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Fox News and The Broken Window

There's No Such Thing As A Free Lunch

Written by Brian Hicks
Posted December 21, 2009

Last week, a colleague of mine posted an article that blasted Fox News for "fear mongering." 

I respectfully disagreed with the premise of the piece, and it looks like quite a few of you did, too. (Nick's a heck of a stock picker, but when it comes to politics, we often don't see eye-to-eye...)

The controversy was over Nick's defense of tax credits and Cash for Clunkers. He blasted a Fox News piece in which John Stossel questioned a $2,500 tax credit for Neighborhood Electric Vehicles. Stossel argued it was a wasteful program, and referred to the program as "Free Golf Carts!"

Nick is a big proponent of green technology (and consistently makes his readers lots of money picking cleantech stocks), so he took offense to Stossel's piece.

While I always appreciate honest and rational debate, I believe Fox News got it right with this one. Tax credits and government spending are not always good for the economy.

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As Robert Heinlein said, "There ain't no such thing as a free lunch."

Encouraging people to purchase specific items — electric vehicles, in this case — may seem attractive at first glance. Lower pollution, less gas demand, etc.

But you have to consider the unintended consequences. Tax credits directly transfer cash from the Treasury to individuals... the result is a smaller tax base. A few benefit, while the rest are penalized at their expense.

A 19th century philosopher, Frederic Bastiat, offered a good way to understand the issue. It's known as the "Broken Window Fallacy," and hardly any modern economists address it.

Bastiat's broken window parable debunks a central pillar of economy — that increased spending (and even the destruction of assets, as is the case with a program like Cash for Clunkers), can result in a net gain for the economy.

Henry Hazlitt explains the theory in his 1946 classic Economics in One Lesson:

A young hoodlum, say, heaves a brick through the window of a baker's shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection.

And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business?

Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death.

But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

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.

Bastiat's theory dates back to the 1850s. It has stood the test of time, but career-minded economists are wise to ignore it. If you want to get ahead in the field of Economics, you don't do so by cracking down on government spending. Those are the realities of politics, unfortunately.

Today's Media

I find most news sources today to be useless. The stuff that passes for objective and unbiased would make Edward R. Murrow turn over in his grave. You know things are bad when Jon Stewart is chosen as America's most trusted anchorman.

Media coverage of the economy has been particularly awful. But unlike most outlets, Fox News has NOT turned a blind eye to the ongoing disaster that is Obama's economic policy. They've been on it from the start.

And frankly, I don't care if Fox is only criticizing Obama because they are GOP-biased. I don't belong to either political party. They are both bought and paid for, in my view.

So while I find the political infighting to be entertaining, I don't have a horse in the race. I'll cheer on anyone who is willing to call out bad economic policy — just as Stossel did.

The Bottom Line

We have some lively debates in the office over stuff like this. While we don't all share the same political and economic beliefs, we do agree on one thing: making money. To that end, I suggest reading Keith Kohl's latest report on the Bakken Oil Shale. Looks like Keith made a "mistake" in his original research... but it's going to be a very profitable mistake.

Until next time,

Adam Sharp

Guest Editor, Energy and Capital

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