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Today’s Must-Read

Posted by Lissa on January 29, 2009

By way of Trying to Grok, I stumbled upon this very simple, lucid, SENSIBLE explanation of why the New Deal was not a successful program.

Let me modify it, and present it to you this way. Let’s say that we have a nice suburban area sort of like we have here in Washington, DC, out in Chevy Chase. And we have some guy there who has a nice picture window, and some kid goes by, a hoodlum, and throws a rock through that window, breaks it. And let’s say that it costs $500 to replace that window. Well, our first reaction might be: What a horrible thing. Let’s catch the perpetrator.” But what if somebody else came up and said, “Wait a minute. The window’s been broken, some time has elapsed, we haven’t caught the guy, but maybe we shouldn’t catch him to throw him in jail. Maybe we should catch him to pat him on the back. Because I’ve observed what’s happened in that house and what’s happened is this: He broke the window, but the guy who had the window broken called up the glassmaker and the glassmaker put the window in and installed it for $500. Then the glassmaker took that $500 and bought a DVD player. He also bought a couple DVDs. And then he bought a reclining chair to sit back and watch the movies, all with that $500. So that broken window has generated business and now we have more DVD sales, more reclining chair sales, and it’s generated business all around town. So isn’t this a good thing?”

Where’s the problem with this argument? The valid point here is that the guy whose window was broken also might have wanted to buy a DVD player and a reclining chair. Or he might have wanted to buy a suit of clothes and some insurance. So that guy, and the tailor, is out $500 because instead of buying a suit and a shirt, he now had to pay for the window. You never generated real business because the guy who had the window broken is out $500 and the guy who had replaced the window is up $500, but the guy who had the window broken would have also been spending $500. So there’s really no net gain. Hazlitt called this the broken window fallacy.

Do you see the linking of the Fox News poll and the broken window fallacy? If you have a government program, the taxpayers pay for it. You never actually generated a job with that program; you merely transferred dollars from the taxpayers to the government. The taxpayer would have bought radios, or TVs, or DVD players with that money. Or he could have put it in the bank and it would have gone out for a loan to someone. See, the point is it would have been put to use, but instead it was taken from him, given to someone else who now has a job. But the only thing that you see is the job that was created. If you understand those principles, you can understand why the New Deal failed.

The New Deal consisted of a set of programs initiated by Franklin Roosevelt and the Democrats in Congress. Those programs transferred assets from taxpayers, centralized them in the federal government, and dispersed them supposedly to create new jobs. However, every time you see a New Deal program, you need to see that money leaving a taxpayer’s hand. Once you mentally see that shift taking place, you’re alert that a job was never actually created.

Go.  Read.  Or do you need more to whet your appetite?

Now, with Roosevelt you say, “My gosh! How could he win elections?” Roosevelt went on the campaign trail in 1936 and said, “You poor people are doing your share, but the rich are avoiding the taxes. We should make them pay.” And he recommended a tax to congress, on all income over one hundred thousand dollars. His recommendation in 1941 was for a 99.5 percent tax on all income over one hundred thousand dollars. And when the budget director said, “What!” Roosevelt’s comment was, “Why not?”

When congress refused to pass that bill, Roosevelt was furious. Therefore he instituted a 100 percent income tax, by executive order, on all income $25,000 or more. I repeat, Roosevelt instituted an executive order on April 27, 1942 for a 100 percent income tax on all income over $25,000. How many of you knew about that? Oh good, somebody did. Actually, the Republicans won the next election and voted it out, and Roosevelt had to settle for 90 percent. He had to settle for a 90 percent marginal tax. Here’s a quotation from Roosevelt, it was during World War II, “Discrepancies between low personal incomes and very high personal incomes should be lessened.” Oh, and he used the war as a crisis, you see. “And I therefore believe that in this time of grave national danger, when all excess income should go to win the war, no American citizen ought to have a net income after he’s paid his taxes of more than twenty-five thousand dollars.”

I have made this offer to teachers and students around the country. You show me an American history textbook that tells that Roosevelt had a 100 percent tax. I would think that if you’re going to rank him the number one president in American history, and he did that, that ought to be mentioned somewhere. You show me where it’s mentioned in any U.S. history textbook, and I will eat the textbook. I only ask that they bring me mustard and salt. I must say that I’ve had a textbook free diet for every year since I’ve been making that offer. I have never seen a textbook bring up that fact.

Certainly news to me (though it may not be to the rest of you).  I’m not 100% sure that date is correct — looks like it was October, not April —  but yes, it does appear to have happened:

7. In order to correct gross inequities and to provide for greater equality in contributing to the war effort, the Director is authorized to take the necessary action, and to issue the appropriate regulations, so that, insofar as practicable no salary shall be authorized under Title III, Section 4, to the extent that it exceeds $25,000 after the payment of taxes allocable to the sum in excess of $25,000. Provided, however, that such regulations shall make due allowance for the payment of life insurance premiums on policies heretofore issued, and required payments

I repeat:  Go.  Read.

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4 Responses to “Today’s Must-Read”

  1. Mike said

    With the broken window fallacy piece, I’d also add that it isn’t a simple issue of shuffling money around either. There are real costs to shifting capital to less-productive uses and the total pie shrinks compared to what it would have been, so it’s not simply that we can easily see the job “created” instead of the one destroyed.

    By the logic of the New Deal, was Hurricane Katrina then a boon for the economy in New Orleans because there were a whole lot of windows to fix? Look at all the construction jobs it created!

  2. totwtytr said

    I haven’t read the article yet, but I have read that the New Deal extended the Depression well beyond what it would have been had the government just kept it’s hands off and let economics take it’s course.

    The broken windows fallacy has an analog in self defense. Those who strive to deny people the right to self defense say that “Property is not worth killing over.” I disagree. If someone steals my property, then I suffer a loss. Even if I have insurance, it will only make up part of my loss. Plus my insurance rates will go up in subsequent years. Thus, I will have immediate out of pocket expenses and expenses further on out, while the robber gets a net profit of 100% because he didn’t pay for what he took.

    So, I am impoverished and the criminal is enriched by his illegal act.

    Why should that sort of behavior be tolerated?

  3. Jeff said

    Also, you worked to earn the money to buy whatever the thief took. How is his theft any different from forcing you at gunpoint to work for no pay?

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