I keep thinking I should return to recording my random thoughts in this space. After all, I pay to maintain the server and keep the domain so I should, right?
I had a thought-provoking phone call yesterday about the unintended consequences of working from home. Actually, it started me thinking I should be recording these thoughts, privately or publicly. More on that call later.
Buy American
Today I was reading Facebook and a campaign by allamericanclothing.com was encouraging me and others to buy American clothing and create 200,000 jobs. I like American, I like jobs, maybe I should spend more on what their ad was selling. Actually here was the promise:
“If each American spent $64 on a piece of clothing, it would generate 200,000 new jobs.” – allamericanclothing.com
That is quite a claim and sadly not true. And it is not true because of the amounts, I have no idea whether $64 from each American will translate to 200,000 new jobs, but let’s say that is correct with the implied 200,000 jobs making American clothing.
Not true
Why is that then not a factually true statement? Because if each American would take $64 and spend on clothing, they must withdraw that $64 from another use, whether consumption or savings. If I increase my clothing budget $64 then other things I would have spent it on will not be made and people will lose their jobs in those areas. Not because of my measly $64, but from the collective action of “all Americans.” So in round numbers, if 300 million people spend $64, that is $19.2 billion dollars not spent in other places, $19,2 billion dollars not received by suppliers, and some large portion of that $19.2 billion dollars not going to employ lots of workers.
So spend on American clothing if you want, just know that every action has a cost in what is not purchased and that opportunity cost is that others will not be employed. Yes, your $64 is that powerful.
Truth in a 1946 book
Henry Hazlitt in his excellent 1946 book, Economics in One Lesson (freely available at the Foundation for Economics Education) repeats the oft-ignored classical tale of the hoodlum that destroys a baker’s window with a brick. Someone says, here is the good thing, the silver lining. at least there is a job created for the glazier. He gets work, money for services, and can go buy stuff, feed his family, and so forth and so on. See that is a good thing for the economy. Sure a window was broken, but fixing it creates a job and puts money into the system. Lots of people believe this story because they want to, it sounds good. Just like increasing my clothing budget for American Made clothes by $64, it sounds good, perhaps my patriotic duty, and it helps create those 200,000 jobs.
Buth those same people who sing the praise of what the window-fixing money will do for society, forget one thing. Now the baker whose window was broken can’t buy a new suit. The money he was going to use to buy a new suit just went to the glazier. The money to the glazier and then on to whomever he shares it with is a benefit, but not a net benefit. The new window cost a tailor the business of making the baker a new suit. No new suit for the baker, no new business for the tailor, and no sharing of that stream of income to all with whom the tailor would have shared it.
So next time you see a Buy American ad (which by the way I am not against), realize that there is a benefit that more Americans will be employed making the American good, but others, including Americans, will have less demand for their services making the good you did not make.
More
The oft-ignored classical tale owes to Frédéric Bastiat (1801-1850) an amazing French economist and journalist. His popular, common sense writings have educated millions, but alas rarely does his wisdom, and the wisdom of writers like Hanry Hazlitt, permeate the bastions of politicians and sad to report of economists as well. I believe in part this is why
British Economist Joan Robinson, (1903-1983) said the main reason to study economics is to avoid being deceived by economists. I always hasten to add politicians.
Bastiat was particularly hard on the politicians as well as the economists who supported policy, that they would often focus on the present good of a policy and ignore the longer-term harm. He referred to those who thought this way as bad economists. Good economists were those who could see what is unseen. The unseen includes the opportunity costs of the policy which may include near-term harm, but certainly ignored was the long-term harm. This focus on only the good part of the policy and ignoring all other aspects happens today all of the time, but Hazlitt and Bastiat, and Smith (1723-1790) show that it is a constant occurrence.
Here is a great little video on the Broken Window Fallacy from Art Carden. I do like the learn liberty videos and use many in my classes.
Used in every class
My final comment in this first in a while entry is: Economics in One Lesson is such an important book that I have used it as the first assignment in my classes, read the lesson in chapter 1, read the broken window fallacy in chapter 2, and then review any additional chapter. I find that the students get an amazing amount of insight about how to think before we buckle down to the economic text. I encourage everyone who has made it this far to read chapter 1 and 2, and they are both very short chapters. You will enjoy it.
For those who do not click the link and read the first chapter, you will miss that Henry Hazlitt reduces economic analysis down to a single sentence and an amazing sentence at that. Ready, here goes.
“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.”
Until next time.