ECONOMIC FALLACY #2 : HIDDEN COSTS Not Accounting For Hidden Costs or HIdden Tra

ECONOMIC FALLACY #2 : HIDDEN COSTS

Not Accounting For Hidden Costs or HIdden Transfers.

This is somewhat similar to “the broken window fallacy” introduced by Frédéric Bastiat. Bastiat tells a parable where a shopkeeper’s son breaks a window in the shop. As a condolence people say that at least the son has fueled a job for the man who will repair the window. While the son did circulate money, and boost one industry, the shopkeeper would have used his money to employ other labor if the window had not been broken.

When the government spends money on something, part of the cost is not only the dollars spent, but the things that the money would have been spent on otherwise. Amazingly what the money would have been spent on otherwise is very often the same thing the government is trying to create. So politicians may have done nothing at all when all is said and done, we may even be worse off, but they can take credit for what was created.

The current best example of this is the stimulus. Supporters of the stimulus can say that it created jobs, but because we can only speculate on what might have happened without the stimulus, the true costs remain hidden.

Lawrence Lindsey argues convincingly that it was simply a waste of money. One of his best lines is “Since the beginning of the recession, the number of unemployed has increased by more than 8 million people. For $800 billion, we could have handed every one of these people a check for $100,000.” Not only is the cost over $800 billion, but it may very well be the case that more jobs would have been created if that money remained in the hands of the private sector. For those of us who think government is by nature horribly inefficient, that is a reasonable conclusion.

Spending money for policies like the stimulus is usually a beneficial political move (although when you get up to $800 billion your chances get a lot worse). First and foremost, you can say you “did something about it.” That always counts for a lot in politics (this is another point made by Sowell). You don’t want to be caught sitting on your hands, not wasting money. Second, you can say that it would have been far worse if you didn’t do something, since all we can do is speculate about the alternative. Third, you can point to a concrete example of progress you have made. You were part of the effort that created hundreds of thousands of jobs. It doesn’t matter if its cost was so high, that it may have also erased hundreds of thousands of jobs.

Generally speaking the government is so inefficient that when it says it created something, most likely it destroyed far more in order to create it.