So Grover Norquist, head of the libertarian Americans for Tax Reform, tweets: “If Keynesian economics worked—shoplifting would create jobs.”
In reply, Matt Yglesias, a fellow at the liberal Center for American Progress Action Fund who has a BA in Philosophy from Harvard, thinks that, yes indeed, shoplifting can create jobs:
It seems to me that in an economy with high unemployment and excess capacity, a temporary increase in shoplifting would in fact create jobs. Why? Well, retailers place their orders on a forward-looking basis. If you think you can sell stuff at a profit in the future, you order stuff. The shoplifting surge would reduce inventories, and cause a spike in orders. That would mean extra employment in manufacturing and transportation.
This seems to me to be similar to the alleged broken windows fallacy. Having goods vanish off store shelves would produce no additional jobs if full employment were already in effect since it wouldn’t be possible to create any extra goods. Only technological improvements to move the production frontier outward would raise living standards. But if there are unemployed people sitting around, then why shouldn’t shoplifting boost employment? Of course we need to distinguish a temporary surge in shoplifting from a permanent increase in the level of shoplifting. The latter would merely increase retailers’ costs and depress the economy.
First: Yes, he really said this. Second: No, I don’t he was not joking. Third: This is the sort of thinking that results from going from the Ivy League to a D.C. think tank without first passing through the real world.
Unfortunately, this type of error is not limited to young liberal think-tank eggheads. As the economist Henry Hazlitt once wrote, “The broken-windows fallacy, under a hundred disguises, is the most persistent in the history of economics.” (For an explanation of why Yglesias is wrong, see the end of this post.)
This sort of fantasy-world thinking is an example of why, as Stephen Moore says, that “Americans hate economics“:
Economic bimboism is rampant in Washington. The Center for American Progress held a forum earlier this summer arguing that raising the minimum wage would create more jobs. For this to be true, you have to believe that the more it costs a business to hire a worker, the more workers companies will want to hire.
A few months ago Mr. Obama blamed high unemployment on businesses becoming “more efficient with a lot fewer workers,” and he mentioned ATMs and airport kiosks. The Luddites are back raging against the machine. If Mr. Obama really wants to get to full employment, why not ban farm equipment?
Or consider the biggest whopper: Mr. Obama’s thoroughly discredited $830 billion stimulus bill. We were promised $1.50 or even up to $3 of economic benefit—the mythical “multiplier”—from every dollar the government spent. There was never any acknowledgment that for the government to spend a dollar, it has to take it from the private economy that is then supposed to create jobs. The multiplier theory only works if you believe there’s a fairy passing out free dollars.
Addendum: So does a temporary increase in shoplifting create jobs? Maybe in Kenysianville but not in the real world. I honestly don’t know anyone who has every actually created a job that would think it works this way.
Yglesisas, as Hazlitt would say, is confusing need with demand. The retailer may need to replace his stock but he is not doing so because of an increase in demand. He has to spend additional capital merely to replace the shoplifted inventory. If a TV cost him $50 he has to spend an additional $50 to replace the TV. Now his cost for one TV has increased 100%. Who pays for that? The consumer. As The Economist has noted, theft inflates the average family’s annual shopping bill by $186.
Okay, sure, we know that the consumer pays more for the product, which is why shoplifting is, as Yglesias admitted, detrimental in the long-term. But doesn’t the manufacturer of TVs now have to create new jobs in order to replace the stolen TVs? Not likely. Remember, while there is a need to replace the TVs there is no new demand for them. The manufacturer of TVs is likely either to replace them out of their current inventory or meet the production needs from existing labor capacity. The manufacturer has no real incentive to hire new labor to meet this temporary need.
By now you’re probably starting to remember the Economics 101 class you took your freshman year and thinking, “Oh yeah, temporary shortages cause prices, not employment, to increase.” That’s exactly right. Instead of having a reason to hire new people that they will have to fire in a few days/weeks, the manufacturer merely has the incentive to raise prices on the TVs they are already producing. So now the original retailer has to replace the TV that cost him $50 by paying, say, $60.
In other words, the stolen TVs do not create new jobs but merely raises prices (perhaps temporarily) on the existing inventory of TVs. The short-term effect is the same as the long-term effect that Yglesias described: “. . . merely increase retailers’ costs and depress the economy.”
August 23rd, 2011 | 10:18 am
“Second: No, I don’t he was not joking.”
I had a friend who created his own security job one summer at a department store. He gave his mother, his sister, and a few of his mother’s friends a script. Starting in March, they called the store, speaking of their difficulty in navigating the different floors, and that a few shady-looking men were looking at them funny. (It was a downtown store, not attached to a mall.)
