Wednesday, March 13, 2013

Glass Breaking Fun

This past week economist Greg Mankiw’s blog posted a couple of cartoons relating to the broken glass fallacy. I summarized the fallacy last July this way:

A vandal comes and breaks a baker’s window. The baker then employs a glazier to replace the window, so the glazier has more income, which he spends to by a suit. And so on, implying that the economy is better off because of the broken window. But this looks only at what is seen, not what is unseen. The baker was building up capital to buy a larger oven and hire more workers. But he had to use the capital on the window, which he wouldn’t have had to do without the breakage. So there was a loss in the economy to the baker, to his possible employees that didn’t get hired, and to the manufacturer of the new oven that didn’t get purchased. Those losses are unseen. The economy is actually worse off because of the unnecessary glass breakage.
First there was this cartoon:
From Greg Mankiw's blog

 Then there was this follow-up:

My son Political Sphere was visiting for spring break this past weekend, and we were laughing about these cartoons (I know, our forms of entertainment are admittedly a little arcane), and he asked if I’d heard about the real life example. This happened in Arizona while he was living there, so he was familiar with it; I had to look it up. Here’s a portion of the story from January 2009:
A Maricopa County grand jury returned the Jan. 22 indictment against Troy Jason Vollberg, 34, who was arrested Friday by Scottsdale police.
The indictment contains 12 felony counts including fraudulent schemes, aggravated criminal damage and burglary in the first degree….
Those documents accuse Vollberg, owner of Tri-State Glass, of being the mastermind behind an effort nearly two years ago to bilk the Scottsdale Unified School District out of hundreds of thousands of dollars to replace broken bus windshields.
Investigators claim Vollberg paid Scott Sloan $5,000 to find a person to knock out the glass, and then paid Mike Olivares $15,000 in April 2007 to break out the front windshields of 70 school buses in a Scottsdale bus yard.
Vollberg, whose company was a subcontractor for the school district, charged the district $134,000 to repair the windshields.
Police documents say Vollberg pocketed the money and used it for a "trip to Las Vegas and new tires for his truck."
This is a real-life example of literally broken glass. Clearly the prosecution shows there is a belief by society that Vollberg’s “contribution” to the economy was not a net positive. Yes his glass repair company (or mainly himself) got a temporary net increase of $134,000, pretty significant business. He “invested” $20,000 to a couple of thugs to do the actual glass breakage, so subtract that amount from his profit, but include it as being spent elsewhere in the economy. And then he spent a chunk of the profits on a trip to Las Vegas, contributing to the tourism industry, and also purchasing new truck tires, with some trickle-down economic benefit there. All positives so far, right? Then why the prosecution?
Because he caused the school district to spend $134,000 of its budget on bus window repairs. Now, I’m often critical of the way public schools prioritize their spending, but I can’t imagine any district preferring to spend their budget on vandalism repair, for the sake of the economy, at the expense of educating children.
Later on, Vollberg “invested” $8,000 to hire a thug to break windows at a trucking company, where he got a return of $45,000 for repairs, and additionally spent a mere $10,000 for smashed bus windows—again—this time charging $270,000. It was the inflated price for repairs this time that set off the investigation that finally uncovered his window-breaking scheme. So, this one man has given us plenty of real life case studies.
If it’s not clear to you that damaging other people’s property in order to profit yourself is (and should be) against the law, you may be a Keynesian. If you believe in respect for private property, and believe the use of capital for positive ends is better than for unnecessary damage repair, you may be a free marketer (AKA classical economist).
More pertinent (and more in accord with the cartoons), Keynesians believe government ought to "stimulate the economy" by spending money somewhere, even if it means "breaking some glass" to spend it on, while free marketers believe government interference is much more likely to harm than help the economy.

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