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Broken principles and broken windows

Written By: - Date published: 7:33 pm, September 5th, 2010 - 45 comments
Categories: class war, jobs - Tags: , , ,

Compare two situations:

People put money into a finance company after dozens have collapsed. They know that high interest equals high risk. They know SCF is shaky as hell. It goes belly up and…. government pay-outs for all of them. Including the interest! Including non-residents who aren’t covered by the rules! No questions of whether SCF met the terms of its guarantee. No worries about ‘moral dilemma’ of letting people gamble with all the risk on the taxpayer.

People whose houses and property were damaged in Christchurch but don’t have insurance get the cold shoulder from the government. Key says “Ultimately if you don’t have insurance and you don’t fit in the category of real hardship, then there’s no question there will be a cost,” Reckons he’s worried about “moral dilemma”. Doesn’t want to make not having insurance risk-free for home owners. But risk-free investing underwritten by the taxpayer is fine, eh?

Rich investor and you put your money in a dodgy finance company? Did the company collapse? You get your money back. No questions.

Lost your job thanks to this endless recession? Couldn’t afford insurance? Property damaged in the quake? Key says you can get stuffed.

The rich get taxpayer-backed insurance for their savings. The workers don’t for their houses.

It’s called class war.

One more thing. Key reckons the rebuilding will be a “be tremendous stimulus”. Says it’s a “great irony” that jobless workers in Christchurch might get work in the rebuilding. Nah, you pillock, it’s called the broken windows fallacy. Working to rebuild what you lost is no gain. Not a substitute for real stimulus.

45 comments on “Broken principles and broken windows”

  1. So, this broken windows fallacy.

    Does it apply if the money will be paid by local insurance companies who have reinsured with overseas companies? (Which I am assuming is the case.)

    Doesn’t this mean that we (New Zealand) are receiving money from overseas that we otherwise would not have got and that this transfer therefore does have some stimulus effect?

    (Of course, if the actuaries have done their jobs correctly I guess we have paid for it, with a profit margin, in our insurance premiums transferred to those very same reinsurers.)

    • Marty G 1.1

      ha, zet’s right. working to replace a loss is not a gain in wealth. In fact, it means that resources are expended that otherwise could have been used to gain wealth. Think about it. If this was a great economic event and there’s been no loss of human life, we would be celebrating, wouldn’t we? But we’re not because we’re going to have to spend so much time rebuilding, diverting resources from stuff we would rather be doing.

      Sure, there will be jobs created in the short-term but what’s happened is the loss of a couple of billion in capital in physical damage and the conversion of a couple of billion of EQC capital into present spending.

      • Yes, but if the person paying for the window to be fixed is overseas, how does that change things? In that case the money is coming from out of our economy and means that New Zealand is receiving money that would otherwise have gone to the shareholders in France as profit.

        Of course, to analyse properly, you’d have to have a good idea of where the insurance money was coming from and the domestic/foreign split.

      • KJT 1.1.2

        If the resources would otherwise go to profits in overseas insurance companies then you could say it is a gain in wealth.

    • Ari 1.2

      If you have a window and it breaks, and someone else offers to pay to fix it, you haven’t gained the money they gave you to fix it. You’ve broken even because you’re spending it to replace lost assets. Foreign insurance companies don’t even account for that, as you’ve had to pay them previously for the privilege, so you’re actually out of pocket for the deal unless they somehow overpay you.

  2. RedLogix 2

    Nail head hit Zet.

    In the normal course of events Key might have a point; after all it’s kinda galling for sane responsible folk who’ve paid their own insurance, to see their taxes spent on bailing out those who have chosen not to.

    But set in the context of the SCF bailout, and impact of the recession, the hypocrisy is laid bare. Moreover Key has let the mask slip badly here.

    As Warren Buffet famously put it, ‘it’s class warfare alright, and my class is winning’.