A week or two before Spring semester ended, he went to the store’s HR office and offered a resume as a greeter/security consultant. Thus, my student friend found himself gainfully employed for several months, with the only downside being he had to wear a coat and tie and walkie talkie.
So yes, I’m sure a surge in shoplifters would create all sorts of jobs. So would a tornado ripping through a midwestern town for construction workers. Both are bad things we wouldn’t wish on our adversaries.
That unemployed Americans are waiting on corporations to let loose on their stockpile of stock gains to hire them is also bad, if not immoral and unpatriotic.
There are a lot of hateful things about how the American economy is run, and I’d be inclined to say that the Right is more at fault these days than the Left.
August 23rd, 2011 | 10:18 am
Stephen Moore says:
That has got to be one of the stupidest things I have ever read. No one who knows anything about economics would say such a thing. Macroeconomic theories don’t apply to two isolated individuals.
This is equally stupid:
It is not “raging against the machine” to point out that increased efficiency and automation result in fewer jobs, at least in the industry where they are implemented. It is telling the truth.
August 23rd, 2011 | 10:28 am
David Nickol:
> No one who knows anything about economics would say such a thing. Macroeconomic theories don’t apply to two isolated individuals.
No. What is stupid is the belief that macro reverses all the rules of micro.
August 23rd, 2011 | 10:30 am
David Nickol No one who knows anything about economics would say such a thing. Macroeconomic theories don’t apply to two isolated individuals.
Naturally, Moore never said that macroeconomic theories apply to two isolated individuals. Here is the preceding sentence:
Moore is, of course, absolutely right. His teenagers example was merely an analogy—and a fitting one.
It is not “raging against the machine” to point out that increased efficiency and automation result in fewer jobs, at least in the industry where they are implemented.
But in the banking industry, the example Obama uses, increased efficiency and automation has not led to an fewer jobs:
August 23rd, 2011 | 10:48 am
David, I disagree with your assessment.
The key argument of the article is that macroeconomic policies in fact *do* apply to isolated individuals — that’s who every economic policy applies to. That’s the entire point of economic policies: to make life better for individual citizens (or at least it ought to be).
The fundamental argument against Keynsian economic theory is that the effects of economic forces do not in fact fundamentally change as they increase in scale.
Giving a person $1000 a month if they don’t work is going to make him less inclined to find work than if you give him nothing. The same thing happens if you give 5 million people $1000 a month in unemployment insurance if they don’t work. That’s pretty easy to understand, I think.
Now, there’s still a valid argument to make that the positive effects of giving out the unemployment insurance outweigh the negative effects of decreased incentive to seek work (mainly by giving the recipients the resources to more effectively look for work when they choose to, and by cushioning the long-term financial effects of job loss on them), and I happen to agree that they do. But it’s simply wrong to argue that there is no negative effect at all.
August 23rd, 2011 | 10:49 am
There’s a guy that comments on just about every single First Thing post I see. It’s at the point where you could hand me something written by any conservative writing on any topic, and I could tell you how he’d respond almost verbatim even if I had never seen him write previously on that topic. And yet all of his comments are written as if he has some fresh perspective that others are missing. Out of sheer politeness I won’t say who this person is.
August 23rd, 2011 | 10:53 am
I highly doubt Mr. Obama has been in a bank for a looooong time, so perhaps he honestly does think that they are now entirely staffed by robots, and that the national unemployment rate of greater than 9% is entirely due to out-of-work bank tellers.
I remember reading Mr. Yglesias’ blog when he was a Harvard undergraduate (what was that–2003 or so?). His ignorance of anything but the extremely privileged world of Manhattan and the Ivy League was understandable then, but maybe is sort of a handicap to being taken seriously as an adult commentator, I would think. Of course, he’s sadly typical of the contemporary American media and political “elite” in that respect, just a bit younger than average.
August 23rd, 2011 | 11:00 am
Paul Krugman, on the other hand, thinks that what the economy really needs is a threatened invasion by aliens.
http://www.huffingtonpost.com/2011/08/15/paul-krugman-fake-alien-invasion_n_926995.html
You just can’t make this stuff up.
August 23rd, 2011 | 11:04 am
What the White House is telling us is that the more unemployed people we can pay for not working, the more people will work. Only someone with a Ph.D. in economics from an elite university would believe this.
