Enough of the broken windows, already!

President Obama has assembled an economic team with tremendous brainpower.  These guys are super.  Really. So it's pretty amazing to me that the collective wisdom of that team must surely have been ignored when the administration created this little project:

Part 1: "We, the U.S. Government, will purchase your used car for $4,500 if you buy a new vehicle."

Okay, so some might find that part of the plan objectionable--government is not generally in the habit of subsidizing our purchases, and some training in economics will allow you to show that every dollar car buyers receive from the program costs someone else (we don't know who, but why quibble) a bit more than a dollar. But we were in a recession, and car companies were having a hard time, so if government believes that the auto industry is important and needs to weather the storm, I at least understand that. It's the second part of the plan that I find absolutely stunning:

Part 2: "After we purchase your used car, we will destroy that car by pouring molten glass into the motor."

So if the goal of propping up ailing automakers is accomplished by part 1, then why the need for part 2? All the plan does is take a perfectly good car that someone might have gotten a great deal of use from--perhaps someone who couldn't afford a new car even with the subsidy--and destroy it in the name of job creation.

That car simply becomes another broken window. And the lesson for Obama's economic team is that they should try harder to impress upon our policymakers that nobody--not a gang of hooligans, a hurricane, or a government--can create wealth by destroying wealth.

Meet Cooper!

I warned you that this wasn't going to be an "all-business" blog, didn't I?  So meet my little boy, Cooper!

More broken windows . . .

Of course, the idea that the broken window created a flurry of economic activity is neither new nor particularly original.  One hears the same thing about wars -- "WWII pulled us out of the Great Depression" -- and about natural disasters -- "Hurricane Andrew created thousands of jobs in Homestead, Florida."

The problem with such reasoning is this: it is true that the broken window made our guy spend money with the glass dude, who could then buy a TV, who could . . .  But here's what's often ignored: what might the first guy have done with his money if he didn't have to spend it on a new window? Perhaps he would have spent it on a flat panel television. Or perhaps he would have put it in the bank, where someone could have borrowed it to buy a new car. Either of these actions would have touched off just as much spending as the broken window did.

The point is that in the first case, we get a lot of spending. But in the second case, we get exactly the same amount of spending and we save ourselves a broken window. WWII was indeed a great thing for the American economy, unless, of course you count the half-million people who died and all of the tanks, jeeps, ships, and planes that were destroyed in the process.  And those jobs in Homestead were jobs created simply to replace what had been destroyed, not to create anything new.

When we evaluate the impact of an event, it is not right, accurate, or fair for us to look only at the benefits, we must also look at the costs.

About broken windows . . .

A man wakes one morning to find that some punks have thrown a rock through his living room window. He calls his window dude, and the window guy rushes out to replace the window at a cost of a few hundred bucks.





The window guy is now a few hundred dollars to the good, and after all, it's March Madness, so he rushes to the appliance store to buy a flat-panel TV.

The appliance salesman had been wondering how he was going to pay for his daughter's college tuition, but no more. With the few hundred bucks he received from the window guy, his daughter is free to take that econ class she's always wanted.

The econ professor has been needing some new suede patches on the elbows of his sportcoats, so he takes the appliance guy's money and . . . well, you get the picture by now. Just look at all of the economic activity, all of the income, that has been created by that broken window.

Aren't we lucky that window got broken?

And if breaking windows makes a society rich, then maybe we should hire those young punks to go out and break some more.



The town in the photo above is surely very wealthy.

Immigration and Free Trade

It's fascinating to me how many people are advocates of free trade but opposed to free immigration. You can import your labor in human form, or you can import it embodied in a product or service. In either case, you are hiring an foreigner to perform work for you; where the work actually gets performed is largely immaterial. 

Sunk Costs are Sunk

One of the cornerstones of economic analysis is what we call "marginal thinking."  Marginal thinking simply means that we look forward one step from wherever we happen to be, compare costs and benefits of actions that we're considering, and take those actions whose benefits outweigh their costs. It takes some calculus to prove, but making marginal decisions in this way tends to produce the highest level of available well-being for those that practice it. 