    • Rex Widerstrom 2.1

      Nail hit too RL. It’s like these reckless shits who drive around uninsured and with no asset backing and then leave other people holding the bill… not to be encouraged. But that argument, perfectly valid in its own right, kinda falls flat when you’re happy to have your mates recklessly drive a company into a metaphorical power pole, only to have everyone else pay to tow it off and panelbeat it.

  3. Macro 3

    What about the rural community hit by extreme weather (flood, drought, etc)? Minister of Ag on the spot to fork out relief packages aplenty! Another of what’s good for some – not for others.

    • KJT 3.1

      Yeah always thought that was funny. There with bells on for cockies. Not that I think we should not be! But! No help for the drainlayer in Whangarei who went bust after a winter of solid rain.

  4. Anne 4

    Didn’t Bill English and John Key decry Labour – both before and after the election – about Labour’s policy to create a stimulus package as a means of overcoming the worst effects of the recession? Smile and Wave has had a change of heart then?

  5. Puddleglum 5

    As Minister of Tourism I would have expected John Key to factor in the loss to Christchurch’s heritage in any ‘accounting’ of the benefits of fixing these particular ‘broken windows’ – and perhaps supporting the strengthening of what remains of the city’s older buildings (not to mention those of other cities).

    That work would provide a rather less ‘ironic’ stimulus. (The phrase ‘great irony’ may actually show that Key has some dim awareness of the fallacy he is hawking to the public.)

    • bbfloyd 5.1

      that awareness isn’t dim….. he knows full well what he’s saying..and how honest it isn’t..

      • Draco T Bastard 5.1.1

        Yep, even in the limited economics training he got at uni as part of his business degree he would have been introduced to the Broken Windows Fallacy.

  6. illuminatedtiger 6

    Not sure if this is entirely on topic but did anyone notice how Key could only talk about swimming pools when interviewed by John Campbell last night? Is this seriously all our Prime Minister thinks about. Does this man know what a typical Kiwi home looks like?

    • Marty G 6.1

      “Does this man know what a typical Kiwi home looks like?” -No.

      • joe bloggs 6.1.1

        Liar. Dissembler. There has been no end of publicity about JK’s beginnings:

        I was raised, along with my sisters, in a state house in Christchurch. Back then I thought I was poor and, by most standards we were.

        John Key: Valuing Families
        Speech to the Family First New Zealand Forum on the Family
        08 September 2008

        He goes on to say in the next breath

        “As I grew up, though, I recognised that what my mother gave to my sisters and I was far more valuable than money. She instilled in us the desire to improve ourselves by our own hard work, the confidence that we were able to do it, and the hope that it was possible to do so. She instilled in me an ethic of hard work and determination and a genuine belief that “you get out of life what you put into it”.

        Evidently the politics of envy plays a central role in YOUR belief system Marty.

        • prism 6.1.1.1

          joe bloggs – Sounds like a quote from John Key’s personal PR manager. It makes its three points which are a well-known effective speechifying strategem. It sounds very preachy, it would be peachy though, if all one had to do to become a millionaire or just a success was to follow his mother’s approach. It sounds a good approach but it needs to include having consideration for others and not measuring yourself or them firstly by the value of financial assets.

        • Puddleglum 6.1.1.2

          It’s all about what comes to mind, joe bloggs. And, what comes to mind is usually determined by recent, adult experiences rather than what happened in your childhood.

          I, too, was raised in a state house in Christchurch and, before that, a migrant’s hostel in Australia and, before that, post WWII prefabricated housing for the working class in England. But I became educated and have spent most of my adult life around educated people. I still find myself assuming that people know things that I just take as ‘general knowledge’ – but most don’t. That is, I don’t relate to other people’s likely experience of ‘general knowledge’ based on my childhood experiences of people’s knowledge but on the experiences I’ve had for the last few decades.

          Similarly, I imagine that hearing about swimming pools, spa pools, or whatever, was salient for Key because of HIS last few decades of experience around wealthier people. Naturally enough, that’s probably how he could empathise/ understand what was going on – by its effects on upper middle class New Zealand. Not by its effects on the lives of the less wealthy.