Joe Carter:
We don’t pay the unemployed “for not working.” We provide an income for unemployed people who can’t get jobs. Of course if you pay people not to work, you are creating a problem, and available jobs will go unfilled. But the problem in the United States today is that there are more people who need jobs than there are jobs for them to take. My father, who was not an economist, used to say, “How can there be unemployment? Look at all those jobs listed in the paper!” Well, there can be unemployment when there are a thousand jobs listed in the paper and five thousand applicants for those jobs.
August 23rd, 2011 | 11:28 am
The “fairy passing out free dollars” is the Issue Department of the Central Bank.
Look at the Bank of England’s weekly Return for 15 August 2007, when it held no government bonds and only £51.9 m in “other assets” (commercial securities) against its bank note issue. On 17 August this year, it held £5 bn in government bonds and £38.3 bn in “other securities.” In the same period, it has reduced its Ways & Means advances to HM Govt (the Treasury’s overdraft with the Bank of England) by £13 bn
The Bank of England can print one new £5 note for every £5’s worth of securities it buys from the market and it receives interest and dividends on its purchases, but pays nothing to those who hold its notes. Fractional reserve banking means that he commercial banks, who receive the proceeds can lend up to twenty times the amount of new money thus created.
It can do the same with its short and long-term reverse repos to secure its advances to the money market. It simply prints the money it lends, backed by the collateral of the loan. By convention, the government raises its short-term borrowing in the money market, rather than from the Bank.
It can reverse the process at any time, by simply selling securities and holding the proceeds in the Banking Department, thus reducing the notes in circulation, forcing the commercial banks to restrict credit or even call in loans.
They call it “fiat money” for a reason.
August 23rd, 2011 | 2:40 pm
Ironically the “shoplifted” argument is used to justify piracy. The more people shoplift your digital product, the more chance they might buy future products, because they shoplift it to try it out. Increased shoplifting also gets your name out, and if you lower prices you might just make a lot of money. For digital stuff shoplifting is probably the reason why the PC games industry is decimating itself in terms of cost, pricing games at $1.00 or less.
As for innovation killing jobs, it does. More productivity per worker means less workers needed. If we didn’t have ATMs, banks would have had to expand their hours of operation to meet the challenge of a world that operated second shift. Even expanding industries can shed jobs-we just don’t notice it in the expansion.
I think most people don’t like economics because economists tend to be dead wrong about things more often than not. They didn’t predict the tech bubble, they didn’t predict enron, they didn’t predict the whole real estate fiasco, and they tend to boost things like offshoring which hurt people. Imagine a science where the scientists were consistently wrong about real events that came from their theories.
August 23rd, 2011 | 3:24 pm
Why on earth does Iglesias think that just as many people will buy socks if a certain percentage are shoplifted, as will buy socks if everyone who wants them pays for them?
How many socks (substitute other items) does he think people want/need?
Just because the Walmart manager feels pressure to restock the stolen socks does not mean that all those socks will then sell. The number of socks that would have left the store by any means does not increase, unless somehow there’s some kind of weird sock black market going on. Therefore, the stolen socks reduce the number of socks that will be sold in the future. If 20 pairs of socks are stolen, that means 20 pairs will not be sold in the future. Of the 40 pairs that the manager has to restock in order to account for the theft plus normal sales, 20 will not sell because the20 thieves already have socks.
So if Handydandy Sock Co. ramps up production to fill Walmart’s order for the extra 20 socks, they’ll be creating excess inventory for Walmart and excess capacity for themselves, which costs everybody money, and might result in them laying off their workers later.
Is that not obvious? Or am I missing something?
August 23rd, 2011 | 4:27 pm
Pentamom, they already do.
Most stores have a concept called shrinkage. Shrinkage is the percent of lost inventory that is lost to various reasons and isn’t sold. Reasons include internal theft by employees, external by shoplifters, breakage, and other means.
The same amount will sell regardless, shrink is measured as a percentage of inventory. It impacts profits. I think he’s saying if shrink rises, stores will need to order more goods to maintain inventories, and their profitability will go down. But then it gets transferred to the vendors, who will add jobs because of increased demand for goods. Shrink can fluctuate wildly depending on business and still remain controllable.
I don’t think this will work though because shrink in most businesses wont create jobs if increased. It’s not like vendors are running at full capacity or productivity. There wont be any loss of jobs: most retail stores literally run on skeleton crews as it is. But a modest increase in shrink wont create enough demand, and a massive one will lose jobs by closing locations down.
An increase in shoplifting wont even create jobs for store detectives. The chains that have them focus on employee theft and usually dont have detectives in every store.
August 23rd, 2011 | 4:30 pm
Here’s an interesting statistic: 98% of all bloggers are experts in economics. (100% are experts, period.)
