expert opinion quoted Goldman Sachs’s Jan Hatzius, who predicted a surge in the wake of the storms, “reflecting a boost from rebuilding efforts and a catch-up in economic activity displaced during the hurricane.” The Los Angeles Times, meanwhile, focused on one particular “glint of silver lining” in all the hurricane destruction — the bonanza it would spell for car dealers:

    Floodwaters in and around Houston severely damaged or destroyed hundreds of thousands of cars and trucks, most of which will be replaced. Those new and used vehicle sales will benefit automakers and the economy, providing a glint of silver lining amid terrible tragedy.

    It never fails. A terrible disaster wreaks havoc and ruin, and is promptly followed — or even, as in this case, preceded — by experts insisting that the devastation will be great for the economy.

    Could anything be more absurd?

    The shattering losses caused by hurricanes, earthquakes, forest fires, and other calamities are grievous misfortunes that obviously leave society poorer. Vast sums of money may be spent afterward to repair and rebuild, but society will still be poorer from the damage caused by the storm or other disaster. Every dollar spent on cleanup and reconstruction is a dollar that could have been spent to enlarge the nation’s reservoir of material assets. Instead, it has to be spent replacing what was lost. That isn’t a “glint of silver lining.” It is the tragedy of vanished wealth and opportunity, to say nothing of immense human suffering.

    As a matter of theology or philosophy or psychology, there may be a certain validity to interpreting tragedy as a blessing in disguise. But as a matter of economics, it is madness. If your car is totaled in a crash, you don’t celebrate your good fortune because the insurance company is going to send you a check to pay for a new car. Sure, the auto dealer will be glad to make a sale, but his gain will not outweigh your loss. Nor will the economy as a whole be better off: The money you have to spend to get another set of wheels is money that might otherwise have been devoted to enlarging society’s stock of capital. All it can do now is restore capital that was wiped out.

    Yet the fallacy that disaster is a boon never seems to go out of style. Even Nobel laureates indulge in it.

    “It seems almost in bad taste to talk about dollars and cents after an act of mass murder,’’wrote Paul Krugman in The New York Times, just after the 9/11 horror 16 years ago today, but the terrorist attacks could “do some economic good.’’ After all, he continued, Manhattan would “need some new office buildings’’ and “rebuilding will generate at least some increase in business spending.’’


    All the increased spending on earth will never bring back those who died. It will never undo the fear and trauma and sorrow of the survivors. And it can never restore the millions of man-hours required to repair and rebuild and recover.

    No, hurricanes are not good for the economy. Neither are floods, earthquakes, or massacres. When windows are shattered, all of humanity is left materially worse off. There is no financial “glint of silver lining.” To claim otherwise is delusional. To make that claim in the midst of a catastrophe is callous beyond words.

    This piece ran at the Boston Globe 

    Jeff Jacoby

    Jeff Jacoby has been a columnist for The Boston Globe since 1994. He has degrees from George Washington University and from Boston University Law School. Before entering journalism, he (briefly) practiced law at the prominent firm of Baker & Hostetler, worked on several political campaigns in Massachusetts, and was an assistant to Dr. John Silber, the president of Boston University. In 1999, Jeff became the first recipient of the Breindel Prize, a major award for excellence in opinion journalism. In 2014, he was included in the “Forward 50,” a list of the most influential American Jews.

    This article was originally published on FEE.org. Read the original article.

  • Did You Know about the Great Hyperinflation of the 17th Century?

    The oldest trick in the monetary book is cheating the people by debasing the coin or currency. It goes back at least as far as the Eighth Century B.C. when the Jewish prophet Isaiah chastised the Israelites for doing it. “Thy silver has become dross, thy wine mixed with water!” he admonished.

    Reputable private issuers of money, when governments don’t ban them for self-serving reasons, might be tempted to dilute the value of their product. Their incentives, however, tend to run strongly in the other direction.

    If their product gains in value, they make money (literally and figuratively). If they debase it, they might be prosecuted for counterfeiting or fraud. But in any event, customers will flee to competitors happy to “make money” by offering it in a more trustworthy form.

    When entrepreneurs and willing customers shape the framework of a market, the famous Gresham’s Law works in reverse: the good money drives out the bad.

    Similarly, because you prefer fresh eggs to expired ones, or use an iPhone now instead of a walkie-talkie, the inferior product disappears. But when political monopolists backed by the coercive power of government are in charge, the quantitatively-eased stuff is foisted on you whether you like it or not, while the good alternatives are driven overseas or underground.