          More charitably, perhaps he thought he was basically talking to relatively wealthy Aucklanders on John Campbell’s programme and that’s how he thought he could best get the sense of the event across to those people. Who knows? What’s for sure is that swimming pools aren’t a priority for most Christchurch citizens at the moment and so such comments won’t resonate with them.

          To be honest, I don’t think this is just a failing of Key’s. There are tens of thousands of people in Christchurch who have no idea of the daily experience of even more tens of thousands of their co-citizens. I think it’s that basic ignorance that allows some New Zealanders to say things like “there are no classes in New Zealand” and other ridiculous claims.

          One of the (predictable) tragedies is that it was the eastern (lower SES) suburbs that were hit worst because of the liquefaction and general instability of the ground their houses were built on. As cities grow, typically, cheaper housing gets developed on less ‘prime’ more marginal land. Apparently there’s a recent Bexley development (an eastern suburb) that has had major damage to the foundations of most of the houses in it. Still, I guess the developer did his or her bit to boosting GDP at the time the development went ahead. Now it can be boosted again by fixing it up (or trashing it).

  7. Tigger 7

    Key is praying for a hurricane, tsunami and a couple of major fires to hit various parts of the country. Heck, if Rangitoto erupts he’ll likely wet himself in delight. He is revolting.

  8. vto 8

    Your parable may have some relevance in normal conditions however here in Canterbury at this stage of the depression (will everyone stop calling it a recession please) the influx of money is indeed a silver lining.

    People I know in the construction industry who were looking down the barrel of empty work orders are now full to over-flowing. This provides income to people wo would not otherwise have had it.

    So, fine parable and maybe it is correct in the final outcome in that people may not have new shoes, and instead have repaired windows, but it will drastically improve the incomes in Canterbury in a situation where things were dire.

    Save the parable for when all else is equal.

    • Marty G 8.1

      The country is worse off, you can’t get around that. Ultimately, we end up with $2 billion less in our national savings that has been spent replacing $2 billion of physical damage.

      Yes the rebuild will contribute to GDP but that just shows the flaws in GDP as a measure of human welfare. Anyway, the loss of ordinary business activity may offset that.

      Remember, if the broken windows fallacy doesn’t apply then it stands to reason that you should be going around damaging more buildings to create more stimulus.

      • Pascal's bookie 8.1.1

        “The country is worse off, you can’t get around that.”

        Undeniably true. There was a big fucking earthquake that wrecked a bunch of shit.

        But what’s also true is that there is an increase in aggregate demand that will be filled by using labour and capital that previously couldn’t find anything particularly productive to do.

        The source of that increase in demand is, in a sense, irrelevant. The work created is undeniably productive. It’s not nothing. Sure, it’s rebuilding assets that were lost, but so what?

        “should be going around damaging more buildings to create more stimulus.”

        Not really, because no one is saying that the damage is good thing. They are saying that fixing broken shit is work. It’s more like saying that a govt should soak up ‘excess’ labour in a depression by fixing up run down infrastructure. Would you respond to someone who suggested that by saying that they ‘may as well go around blowing up bridges?’

        I’m not saying that fallacy isn’t real, just that it’s not entirely convincing or always appropriate.

        I’m pretty sure the folks getting paid, and their families, and the people they buy goods and services off, would agree. If that offends libertarians, econowonks, and people who think an economy is a race to build the biggest pile of shit, fuck them.

        People that didn’t ahve work, are gonna have good productive work. And it’s going to be paid for with funds that otherwise would have been sitting in investments waiting for just such an occurance.

        • Loota 8.1.1.1

          But what’s also true is that there is an increase in aggregate demand that will be filled by using labour and capital that previously couldn’t find anything particularly productive to do.

          The source of that increase in demand is, in a sense, irrelevant. The work created is undeniably productive. It’s not nothing. Sure, it’s rebuilding assets that were lost, but so what?