August 23rd, 2011 | 5:27 pm
“The fundamental argument against Keynsian economic theory is that the effects of economic forces do not in fact fundamentally change as they increase in scale.”
That’s not an argument, that’s an assertion.
The problem is that we’re seeing things happen in the macroeconomy that cannot be predicted by neoclassical microeconomics. Nobody has been able to scale neoclassical micro up so as to be able to explain such basic phenomenon as business cycles (there’s no reason why business cycles should even exist at all under neoclassical micro). Yet, we have them. Either neoclassical microeconomics is simply entirely wrong, or macroeconomics operates differently than microeconomics.
August 23rd, 2011 | 5:41 pm
“Yglesisas, as Hazlitt would say, is confusing need with demand.”
You’re building a self-contradictory edifice. There’s no way in neoclassical economics to distinguish needs from demands. Take a look again at the basic theory – the demand curve is constructed precisely so we can fit all human utility into one equation. Then market price is determined by the intersection of that equation (the demand curve) with the supply curve.
If we theorize there are true needs as opposed to demand, then this pricing model above is irrelevant. What Hazlitt is doing is re-introducing the use theory of value, which means that assets should be priced by some process of expert valuation (some calculation of their use values), not by market mechanisms at all.
Now, I actually like the concept of use value. But I don’t think you or Hazlitt quite understand the implications of that.
August 23rd, 2011 | 5:52 pm
“Paul Krugman, on the other hand, thinks that what the economy really needs is a threatened invasion by aliens.
http://www.huffingtonpost.com/2011/08/15/paul-krugman-fake-alien-invasion_n_926995.html
You just can’t make this stuff up.”
If humans were fully rational, we likely wouldn’t see business cycles at all. So how the rationality we do possess interacts with irrational behavior. I wouldn’t recommend fake alien invasions myself, but the business cycle seems to be at least partly driven by partially irrational things like overall economic narratives, optimism or pessimism and so on. Public policy that works with both our rational and irrational natures is probably well-advised – and that might mean shaping a grand optimistic narrative (i.e. a story and the structures of stories are not fully rational).
August 23rd, 2011 | 5:57 pm
“How many socks (substitute other items) does he think people want/need?”
You agree with him – you both believe that the demand curve is infinite.
August 23rd, 2011 | 6:11 pm
I think the important point is that this statement . . .
“If Keynesian economics worked—shoplifting would create jobs.”
. . . isn’t worth discussing seriously.
August 23rd, 2011 | 7:24 pm
In the real world, those who pooh pooh the broken-windows fallacy also don’t get it some of the time. That’s because, in the REAL world, some day some punk kid may throw a brick through your shop window. That’s why you’ve got insurance. That’s why you pay taxes for the police. That’s partly why the glazier is in business: not just to make new windows for new businesses, but to replace old windows that punk kids may throw bricks through.
Duh.
If all of us acted morally 100% of the time, would we need militaries, police, prisons, private security forces, alarm systems, closed circuit cameras, etc.? Would we need to insure ourselves against losses caused by crime or need lawyers and auditors? No.
Duh.
Just as if all of us maintained proper diets and exercised and observed more precautions in life, fewer of us would pursue being doctors and nurses.
Sure, throwing a brick through the shop window may not create employment. But many people are employed, and remain so, because chance and evil demand it.
August 23rd, 2011 | 11:29 pm
As I’ve said elsewhere, economics shows clearly that “social science” is not in any meaningful sense science. It is sophistry, the advocacy of desired ends through polished rhetoric, logical-sounding theory and cooked-up “facts”.
Plato defined the difference between philosophers and sophists. Sophists (and real scientists) seek truth; sophists seek to persuade others to buy the arguments they are selling. Sophists dress themselves in the guise of philosophers (and real scientists).
The true nature of economics should be amply demonstrated by the fact that every party and economic interest employs their own economists to sell their own platform. That is not the structure of science, but of advocacy. And it must be noted that economic debates NEVER END. Remember the old joke about the number of end-to-end economists needed to reach a conclusion?
Science reaches conclusions. Economics (and other “social sciences”) only fuel endlress self-interested debate.
August 25th, 2011 | 2:54 pm
“You agree with him – you both believe that the demand curve is infinite.”
Huh? First of all, I believe no such thing, and secondly, what makes you think I believe any such thing?
August 25th, 2011 | 2:57 pm
“But many people are employed, and remain so, because chance and evil demand it.”
Once again failing to account for the fact that if we weren’t paying for cops, insurance, etc., we could pay for other things that actually constitute wealth.
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