Snowmageddon 2016: The Broken Window Fallacy

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In case you’ve been sequestered, the Mid-Atlantic region of the U.S. got slammed by a winter storm called Jonas over the weekend.  Jonas dropped three feet of snow on Kennedy Financial world headquarters in Ashburn, VA, and the DC metro area is at a stand still.  Even the federal government was closed on Monday and Tuesday, and it may be delayed on Wednesday.  Experts estimate that the storm affected 88 million Americans and will cost upwards of $1 billion.  Good news, right?!

Keynesian economists like Paul Krugman would have you believe that this winter blizzard is a boon for regions hit by the storm because unforeseen spending will occur.  Money will be spent on snow plows, tow trucks, snow blowers, gasoline, shovels, salt, sand and generators.  One enterprising neighbor even cleaned out Home Depot and marked up the previously mentioned items by 200%, sending his community into a tizzy (see episode 40)!  Mainstream economists are overjoyed by the stimulus that Jonas brought, but we are simply witnessing the The Broken Window Fallacy once more.

Frederic Bastiat explained the fallacy in the early 19th century by telling the story of a hoodlum who throws a brick through a baker’s window.  The baker is forced to pay a glazier to repair the window, and the glazier subsequently pays a cobbler for a pair of shoes.  It seems on the surface that everyone is better for the broken window, but further inspection reveals a different story.  Before the hoodlum broke the window, the Baker had been in the market for a new suit.  But since the baker had to pay the glazier for a new window, he can no longer afford to visit the tailor.  The production of one suit is lost thanks to the hoodlum’s destruction.

Our modern U.S. government is full of examples of how broken windows “help” stimulate an otherwise anemic economy.  But our leaders fail to understand what is lost thanks to blizzards like Jonas.  The lesson is easy to understand when simply looking at an anecdotal situation.  Thanks to Jonas, my family spent five hours collectively shoveling snow from our driveway.  This time is permanently lost and will never be used in the capacity of a reading tutor (my wife) or pro-bono financial counselor (me).  Society is worse off because a child did not gain more literacy skills, and a potential client still thinks financing a brand new car over 8 years is a good idea.  There are at least 88 million other examples of how the area affected by the storm is worse off.

This won’t be the last time that the fallacy will need to be shot down.  But you can be rest assured that Kennedy Financial is here and ready to dispense the truth the next time it is uttered.

A Sobering Admission: Richard Fisher’s CNBC Interview

Screen Shot 2016-01-10 at 2.17.07 PMOn Tuesday, January 5th, former Dallas Federal Reserve President Richard Fisher appeared on CNBC, and the admissions he made were both refreshing and shocking. Fisher’s candor was the best CNBC footage since Jim Cramer’s 2007 on-air meltdown. Fisher admitted that the artificial gains in the stock market can be attributed to quantitative easing and 0% interest rates. “We frontloaded a tremendous market rally,” Fisher said proudly. This was a rare piece of truth coming from a former member of an organization that typically lies with impunity.

Fisher’s statements left his CNBC interviewers surprised, especially his comments about the “overpriced” stock market. Fisher tried to defend himself saying he didn’t vote for QE3, but that’s like Rob Schneider saying he didn’t make a third Deuce Bigalow movie.  As anyone who has seen Male/European Gigolo can attest, the damage had already been done.  Like Bernanke, Fisher rode off into the sunset and will not be blamed for the economic devastation that lies ahead.  He now works for Barclays, and he serves on the boards of PepsiCo and AT&T.

The main takeaway from Richard Fisher’s ten year term with the Fed is that even he could not resist the temptation to tinker with the U.S. monetary system.  In February 2015, Steve Matthews wrote, “As an interest-rate setter, Fisher has been an überhawk, the kind of policymaker who worries about inflation and asset-price bubbles even when neither is evident. That concern guided his consistent calls—and dissents at the Federal Open Market Committee—for a withdrawal of Fed stimulus as soon as possible.” It’s sad when even the ‘überhawk’ thinks QE is perfectly fine.

I covered the Fisher interview, along with many other topics, in episode 37 of Kennedy Financial, so please check it out if you would like to learn more.