          This is exactly why major powers love wars.

          Nothing gets the economy going like a good bash-bam.

          All things considered however, NZ should already have been spending that $2B developing new science and industry.

          That’s what I call stimulus.

          This, this is just spending to stand still. Pays some bills for some contractors, great, but don’t see it as being much more than that.

  9. Jenny 9

    .
    ZETETIC:

    Key reckons the rebuilding will be a “be tremendous stimulus”. Says it’s a “great irony” that jobless workers in Christchurch might get work in the rebuilding. Nah, you pillock, it’s called the broken windows fallacy. Working to rebuild what you lost is no gain. Not a substitute for real stimulus.

    In his essay the ‘Beware! the end is nigh! Grant Morgan explains that the ‘growth gene’ is deep in the DNA of capitalism.

    Without continual growth capitalism cannot exist.

    This means, that when capitalism is up against any limits to endless growth, like recessions or depressions – Capitalists Welcome Destruction.

    In a recession capitalists like Key see natural disasters, (or wars for that matter) as a good thing.

    UNITY: ‘Beware! The end is nigh!’

    Capitalism’s growth gene has spurred a reckless looting and spoilage of nature, particularly since the invention of the oil well drill 150 years ago. …

    Morgan’s claim of an endless need for growth and expansion also explains capitalism’s shift to financialisation in the ’80s and ’90s, (ending in the present financial collapse), occurred because the real economy could no longer generate sufficient profits to sate capitalism’s growth gene.

    • prism 9.1

      Wikipedia info on who Grant Morgan is –
      Grant Morgan is a political activist from Auckland, New Zealand.
      Morgan is a leading member of Socialist Worker (Aotearoa), and the chairperson of the Residents Action Movement. He was also the first Secretary of the Solidarity Union, and the last General Secretary of the Communist Party of New Zealand.

      And Gareth Morgan is NZ financier. Just for those who like me don’t know who’s who about all.

  10. nadis 10

    It’s not a black and white as you’d think.

    GDP = C +G +I +(Ex-Imp)

    In the aftermath of the earthquake you’ll see C , G and I all increase plus the multiplier effect as money circulates, so in GDP terms it is likely there will be an increase in measured activity (yes i know GDP is a flawed measure that doesnt take account of all externalities). The argument is no different to calls for stimulus on the back of the GFC induced recession. Exactly the same logic but on the back of the earthquake, any spending (stimulus) will be far better targeted – good for employees,small business, big business. And afterwards you have (hopefully) better quality infrastructure than when you started so there will also be a productivity gain (one of the externalities ignored by the broken window fallacy).

    The problem with invoking the broken windows fallacy is that it makes more sense in micro-economic terms than macro as it ignores a lot of external costs and benefits.

    It actually would be a good thing to go around breaking windows to promote GDP growth – as long as you stopped when you had spent the savings you had put away for the rainy day, and provided you were installing fancy new improved windows that allow businesses and investors to be more efficient in the future. After that point though, it doesn’t make sense to continue breaking windows.

    And tell the the tradesman in a small business who previously had no forward work who now has 12 months of work that “it’s not real activity”.

    The real issue here (which I don’t disagree with) is the inequity of treatment you point out between SCF investors and uninsured homeowners. The initial guarantee scheme was flawed, the extension was flawed, neither should have have extended beyond banks and building societies. So no argument that the SCF bailout was a joke. But equally no argument that if you are uninsured you are stupid. NZ is earthquake prone.

    • Lanthanide 10.1

      “And afterwards you have (hopefully) better quality infrastructure than when you started so there will also be a productivity gain (one of the externalities ignored by the broken window fallacy).”

      I don’t deny that in general that could be an outcome, but I don’t see it as particularly being the case here. Most of the damage is to chimneys and inner city brick buildings. These aren’t ‘productive’ assets anyway, so replacing them with new ones isn’t going to increase productivity. Ok so the new buildings might have new, more efficient heating and lighting, but that’s about it, and the number of buildings affected is so small that it would count as a rounding error and nothing more.

