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Ridelust Rant: GM’s Broken Window Fallacy

Posted in auto industry, Bizarre, GM, Newsworthy, Politics by Vito Rispo | October 29th, 2008 | 3 Responses |

“…the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
-Henry Hazlitt

A Broken Window, get it?

Peter Schiff has said about this whole GM bailout debacle, “Why would we want to prop this company up? So they can go on losing billions more? Why not just let them fail? We need an automobile industry in this country and I’d like to have one but we don’t need GM and we don’t need Ford and Chrysler, these guys have run the industry into the ground.”

And why not let them fail? GM has lost nearly $30 billion this year and it’s share price is down 80 per cent from where it was in January. They’re not competitive and they’re not producing the quality of cars that some of the other major companies are. And now they’re asking for $15 billion dollars from the US government, which would have to come from taxpayers or from the Fed’s printing press, in which case it would eventually impact taxpayers dollars anyway in the form of inflation.

The economist point of view usually runs contrary to conventional wisdom, so it’s a tough side to argue. But I’ll try.

This idea that we need to prop up GM to save jobs is a variation on the Broken Window fallacy. If you’re not familiar with Frédéric Bastiat’s parable of the broken window, here is an ultra-simplified version of it: “Let’s go downtown and break all the windows in the bank. That way, we’ll create new jobs for window makers. The window makers will get paid to replace the bank’s windows, and then use the money they made to spend on other products and it’ll filter out and be a gain for the economy as a whole.”

This is, of course, total nonsense. Destruction never benefits society. The owner of the bank needs to pay for the new windows and he’s been robbed of his ability to use that money elsewhere. He may have wanted to spend that money on new shoes and a new suit. So the shoe maker and the tailor actually lose out because of the broken windows. That is the unseen effect.

The essay that the broken window fallacy comes from is called “The Seen and Unseen”. The idea of unseen factors is a recurring theme in economics. The unseen part of the equation is often the most important part, and the fact that it’s unseen leads people to misinterpret the situation. The unseen part of the GM bailout is the future use of the $15 billion dollars that gets taken away from taxpayers. If taxpayers had that extra money they could have spent it on maybe a new phone, for example, and the sum result of many people buying a new phone could have lead to an advancement in technology in that field, which would create jobs.

So by bailing out a failing company, we’re not saving jobs. It may appear superficially that we are, but all we’re really doing is helping those particular jobs at the expense of some future jobs that otherwise would have been created. Just like by breaking the banks windows, we’re helping the glass makers at the expense of the shoe maker and the tailor.

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3 Responses

  1. larry says:

    It’s like when people litter and say “I’m just giving the trash men more work”- meanwhile, my city looks like shit and my taxes go up.

  2. Criticizing someone is always easy. I’ll give it my cheap shot and say that in my less than humble opinion, GM should have never stopped making the EV-1. If they had not, they’d been well positioned to transition into the so-called new reality where gasoline is either expensive, or people are so anxious about that occurring, combined with the fear of global warming, that they are ramping up for hybrids and electric cars like children seeking ice cream; when the ice-cream truck comes ’round in summer.

    True enough is the fact that the old lead-acid battery wouldn’t have cut it for the EV-1; but by now, maybe GM would have found a better battery. At least, they wouldn’t look so foolish, and have to go through the painful process of saying “nice to have known you” to folks such as those at the SUV factory in Jainsville, Wisconsin.

    Chrysler was poised to starting going in a new direction, with hybrid versions of its Durango and Aspen; and now, by year’s end, the factory that builds them, will be closed down. It remains to be seen as to whether or not Chrysler will survive long enough to build and (try to) sell its own electric cars.

    As for bailing them out, I too try to take a libertarian perspective on this, which is probably the most defensible and sound economic perspective. But consider this. Back in the fall of 1979, the Federal government guaranteed bank loans to the old Chrysler Corporation; and by 1983, the money came back to the government – meaning us – and Chrysler survived, until now. Well, as a satrap of Daimler-Benz for a few years, it did.

    As for allowing Ford, Chrysler and GM to go broke in the theory that new jobs will blossom, well it’s the same argument we get these days from Tom Freidman of the New York Times who believes that a new “green economy” will blossom, if we just allow to happen. T. Boone Pickens keeps beating that same drum.

    I’m a skeptic about both schools of thought. Years of working at newspapers and magazines and following too many politicians around will do that to a person.

    I’d like to believe if the Feds give the so-called Big Three some of our money, they will get their heads out of wherever you think it is, and do the right thing(s). Rick Waggoner, Robert Nardelli and the guy Ford brought over from Boeing will have to work to expand their understanding of what the country needs and wants in the way of vehicles, now that the SUV dream – or nightmare, depending on your point of view – is over.

    But as Upton Sinclair once said, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

  3. I think if Presedent Obama realy wanted to make a Big splash. He should pore more money into Tesla than the Big three , GM, Ford, Dodge. We all want a car that works! Tesla has two that work. Why don’t do reserch on a car that all ready works? All we need to do is make it more aforeable so we all can drive gaseless cars!

    Robert L Jordon of Washington State