Why Americans Hate Economics

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.

Read more . . .

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.”