    • Bright Red 10.2

      “It actually would be a good thing to go around breaking windows to promote GDP growth – as long as you stopped when you had spent the savings you had put away for the rainy day, and provided you were installing fancy new improved windows that allow businesses and investors to be more efficient in the future.”

      No, it would be good providing you had nothing better to expend your resources on than replacing windows with better windows.

      I think we can agree that being forced to replace infrastructure that was working perfectly well with more modern infrastructure is not a good thing when it diverts resources from elsewhere or, at the very least, leaves our national accounts $2 billion worse off.

      And you’re ignoring the fact that going around breaking windows would prevent those buildings being used efficiently until the windows are replaced. The same is true of the earthquake – yes, there will be economic activity replacing damaged infrastructure but a whole lot of ordinary economic activity (which is presumably more optimal in normal times) will be disrupted for months.

  11. F.Y 11

    It may also be more profitable not to rebuild and instead demolish damaged buildings, using the sites of less profitable dwellings for better use or bank their value as bare land. Key isn’t really thinking straight. That’s pretty clear, he’s just making something bad look good for him. Luckily, no one will pull him up on it. And 98% of voters won’t even notice. Being busy is an integral part of NZ culture. Doesn’t matter if you’re picking the nose off your face as long as you can say you’re busy over a beer later.

  12. Bill 12

    At least the reconstruction of infrastructure will be useful and might have the added benefit of making up for any shortfalls that might have been occurring vis a vis maintenance.

    And repairing ‘broken windows’ is a lot more desirable and possibly rewarding for workers that the mind numbing tedium that defines far too much utterly pointless employment that is undertaken for absolutely no good reason and that constitutes a total waste of resources (both human and material).

    Actually, talking of princilples and things that get broken, there would seem to be an argument for breaking a whole heap of windows, not repairing them and concentrating on repairing the humanity that has been crushed and diminished by the imposition of utterly unrewarding and soul destroying ‘gainful’ employment.

    Now wouldn’t that be novel? To see a social initiative that encouraged people to realise their human potential rather than insisting that they become enthralled by their earning potential or lack thereof and summarily judged by that same sole criteria?

  13. zimmer 13

    Yet deciples at this site are happy for us to be taxed billions for CO2 emissions when the earth is not getting any warmer.

    No insurance should mean no payout, whats the point of insurance then? SCF was covered by a scheme, I have a problem with it but they were covered.
    Sometimes people have to learn the hard way and not rely on the tax payer as much for income as they could not be bothered getting it in the first place. This is called being responsible. Like getting a car and ramming a new BMW with no insurance, plain dumb. Insurance is cheap for a house & contents, $10-15/wk, that is all. So don’t cry if you are not insured. Just rent.
    Last week you were saying the Greens had a plan, build state houses, but to rebuild houses in Chch is different? Labour/Greens good, National bad.
    Class war my arse, just a little game going on in your deluded head. I bet a few employers will lose their shirt over this EQ as well, especially un-insured or under insured. Dumb arse Unite Union upset some workers may not get paid, well how can an employer pay when he has lost a revenue stream? The worker & boss will suffer together. That what happens in disasters.

    • F.Y 13.1

      You tell us that not be insured is dumb, and not to cry for the victims, then tell us some employers will be left with nothing because of no insurance and that’s a shame? Class war, yep, you’re part of it, pushing “the employer is better” end. And just to upset your silly little world, renters need insurance too. Landlords insurance doesn’t cover the tenants belongings or the property in some situations. But why should facts upset those who also think landlords are owed? Carry on with your class war, it only demonstrates your ignorance.

