Most of us are aware that government is not as transparent as it wants you to believe. How many times have government officials outright lied to the public? How many other times have government officials spoken what they believed to be truth when in fact their beliefs are based on misinformation?
A perfect example of this is known as the Broken Window Fallacy. For those familiar with this term, you know where I’m going with this. For everyone else, let’s do a quick recap of what the Broken Window Fallacy is and how we can apply it to our current economic state.
What is the Broken Window Fallacy?
Originally introduced by the French economist Frederic Bastiat in 1850, the Broken Window Fallacy discusses the consequences of a shopkeeper’s son accidentally breaking a window at his father’s store.
Bystanders feel sorry for the shopkeeper but explain to him that the broken window actually helps to stimulate the economy because the window repair company now receives money for replacing the glass pane. This income is then spent on other goods and services.
Aptly titled “That Which is Seen and That Which is Unseen,” the essay written by Bastiat demonstrates that this “economic stimulation” is what is seen. What remains unseen is that the shopkeeper has lost income which he would have spent on other goods and services. In the essay, he uses the example of the shopkeeper planning to purchase new shoes for his wife. Now the shoe store does not receive any new income.
Basically, while the broken window stimulates the income of the window replacement company, it actually detracts from the shopkeeper’s profits and spending on other goods and services in the community.
How Does This Apply to Us?
Unfortunately, the same thought process of the bystander who claimed the broken window was a blessing in disguise is used by politicians today. It is used in almost every speech by politicians and continues to fool most of the population who doesn’t think to look past what is visible on the surface.
Just a few days after the 9/11 terrorist attacks, economist Paul Krugman wrote that “the terror attack could even do some economic good.” It is unfortunate that even economists fail to look for what is unseen. We often expect the media to say things like this, but when it comes from a Nobel laureate economist, we should be concerned.
Let’s talk about the economic stimulus packages that have been “sold” to the American public by government officials since 2008. From bank bailouts to massive infrastructure projects, what are these packages actually stimulating?
It is certainly not us. The government explains how all the new jobs created by creating new highways helps boost the economy. Sure – it provides jobs to people working on the construction projects who then go and spend their money on other goods and services. That is what is seen.
What remains unseen is the increased taxes that pay for these projects. These taxes adversely affect individuals and businesses that would spend this tax money on other goods and services if they did not have to pay it to the government.
Restaurants, movie theaters, clothing stores, and hotels are just a few of the businesses that suffer when consumers do not have the disposable income to purchase these items. Meanwhile other businesses, such as construction companies, see increased income.
What it boils down to is relatively simple. There is a finite amount of money in our country. Although in recent years the government has made a point of printing new money whenever they feel like (which only devalues our currency even further), there really is only a certain amount of money available.
Money spent on one project can no longer be spent on other items.
The worst part is that many of the politicians responsible for making these legislative decisions do not understand economics at all. As politicians, many of them have spent their lives playing the whims of the population to gain votes.
But here’s the question – how can a politician make better decisions on how to spend your money than you?
Even for politicians that do have a basic grasp of economics, it often seems that they are more worried about votes in return for political favors than they are about the long-term future of our country and its financial health.
As members of Resilient Communities, we must focus on the economic health of our own communities and reduce our dependence on those encouraging the “broken window fallacy”.
Invest in local businesses, focus on self-sufficient and sustainable assets, and produce more than you consume.
By focusing on factors within your control, you will have the ability do bounce back from any economic reset the external marketplace pushes your way.
If you haven’t started. Today’s the day.
If you have started. What can you improve today to make yourself more resilient?
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