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    Economics in One Lesson {Week One}

    January 8, 2008 by Brandy Vencel

    Reading Henry Hazlitt’s work, Economics in One Lesson feels like coming home to me. So far, I already know all of this! This was an exciting revelation for me. I wasn’t homeschooled, but we did eat dinner as a family, together, almost every night. My mom always told us to let my father talk. And so we listened. We sat nightly at the feet of a man whose work was closely tied to Wall Street and learned much more than I realized at the time.

    If you want to know much of the content of said dinner conversations {rants?} during my formative years, read this book. Then, my writing of Back in the USSA will make sense to you.

    Early on, Hazlitt defines economics as an art:

    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.

    This is what I have been trying to do with my vain attempts at anti-socialist fiction: put a face to those who have been forgotten. If it is a fallacy to forget to consider all groups in regard to both the immediate and long-term effects to a given economic policy, then Socialism is the ultimate fallacy.

    At this point, I must confess that there is so much in Hazlitt’s work that I am tempted to go a million directions at once. I think I will just follow his work and choose some of my favorite excerpts for commentary and reflection.

    Who is forgotten?

    In chapter 2, Hazlitt applies the most basic economic fallacies:

    A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

    Si was once at a meeting where the Public Information Officer for the US’s largest pension fund declared that every one dollar paid to County retirees generated seven dollars of local economic activity once said dollar was spent. This never made any sense to us. Oh, sure, the person presenting such a “fact” had some sort of fancy equation to “prove” that this was true. But let’s think through this, Hazlitt style.

    Who was forgotten?

    The taxpayer, naturally. And we have no estimate on how many dollars are stolen taxed to pay the one dollar to a retiree. After all, taxpayers are not writing a check directly to the retiree. No, there is a huge, cumbersome, beaurocratic middle-man that surely takes some sort of cut.

    It is perhaps true that the one dollar generates seven dollars of local economic activity {which I take to mean that it changes hands seven times before leaving town}, but there was no estimate for how much economic activity would be generated by allowing the taxpayer to keep his own money and do with it as he pleased.

    As an aside, there are also ethical considerations. Should a taxpayer be forced to pay for employees who are no longer working? When does a tax cross the line and become stealing, allowing one to live from the pockets of another?

    Printing Money and Raising the Minimum Wage

    Hazlitt also considers the idea of printed money:

    Now money can be run off by the printing press. As this is being written, in fact, printing money is the world’s biggest industry—if the product is measured in monetary terms. But the more money is turned out in this way, the more the value of any given unit of money falls. This falling value can be measured in rising prices of commodities. But as most people are so firmly in the habit of thinking of their wealth and income in terms of money, they consider themselves better off as these monetary totals rise, in spite of the fact that in terms of things they may have less and buy less.

    Suggested reading: The Creature from Jekyll Island: A Second Look at the Federal Reserve by Griffin.

    Also, I would encourage my readers to think whenever they hear a politician promise to raise the minimum wage. I remember in high school I had a job that paid above minimum wage. And then the minimum wage was raised. Of course, my wage wasn’t raised. So before the wage hike, I had made perhaps fifty cents per hour more than minimum wage, and after the wage hike the difference was perhaps twenty-five cents.

    Raise your hand if you understand that the effect of this was that I made less money the second the minimum wage was raised. Think of minimum wage as a baseline. Any time it is raised, you have to figure out how to either make more or cut somewhere because your money just became worth less, which is frighteningly close to being worthless sometimes.

    Famous magic words: “It’s for the children.”

    Hazlitt touches another hot spot when he writes:

    Many of the most frequent fallacies in economic reasoning come from the propensity, especially marked today, to think in terms of an abstraction—the collectivity, the “nation”—and to forget or ignore the individuals who make it up and give it meaning. No one could think that the destruction of war was an economic advantage who began by thinking first of all of the people whose property was destroyed.

    Hazlitt was writing, I think, about fifty years ago. Today, everything is done “for the children.” Say this magic phrase, and the California legislature will give you what you ask for. In fact, I feel an anecdote coming on.