    Kipper and Wipper

    I thought I knew the low points in the interesting history of monetary corruption until I came across this fascinating article from Smithsonian magazine. It’s about a brief hyperinflation in 17th Century Europe at the start of the Thirty Years’ War.

    Titled “Kipper und Wipper”: Rogue Traders, Rogue Princes, Rogue Bishops and the German Financial Meltdown of 1621-23, the article’s author (historian Mike Dash) claims that this instance of “monetary terrorism” may in fact be “the most bizarre episode in all of economic history.” It arguably yielded the Western world’s first full-scale financial crisis.

    The German terms “kipper” and “wipper” derive from two nefarious practices: One is clipping coins then using the scrap to make new ones, or melting coins into a cheapened mix of precious and baser metal. The other is rigging the scales so that recipients of coinage so debased could be deceived.

    And if you’re not sure what the Thirty Years’ War (1618-1648) was about, just think of it as the most destructive of the many European religious wars. Eight million casualties resulted from a Catholic vs. Protestant conflict that ballooned into a continental power struggle between the royal houses of France, Spain, the Low Countries, and some 2,000 German microstates of the fracturing Holy Roman Empire. In those German territories alone, no less than 20 percent of the population perished.

    In early 17th Century Europe, the minting of coins was typically the exclusive prerogative of kings and princes, which they often delegated to their well-connected cronies in local governments, the church, or even private business. On the eve of the War, in 1617, thirty mints operated in Lower Saxony alone, according to Peter H. Wilson in “The Thirty Years War: Europe’s Tragedy.” Debasement, however, was rare—until the financial demands of the war pressed governments to find new sources of revenue. The crisis and depression spawned by the five-year hyperinflation (1618-1623) is known in German as the “kipper-und-wipperzeit.”

    The Polish mathematician and astronomer Nicolaus Copernicus is universally acclaimed for his assertion that the sun was at the center of the solar system, not the earth. Less well-known are his important contributions to monetary theory, made just a century before the kipper-und-wipperzeit. If this Copernican observation had been heeded, perhaps the folly of what I’m about to tell you might have been avoided:

    The greatest and most forbidding mistake has to be when a ruler tries to make a profit from the minting of coins by introducing and circulating new coins with an inferior weight and fineness, alongside the originals, and claims that they are of equal value.

    The Debasement Begins

    Desperate to raise cash and secure material for war, many of the German states in 1618 resorted to the debasement of coinage. They clipped and they melted. At first, they adulterated their own coin but then discovered that they could do the same to that of their neighbors too.

    They would gather up as much of other states’ coins as they could, melt them down and mix in cheaper metals (most often copper), and then mint new ones that looked like the original but in fact were cheap counterfeits. Then they would send them with couriers back to the other states in the hope of passing them off on ignorant and unsuspecting citizens. The couriers would return with good coin and/or wagon loads of food and supplies.

    Mike Dash noted in his Smithsonian magazine article that just about everybody got into the act:

    While it lasted, the madness infected large swaths of German-speaking Europe, from the Swiss Alps to the Baltic coast, and it resulted in some surreal scenes: Bishops took over nunneries and turned them into makeshift mints, the better to pump out debased coinage; princes indulged in the tit-for-tat unleashing of hordes of crooked money-changers, who crossed into neighboring territories equipped with mobile bureau de change, bags full of dodgy money, and a roving commission to seek out gullible peasants who would swap their good money for bad. By the time it stuttered to a halt, the kipper-und-wipperzeit had undermined economies as far apart as Britain and Muscovy, and—just as in 1923 [during the infamous Weimar Republic inflation]—it was possible to tell how badly things were going from the sight of children playing in the streets with piles of worthless money

    This is an opportune moment to remind readers of a crucial distinction between inflation and rising prices. They are not the same, in spite of the commonly-held sense that they are. Inflation is an increase in the money supply (and in credit as well, though credit and capital markets in the early 1600s were small and primitive by today’s standards). Rising prices are among the many deleterious effects of the inflation.

    The German states first inflated the money supply by corrupting the coinage, then prices rose. Other effects of the inflation were evident too, including the destruction of savings and fixed incomes, a general economic malaise and social turmoil.