    • prism 13.2

      Hey zimmer you say
      Yet deciples at this site are happy for us to be taxed billions for CO2 emissions when the earth is not getting any warmer.
      It will be good for you to keep writing to this site as the informed people who gather here will play along with your search for the truth and as you fumble around, let you know when you’re getting warmer! You may actually learn about the earth too. But it looks as if you’ll have a big job. Well kia kaha.

      • Craig Glen Eden 13.2.1

        Zimmer Building Additional homes is a stimulus, rebuilding damaged homes does not create a extra building. It simply gets the owner back to the pre earth quake state. If you had been following what people are saying in their posts and you are not biased you can clearly see their point that this will increase the building sector activity and spend, but it is not the same as additional stimulus spending.It is your leader Smile and Wave who is trying to have it both ways.

        Labour said to stimulate National said not to, now Key says the increase in building activity will be good. The only people who are Flip flopping is Key.

        ANTI -spam word caught

    • Bright Red 13.3

      the world is getting warmer: http://data.giss.nasa.gov/gistemp/2010july/

      “So don’t cry if you are not insured. Just rent.”

      Did you opose the SCF bail-out too? Just want consistancy here.

      “Last week you were saying the Greens had a plan, build state houses, but to rebuild houses in Chch is different? Labour/Greens good, National bad.”

      I don’t think anyone is against rebuilding Chch.

    • Armchair Critic 13.4

      zimmer – in response to your “insurance analogy”:
      Most insurance companies put significant effort into making sure claims are strictly in terms of the policy, and will try to find any excuse not to pay out. Once they accept a claim, they pay out as little as they possibly can. The unseemly haste with which National used taxpayer’s money to pay out SCF’s creditors, and the percentage the paid out, is quite unlike what an insurance company would or should have done.
      There is plenty of water to pass under the bridge with SCF.

    • Draco T Bastard 13.5

      Yet deciples at this site are happy for us to be taxed billions for CO2 emissions when the earth is not getting any warmer.

      Actually, it’s the NACT people who think everyone should be taxed billions to pay for their pollution. Oh, and the Earth has just had another record warm year which is fairly irrefutable proof that it is getting warmer.

      SCF was covered by a scheme, I have a problem with it but they were covered.

      Actually, indications are that SCF had broken the terms of the cover and, therefore, weren’t covered.

      Sometimes people have to learn the hard way and not rely on the tax payer as much for income as they could not be bothered getting it in the first place. This is called being responsible.

      The people working 40+ hours a week and still not having enough to live on are being responsible. The people who aren’t are the people who think that paying a living wage is paying too much. People such as Jonkey.

      Class war my arse, just a little game going on in your deluded head.

      Not delusion, NACT really are working to lower the incomes of at least 95% of the population. You know, the people not in their class. This is seen by their removal of workers rights, their reluctance to increase the minimum wage, their removal of democracy in Canterbury and Auckland and their gift of $1.8b to their rich mates in SFC.

    • Vicky32 13.6

      I’d like to point out zimmer-frame, that UB for a single person is $194.00 a week – $15.00 a week for insurance = $179.00. Unaffordable.

  14. So many great points Zet.
    I wonder if any of them will be raised by the ‘Opposition’.

  15. Kleefer 15

    Zetetic, you so nearly hit the nail on the head that I grunted in frustration when you said “real stimulus”. Read Henry Hazlitt’s book Economics in one Lesson and you’ll understand that all government “stimulus” falls prey to the broken window fallacy. However thank you for pointing out Mr Key’s stupidity, it’s up there with Judith “Crusher” Collins touting the economic benefits to a region of having a $1.2 billion prison. Goes to show right-wingers are often just as economically illiterate as left-wingers. They all need to read some Austrian economics and understand how the economy actually works.

  16. Billy the Fish 16

    Interesting comparing the comments by two senior economic analysts (mass paraphrasing)

    ANZ Analsysis – This will stimulate the economy and lead to good things

    Westpac Analysis – Be careful on looking on this as a stimulus – Broken Windows Fallacy

    Looking at moving my account to the W bank as the dude there talks much sense and seems to understand economics 101

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