    California changed the carseat laws from 4-years-old or 40 pounds to 6-years-old or 60 pounds. Besides spending fifty or so dollars for an additional carseat, our family had to buy a new, larger car when our third was born, even though, under the prior law, we would have fit fine in our compact car. But the law is “for the children” and so there is no recourse. No one cares that the children will eat beans instead of steak because Dad and Mom had to pay for the new car they only bought to comply with a carseat law.

    But it gets worse here on the Left Coast. Once families began buying bigger cars, the environmentalists began to wail. Evil SUVs were flooding our freeways. Why were parents driving these huge, gas-guzzling cars? No one made the connections between the SUVs, minivans, and the carseat laws. Instead, they criticized the parents who were doing what they could to comply with the law.

    Will they change the carseat laws to enable three-child families to fit into a compact car? Absolutely not. Instead they will tell you that having large families should be frowned upon as an environmental misdemeanour. According to this logic, we should not have had Baby Q. {Toddler Q.? She’s walking, you know.}

    Which brings me to a point, and I am sure you were hoping I would make one sooner or later: almost every policy or political action is economic in nature. It is also spiritual in nature, but that is not what we are talking about today. A carseat law is not just a carseat law. In this case, it required thousands of dollars for our family and proceeded to encourage liberals to mumur amongst themselves about the evils of those families out there driving an SUV.

    And so I would encourage you to think about how you vote. If you are voting for a bond measure, you are voting to take money from not only yourself but also your neighbor and give it to the government. If you are voting for a politician who wants to raise the minimum wage, you are actually voting to simply raise the baseline and your own money will be worth less {worthless?}.

    And this is why Hazlitt says we must look at both the short term and the long term effects. This is why we must consider all groups, not just “the children.”

    Hazlitt writes:

    For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $10 million the taxpayers will lose $10 million. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

    Some things sound so good for me in the short term, but I have a responsibility to reason out the full effects of a bridge, or even a carseat.

    The government as Robin Hood: taking money from A to give to B

    The government spenders forget that they are taking the money from A in order to pay it to B. Or rather, they know this very well but while they dilate upon all the benefits of the process to B, and all the wonderful things he will have which he would not have had if the money had not been transferred to him, they forget the effects of the transaction on A. B is seen; A is forgotten.

    Suggested reading: The Forgotten Man: A New History of the Great Depression.

    Taxes discourage productivity and the formation of new businesses

    In our modern world there is never the same percentage of income tax levied on everybody. The great burden of income taxes is imposed on a minor percentage of the nation’s income; and these income taxes have to be supplemented by taxes of other kinds. These taxes inevitably affect the actions and incentives of those from whom they are taken. When a corporation loses a hundred cents of every dollar it loses, and is permitted to keep only fifty-two cents of every dollar it gains, and when it cannot adequately offset its years of losses against its years of gains, its policies are affected. It does not expand its operations, or it expands only those attended with a minimum of risk. People who recognize this situation are deterred from starting new enterprises. Thus old employers do not give more employment, or not as much more as they might have; and others decide not to become employers at all.

    Once upon a time Si and I seriously considered starting our own business. When we did the math, the taxes levied by the state made the business a failure from the outset. We had dreamed of this beautiful family business which we felt would not only be an enjoyable endeavor, but enable us to train our son to be a good businessman as he matured and offer meaningful work to even our youngest members. Between high federal and state taxes, plus the burden of numerous OSHA restrictions, we decided owning a business was too much for us–we would never be able to afford employees.

    Big Brother: meddling in home mortgages, breaking down character

    Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief in the long run they do not increase overall national production but encourage malinvestment.

    Does this sound familiar to anyone? I was so tired that I actually turned on the television for a while on Sunday night {first time in many months, I must say}. I was watching a local real estate show with interest. The two hosts seemed to think that this current real estate crisis came out of nowhere, was completely unexpected.

    My husband was in loans for a few years, during the boom actually. We marveled that people would qualify for loans, but qualify they did. The rates had gotten so low, and the government had so loosened restrictions, that people were permitted to be foolish–to purchase houses they simply could not afford!

