Broken windows and broken cars

I'm currently reading Economics in One Lesson by Henry Hazlitt (the entire text is available here). The basic idea of the book is to help you see not only the direct and immediate effects of economic policies, but also the longer-term and indirect effects. Or, as it's commonly put, "the seen and the unseen."

The book starts off by describing the well-known "broken window fallacy." Suppose some disgruntled person comes along and lobs a brick through the large glass window of a bakery. This might be seen, by a rather simplistic bystander, as an economic boon for the town. After all, it generates business for the glazier who replaces the window, and the glazier, in turn, spends some of that money providing business to someone else. Of course, this is nonsense-- destruction does not help a community. We can see that the brick-lobber gives business to the glazier, but what's not seen is what the baker might otherwise have done with that money. He might have, say, bought a suit. Or, as Hazlitt explains:

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.

Now maybe this strikes you as a rather silly example. Throwing bricks through windows can't somehow improve the economy. Surely people are not so stupid as to see wanton destruction as beneficial to the community.

But consider this: the "cash for clunkers" program involves destroying the cars traded in. Apparently we pour something into the gas tank which seizes the engine and renders the car useless. These are mostly paid-off cars in working condition, mind you. They are assets -- real goods -- without attached debts. They are units of wealth which we are destroying. How can this be seen as a good thing? Well, because! Destroying them creates work for automakers.

Well, sure, but meanwhile there are people who can't get jobs because they don't have transportation, and people who are losing jobs when their cars are repossessed. Why didn't the government allot these traded-in clunkers to the needy? Why trash working automobiles? We, as a people, have completely lost all sense of what wealth actually is. Wealth is not a bunch of numbers on a screen, wealth is stuff. Tangible things.

Yes, destroying these older cars breeds demand, and provides jobs to some. But the new cars are not actually owned by their drivers, because their drivers must usually take on debt to purchase the car. And these new car owners might wind up having the car repossessed in the end. If they do make their payments, they will have less money to spend elsewhere. Whatever they spend on the car payment is money they do not spend at restaurants and retailers. Furthermore, the government has taken on debt to pay for the "cash for clunkers" program itself. And on top of that, car companies may have taken on debts in order to ramp up production to meet this new demand. So in other words, we have reduced consumer spending in the non-auto sector, increased various debts, and destroyed some of the collective wealth of the nation, in exchange for retaining auto worker jobs.

And maybe that's a trade-off that we are willing to make. I am very sympathetic to saving American auto manufacturers, because they do have one or two foundries left, plus rail lines and factories and laboratories, and they do, anachronistically, actually make stuff. GM is not some re-insurance company which wheels and deals in derivatives, and Ford is not some business consulting company which contracts out its "consultants" to fire people at other companies, all because managers don't have the guts to do it themselves. No, GM and Ford are producers, and as such they contribute to the nation's real wealth.

However, it is simply indefensible to destroy wealth (cars) as government policy. It is as stupid as paying farmers not to grow wheat and dumping milk in the streets while citizens are starving.

One day we will have to think in real terms again. We will have to survey the remains of the former empire and ask ourselves what we have left. We'll have to inventory our mines, ports, railways, farmland, canals, factories, subways, buildings. We did not evolve into higher beings which no longer require food, clothing, and shelter, but can now live on derivatives contracts alone. The whole holograph, what Jim Kunstler calls the hallucinated economy, can simply evaporate, because it isn't made of tangible things, and doesn't produce anything. And when the mirage of the "service" economy or the FIRE (Finance, Insurance, Real Estate) economy disappears, and the dollar becomes useful only as kindling, we will be short some half a million working vehicles because somebody in Congress thought it was a bright idea to lob a brick through a metaphorical window.