Despite the fact that we do marginal analysis every day, it's still easy to fall into the trap of chasing sunk costs.  Sunk costs are costs that have already been incurred;  the saddest thing about sunk costs is that no matter how badly you want to, or how hard you try, you cannot get them back.  And making decisions based on what has already occurred violates the forward-looking principles of marginal analysis.


Consider, for example, the moviegoer who plunks down $15 to sit through what might possibly be the worst movie of all time: "Dude, Where's My Car?"  Within minutes, the moviegoer knows the movie will be terrible, but sits through the rest of the movie because, "I've already bought the ticket."  Or the college senior who discovers that she hates French literature and never wants to speak another word of French, but continues taking courses in the major because, "I've already got 20 credit hours."  Both of these people are choosing an action based not on what is to come, but what has gone before.  The moviegoer should be asking, "What else can I be doing with the next two hours that is better than watching this stinkpot of a film?" The student should be asking, "What field of study can I choose that I will enjoy more than this stinkpot of a major?"


I recently found myself guilty of chasing sunk costs when I spent the weekend with a friend of 32 years.  At the end of the weekend I realized that I really don't like him, have not liked him for many years, and that I spend time with him primarily because we have a shared history. My friend is a human version of "Dude, Where's My Car," and it's time I realize that this is one movie that's not going to get better if I wait.  Every minute I spend indulging my once-friend is time away from more valuable uses...and so I'm walking out of the theater.

Assessment

One thing that universities need to do is answer the question, "Are our students learning what we want them to?" The process by which that answer is found is called "assessment," and the answers are supposed to inform us of where we need to make changes in our programming. I understand the goals of assessment, but I often get frustrated by the language and culture of assessment, and I often lament that for many, the process is more about the data than it is about using the data to make positive changes to programs. Furthermore, assessment involves lots of data gathering and analysis, both of which tend to happen at the busiest times of the semester. Isn't it serendipitous, then, that I am the semi-official department assessment coordinator?

Recently one of my colleagues who has been doing mostly administrative work decided to return to the department full time.  Last night, Judy emailed me and asked if she could take over as department assessment coordinator.  Here was my response, lifted wholesale from a source much more talented than I:

“Why, it’s you, Judy! I warn’t noticing.”

“Say - I’m going in a -swimming, I am. Don’t you wish you could? But of course you’d druther do assessment - wouldn’t you? Course you would!”

Al contemplated the woman a bit, and said:

“What do you call work?”

“Why, ain’t that work?”

Al resumed his assessing, and answered carelessly:

“Well, maybe it is, and maybe it ain’t. All I know it suits Alan Grant.”

“Oh, come now, you don’t mean to let on that you like it?”

The magic assessment pen continued to move.

“Like it? Well, I don’t see why I oughtn’t to like it. Does a guy get a chance to assess learning outcomes every day?”

That put the thing in a new light. Judy stopped nibbling her apple. Al swept his pen daintily back and forth - leaned back to note the effect - added a touch here and there - criticized the effect again - Judy watching every move and getting more and more interested, more and more absorbed. Presently she said:

“Say, Al, let me assess a little.”

Al considered, was about to consent; but he altered his mind:

“No-no-I reckon it wouldn’t hardly do, Judy. You see, Dean Flaherty’s awful particular about this summative assessment - right here in the public eye, you know - and if it was just low-level formative assessment, I wouldn’t mind, and he wouldn’t. Yes, he’s awful particular about summative assessment; it’s got to be done very careful; I recon there ain’t one person in a thousand, maybe two thousand, that can do it the way it’s got to be done.”

“No-is that so? Oh, come now - lemme try. Only just a little - I’d let you, if you was me, Al.”

“Judy, I’d like to, honest injun; but Dean Flaherty - well, Gary wanted to do it, but he wouldn’t let him; Kevin wanted to do it, and he wouldn’t let Kevin. Now, don’t you see how I’ fixed? If you was to tackle assessment and anything was to happen to it --”

“Oh, shucks, I’ll be just as careful. Now lemme try. Say - I’ll give you the core of my apple.”

“Well, here - No, Judy, no you don’t. I’m afeared --”

“I’ll give you all of it!”

Al gave up the assessment pen with reluctance in his face, but alacrity in his heart. And while Judy worked and sweated over the assessment, the retired department assessment coordinator sat on a barrel in the shade close by, dangled his legs, munched his apple, and planned the slaughter of more innocents.