    In his voluminous history, The Thirty Years War: A European Tragedy, Peter H. Wilson writes:

    Good coins disappeared from circulation, while taxes were paid with debased currency. The real value of civic revenue fell by nearly 30 percent in Naumberg. Prices soared as traders demanded sackfuls of bad coins for staple commodities: the cost of a loaf of bread jumped 700 percent in Franconia beween 1619 and 1622. Those on fixed incomes suffered, like theology student Martin Botzinger whose 30 fl. annual grant became worth only three pairs of boots. Serious rioting spread from 1621, with that in Magdeburg leaving 16 dead and 200 injured.

    It was all over in about five years (the inflation, not the war). Burned by the self-defeating chaos it created, the German states agreed to stop cheating and restore reasonably sound currencies. Then through taxes, requisitions and other forms of plunder, they and most of the rest of Europe waged another 25 years of bloody hostilities.

    A hundred years later, France would be the scene of the Western world’s first experiment in hyperinflation  using paper instead of metal. And in the two centuries since that, history records dozens of ruinous paper inflations. These episodes in monetary cheating all produced the same calamitous results no matter what form they took.

    So what do men learn from history? Sometimes I think it’s little more than the fact that history is, well, interesting.

    For additional reading, see:

    “Kipper und Wipper”: Rogue Traders, Rogue Princes, Rogue Bishops, and the German Financial Meltdown of 1621-23 by Mike Dash

    Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger

    “Finance and the Thirty Years War” by C. N. Trueman

    Special Exhibit of the Deutsche Bundesbank: The German Economic Crisis of 1618-1623 

    “Where Have All the Monetary Cranks Gone?” by Lawrence W. Reed

    “The Times That Tried Men’s Economic Souls” by Lawrence W. Reed

    Lawrence W. Reed

    Lawrence W. Reed is president of the Foundation for Economic Education and author of Real Heroes: Incredible True Stories of Courage, Character, and Conviction and Excuse Me, Professor: Challenging the Myths of ProgressivismFollow on Twitter and Like on Facebook.

    This article was originally published on FEE.org. Read the original article.

  • The Politically Hopeless, Completely Incoherent, and Totally Lame Economic Agenda of the Democratic Party

    The Politically Hopeless, Completely Incoherent, and Totally Lame Economic Agenda of the Democratic Party

    In a column from December of 2015, the Wall Street Journal’s Mary O’Grady unveiled an inconvenient fact that poverty warriors on the American left and right would perhaps prefer remain hidden: from 1980 to 2000, when the U.S. economy boomed, the number of Mexican arrivals into the U.S. grew from 2.2 million in 1980 to 9.4 million in 2000. The previous number is a clear market signal that the U.S. is where poverty has always been cured, as opposed to a condition that requires specific U.S. policy fixes.


    O’Grady’s statistics came to mind while reading a recent New York Times column by Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities. He writes that a “highly progressive agenda [from Democratic scholars and politicians] has been coming together in recent months, one with the potential to unite both the Hillary and Bernie wings of the party, to go beyond both Clintonomics and Obamanomics.”  

    The problem is that the agenda that’s got Bernstein so giddy has nothing to do with the very economic growth that is always the source of rising economic opportunity for the poor, middle and rich.

    More Welfare

    Up front, Bernstein expresses excitement about a $190 billion (annually) program that he describes as a “universal child allowance.” The allowance would amount to annual federal checks sent to low-income families of $3,000/child. It all sounds so compassionate on its face to those who think it kind for Congress to spend the money of others, but given a second look even the mildly sentient will understand that economic opportunity never springs from a forcible shift of money from one pocket to another. If it were, theft would be both legal and encouraged.

    The very economic growth in the U.S. that has long proven a magnet for the world’s poorest springs not from wealth redistribution, but instead from precious capital being matched with entrepreneurs eager to transform ideas into reality. Just as the U.S. economy wouldn’t advance if Americans with odd-numbered addresses stealthily ‘lifted’ $3,000 each from those with even-numbered addresses, neither will it grow if the federal government is the one taking from some, only to give to others.

    Economic progress always and everywhere springs from investment, yet Bernstein is arguing with a straight face that the U.S.’s poorest will be better off if the feds extract $190 billion of precious capital from the investment pool. As readers can probably imagine, he doesn’t stop there.

