Henry Hazlitt on the Bailout

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Treasury Secretary Henry Paulson needs
to read this book.

 
 

Treasury Secretary
Henry Paulson needs to change his reading list. Instead of reading
the balance sheets and income statements of the failing banking
industry, he needs to read Henry Hazlitt’s classic book Economics
in One Lesson
. It will cost Paulson far less than the $700
billion that he is spending on the bailout, and he might just learn
a little economics in the process.

Hazlitt delivers
his "one lesson"
in chapter 1, and proceeds to spend the rest of the book giving
examples. His lesson, based on the work of Frédéric
Bastiat, is that "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."

For example,
in chapter 2, Hazlitt delivers the well-known "broken
window fallacy
" in which a hoodlum breaks a shopkeeper’s
window with a rock. The common folk see it as a tragedy, but an
astute Washington bureaucrat could argue that it creates new jobs
for glaziers. As Hazlitt points out, though, any resources that
the shopkeeper spends on the new window would have been used elsewhere,
perhaps for a new suit. So while the glazier gets new business,
the tailor loses the same amount of business. There is no net benefit;
in fact there is a net loss. Absent the hoodlum, the shopkeeper
would have had both a window and a new suit; given the hoodlum,
the shopkeeper has a window but no suit. Even though the damage
was to the window, it is the suit that is lost to the shopkeeper
and, hence, to society.


 

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Read by Jeff Riggenbach

 

 
 

In chapter
6, entitled "Credit Diverts Production," Hazlitt discusses
government lending policies, such as additional credit to farmers
or business owners. However, he points out, the recipients of such
programs are rarely the more-productive farmers and business owners.
After all, the more-productive people are able to borrow their money
from private lenders. It is only the less-productive individuals
and firms, unable to get funds on the free market, that must turn
to government.

For example,
suppose that there is a farm for sale. A private lender would normally
be willing to lend money to farmer A who has proven his abilities
in the past, rather than to farmer B, who has demonstrated a lower
level of productivity than has A. However, because government taxes
citizens or borrows money itself in capital markets, private lenders
have fewer funds available to lend to A. Instead, government lends
the money to B on the grounds that B is underprivileged, in need
of a hand, or some other politically based argument. The more productive
borrower, A, loses out on the scarce land while the less productive
borrower, B, gains the resources. Because the less-productive individual
acquires the scarce resource, there will be less total production,
and the entire society is worse off.

Read
the rest of the article

October
16, 2008

Scott
A. Kjar teaches economics at Baldwin-Wallace College.

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