Monday, September 22, 2008

Thomas Friedman fails Econ 101

Thomas Friedman is a rare pleasure, as a newspaper columnist, because he's not just consistently wrong about so many issues, but he's wrong in a remedial-reading sort of way. Take, for example, this bit of wisdom from his September 20 piece in the New York Times:
If it weren’t for the government bailing out Fannie Mae, Freddie Mac and A.I.G., and rescuing people from Hurricane Ike and pumping tons of liquidity into the banking system, our economy would be a shambles.
So, all of that government money is keeping the economy afloat? Really?

I have three words for Mr. Friedman: broken window fallacy.

As recounted by the economic journalist, Henry Hazlitt, the story of the broken window fallacy involves a brick heaved through the window of a bakery. A crowd gathers and people console each other with the thought that, at least the baker will have to spend money to replace the window, which will put money in the glazier's pocket. The glazier will then have more money to spend on other merchants, and the economy will get a bit of a boost overall.

But the money for the window doesn't come from thin air. The baker was planning to purchase a new suit, which he'll now have to forgo. In fact, the money is just being shifted around -- there's no boost.

As Hazlitt puts it:
The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
So it is with government bailouts and disaster spending -- or any other kind of government spending. The government doesn't have any money of its own, so it has to take the funds from elsewhere. Other spending plans are dropped, taxes are raised, money is borrowed (meaning higher taxes in the future), or the government dilutes the value of everybody's cash by inflating the money supply.

In short, the money is just moved around from one use to another -- and from potentially productive uses to bailing out business or repairing storm damage.

This is Econ 101 -- the sort of thing Friedman has no excuse not knowing. New York Times columnists may think it's a great idea to pick people's pockets in order to fund their favorite government programs, but they should be honest about their preference for government spending over private retention of money for uses chosen by each individual.

There's no boost to the economy to be found in shuffling dollars around.



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