    There were many economic consequences to this, but this time I simply must raise the spiritual issue: what sort of character were the banks {who were complicit with the government agencies Freddie Mac and Fannie Mae} encouraging in our citizens? What sort of greed and materialism took root in many families during the boom? Let’s forget the current bust for a moment and ask whether the boom–manufactured as it was by government employees tinkering with the system rather than real and true flourishing of the industry–was beneficial to the soul of the people.

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    9 Comments

  • Reply Brandy January 16, 2008 at 11:09 pm

    I had forgotten about the airline regulations! I can say from personal experience that due to such regulation, as well as the elimination of “child seats” (which used to be about half price), we travel only every-other-year.

  • Reply Francis W. Porretto January 16, 2008 at 9:56 pm

    Ah, Hazlitt, the last real economics correspondent to write for the New York Times. We miss him desperately.

    Apropos of seeing all the effects of a policy change, the relatively recent regulation that required that infants be bought, and ride in, their own seats on airlines, rather than riding their mothers’ laps, caused a major deflection of young families away from air travel. What did they choose to do? Mainly, to drive instead. But driving is so much more hazardous — particularly to small children — that this almost certainly increased the number of child fatalities from travel. Thomas Sowell estimated a net of nine extra child deaths per year, back in 1995, purely from the fatalities per passenger mile statistics.

    Governments and their masters never admit a mistake. Especially when it might cost them power, revenue, or prestige to do so.

  • Reply Rahime January 9, 2008 at 8:05 pm

    Sounds like a must-read.

  • Reply Brandy January 9, 2008 at 6:13 am

    Anonymous Dad,

    This is why I am, in principle, against insurance. I think I wrote about this once, so I might be repeating myself, but I remember meeting a woman who took her children to the doctor for every sniffle. Her reasoning was that they were better safe than sorry and, after all, the copays were only $5 per visit. At the time, our copays were $35 per visit, and I did all I could to stay out of the doctor’s office. My hunch is that an $80 appointment is an $80 appointment. It’s just that this woman didn’t think much of the $5 of her own money, and didn’t think at all of the money the insurance company was paying.

    In other words: paying our own way does make us more careful. In general, having our way paid for by others increases wastefulness.

    Your daughter must really love you. 🙂

  • Reply Anonymous January 9, 2008 at 5:38 am

    It is also important to remember that an individual spends money more efficiently than any government. I attempt to get more value from my money than someone who spends other peoples money so the multiplier should be greater when I spend my money.

    It also takes infrastructure to spend other peoples money which I don’t usually need because I am married.

    You make a dad proud.

  • Reply Brandy January 8, 2008 at 9:44 pm

    Open-ended debate at the dinner table sounds like a wonderful idea!

  • Reply Dominion Family January 8, 2008 at 6:42 pm

    Wow, Brandy, wonderful post! We were in NJ when the car seat law was changed there. I was devastated. We did not have the money to put our tiny 7yo in a car seat because it meant we had to have a bigger vehicle. I agonized over that one and I realized that too many laws make anarchists of us all. We ended up moving to Alabama where they haven’t gotten around to making too many laws…yet.

    I love your connection from there to the SUV dilemma.

    Finally, we did try to start a lawn business. In NJ it wasn’t possible because you had to be 18 to put gas in a mower (?) and the rules for small businesses were unmanageable but even in Alabama we couldn’t keep up with all the different certificates we needed to run the business legally. Each certificate requiring a fee paid.

    I think much of this goes back to bad theology. I always say people think if they take their vitamins they will live forever, or
    maybe ‘Where there is no vision the people perish.’

  • Reply Dana January 8, 2008 at 6:28 pm

    Ditto the head-nodder status.

    My father’s favorite thing to do around the dinner table was to throw out an open-ended question and then sit back and watch his six children debate.

    I have fond childhood memories of dinner table discussions.

  • Reply Laura January 8, 2008 at 4:55 pm

    Great post! Your dad sounds much like mine – this book is also a head-nodder for me, because it’s what my parents taught me. But I love reading it and reading the comments by you and others.

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