    Government Jobs

    Interesting is that Bernstein’s next naïve suggestion involves “direct job creation policies, meaning either jobs created by the government or publicly subsidized private employment.” Ok, but all jobs are a function of private wealth creation as Bernstein unwittingly acknowledges given his call for resource extraction from the private sector in order to create them.

    This begs the obvious question why economic opportunity would be enhanced if the entrepreneurial and business sectors had less in the way of funds to innovate with. But that’s exactly what Bernstein is seeking through his $190 billion “universal child allowance,” not to mention his call for more “jobs created by the government.”

    Stating what’s obvious even to Bernstein, government can’t create any work absent private sector wealth, so why not leave precious resources in the hands of the true wealth creators? Precisely because they’re wealth focused, funds kept in their control will be invested in ways that foster much greater opportunity than can politicians consuming wealth created by others.

    Contradictions Abound

    Still, Bernstein plainly can’t see just how contradictory his proposals are; proposals that explicitly acknowledge where all opportunity emerges from. Instead, he calls for more government programs. Specifically, he’s proposing a $1 trillion expansion of the “earned-income tax credit” meant to pay Americans to go to work.

    As he suggests, the $1 trillion of funds extracted from the productive parts of the economy would lead to family of four tax credits of $6,000 in place of the “current benefit of about $2,000.” Ok, but what goes unexplained here is why we need to pay those residing in the U.S. to work in the first place.

    What gives life to the above question is the previously mentioned influx of Mexican strivers into the U.S. during the U.S. boom of the 80s and 90s. What the latter indicated clearly is that economic growth itself is the greatest enemy poverty has ever known. It also indicated that work is available to those who seek it, and even better, the work available is quite a bit more remunerative than one could find anywhere else in the world.


    Rest assured that the U.S. hasn’t historically experienced beautiful floods of immigration because opportunity stateside was limited. People come here because the U.S. is once again the country in which the impoverished can gradually erase their poverty thanks to abundant work opportunities. If Mexicans who frequently don’t speak English can improve their economic situations in the U.S., why on earth would the political class pay natives who do speak the language to pursue the very work that is the envy of much of the rest of the world?

    Put rather simply, those who require payment above and beyond their wage to get up and go in the morning have problems that have nothing to do with a lack of work, and everything to do with a lack of initiative. Importantly, handouts from Washington logically won’t fix what is a problem of limp ambition. At best, they’ll exacerbate what Bernstein claims to want to fix.

    Inequality Hurts No One

    Most comical is Bernstein’s assertion that the tax credits will allegedly mitigate “the damage done to low- and moderate-wage earners by the forces of inequality that have steered growth away from them” in modern times. What could he possibly mean? The U.S. has long been very unequal economically, yet the world’s poorest have consistently risked their lives to get here precisely because wealth gaps most correlate with opportunity.

    Translated, investment abundantly flows to societies where individuals are free to pursue what most elevates their talents (yes, pursuit of what makes them unequal), and with investment comes work options for everyone. Doubters need only travel to Seattle and Silicon Valley, where the world’s five most valuable companies are headquartered, to see up close why the latter is true.


    Similarly glossed over by this confused economist is that rising inequality is the surest sign of a shrinking lifestyle inequality between the rich and poor. We work in order to get, and thanks to rich entrepreneurs more and more Americans have instant access at incessantly falling prices to the computers, mobile phones, televisions, clothing and food that were once solely the preserve of the rich.

    Just once it would be nice if Bernstein and the other class warriors he runs with would explain how individual achievement that leads to wealth harms those who aren’t rich. What he would find were he to replace emotion with rationality is that in capitalist societies, people generally get rich by virtue of producing abundance for everyone. In short, we need more inequality, not less, if the goal is to improve the living standards of those who presently earn less.

    Remarkably, Bernstein describes the ideas presented as “bold” and “progressive,” but in truth, they’re the same lame-brained policies of redistribution that the left have been promoting for decades. And as they’re anti-capital formation by Bernstein’s very own admission, they’re also inimical to the very prosperity that has long made the U.S. the country where poverty is cured. To be clear, if this is the best the Democrats have, they’ll long remain in the minority.

    John Tamny

    John Tamny is a Forbes contributor, editor of RealClearMarkets, a senior fellow in economics at Reason, and a senior economic adviser to Toreador Research & Trading. He’s the author of the 2016 book Who Needs the Fed? (Encounter), along with Popular Economics (Regnery Publishing, 2015).

    This article was originally published on FEE.org. Read the original article.