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The Broken-Window Fallacy-Bastiat
#21
David, call it "preconceptions" if you wish, and you can throw out all the "up front" issues that rebuilding can cause for an immediate recovery. But that is like comparing tactics to strategy. You are looking at the tactical side of things. Sure, it may cause an immediate stimulus to the local economy. But all that 'so called' investment had to come from somewhere other than thin aire.

You cannot get something from nothing.

And that is where the "unseen" or strategic point happens to reside. All those monies most likely came from other investments, that are now short, all because of other disasters. If you are not able to see this, then it is because you are 1) unable to see this, or 2) unwilling to see it.

This is exactly why each of the fifty states need to be living, breathing laboratories where Kooks can go and 'jimmy' with things and not bother more sane people residing in other states. And the federal government should be small, and not put it's fingers into things that it has no business placing them. Because the sane folks should not have to shoulder the less than sane thinking of you guys.

Go to Kalifornia, or Vermont, or some other state, and intercourse the hell out of it, as long as you don't expect the other states, OR the Feds to come and bail you out. Then let's see how much traction all this Keynesian ideology, from people like the little ferret faced fellow from the NYTimes, will get from the other states.

Again, you cannot get something from nothing, regardless what the Keynesians will tell you.
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#22
(07-10-2011, 10:29 AM)John L Wrote: Sure, it may cause an immediate stimulus to the local economy. But all that 'so called' investment had to come from somewhere other than thin aire.

You cannot get something from nothing.

And that is where the "unseen" or strategic point happens to reside. All those monies most likely came from other investments, that are now short, all because of other disasters. If you are not able to see this, then it is because you are 1) unable to see this, or 2) unwilling to see it.

If you take that attitude that "you can't get something from nothing", you'll never be able to innovate - the key to economic growth, even according to the Austrians. All inventions indeed involve getting something for nothing - otherwise why would people invent it?

More specifically, consider the following two scenarios:

1) You are unemployed, and sit around bored and do nothing.

2) You are unemployed, and instead of being bored and sitting around doing nothing you decide to tend to the garden.

Where did that labor "come from?" It came from nowhere. In this case, there were no investments that would have otherwise occurred. Now, make this scenario more complicated, and instead of tending your garden, you're building a big public works project which requires some planning and coordination. Now you've added more complexity, but the main idea remains the same. Now you print the extra money to monetize those transactions, and still nothing changes. There is more money, and there are more transactions on which to spend it.

By saying that these investments are detracting from other potential investments, you're assuming that those other investments would have taken place. Again, it may or may not be true, but I don't see what some dead economist can add to the discussion, that living economists can't do better using real data.
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#23
Quote:2) You are unemployed, and instead of being bored and sitting around doing nothing you decide to tend to the garden.

Where did that labor "come from?" It came from nowhere. In this case, there were no investments that would have otherwise occurred.

The garden is, itself, an investment. It didn't appear for free, out of thin air. Someone paid for the land the garden is on. Someone paid for the plants. Someone paid for the water, fertilizer, and tools needed to tend it.

Quote:Now you print the extra money to monetize those transactions, and still nothing changes. There is more money, and there are more transactions on which to spend it.

Except that having printed more money, each dollar is worth less, not the same amount. More of a given item in existance = less value for each item.
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#24
Bastiat has always been hard for many people to understand, because of the artificiality of short-term goals. Sure the Glazier may make money because of the crimes that broke the window - and the victims of the crimes had to reallocate expenditures because of it...but when criminals make money off crimes, more than economic problems can be measured.

A good economic cycle occurs when the market proceeds without artificiality. Whether it is a government or a criminal who obstructs cause and effect, the system is not running full-throttle. It may seem minor when such small events as a few broken windows in one neighborhood are measured - but multiply that across the entire economy, and major roadblocks are created.

To put it simply, if a glass-repair company gets more jobs than a real economy can support, then that company will feel a bite later on when the criminal feels the pressure to stop breaking windows, and the unsupportable extra work ceases. A company that exists on the basis of unreasonable sales evolves to a plane where that artificial level is needed to support what the company has become. Likewise - the companies that should have had the sales are held back and do not evolve to that more effective and successful place, and may fail because of it. Both sides will feel the pinch.

At a country-wide level, when governments redistribute, the effects are just as predictable. The bad companies get bolstered when they shouldn't be - and the good companies get held back. If progressive Presidents had their way, buggy-whip manufacturers who gave them fundraising support would be prominent - and successful businesses of today could have been killed off.
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#25
Quote:A company that exists on the basis of unreasonable sales evolves to a plane where that artificial level is needed to support what the company has become.


You mean like, say, the over-priced, artificially over-financed housing market?
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#26
(07-10-2011, 08:37 PM)Huh...What? Wrote:
Quote:A company that exists on the basis of unreasonable sales evolves to a plane where that artificial level is needed to support what the company has become.

You mean like, say, the over-priced, artificially over-financed housing market?

Not so much. In the case of housing prices, the equity built-in to sales was the market level of what the market would bear. Allowing the market to work without obstruction may have kept equity rising, but it was cut short due to political machinations by Schumer and others to purposefully hurt the economy so the downturn could be attached to Bush before the eloection.

If The Democrats hadn't enacted programs to increase fuel prices to unnaturally high rates, tourism wouldn't have dwindled, causing Casino owners in Vegas and investors to miss the expected crowds, and fear the future. The unintended consequences of inflicting Green myopia into business caused business to suffer, and the shrinkage of the job market caused foreclosures and unsold, empty homes.

The price of homes is less connected to the broken windows concept - but shares the same effects when there is less money in the system to buy things, or pay for mortgages.
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#27
Bit too much of the conspiracy theory, IMO. Real estate was seriously over-valued due to loans given to people who couldn't afford the loan, because the feds guaranteed them. More people suddenly being able to afford houses, because of artificial means, caused an artificial bubble in real estate value. It was only a matter of time before it crashed.
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#28
(07-10-2011, 09:07 PM)Huh...What? Wrote: Bit too much of the conspiracy theory, IMO. Real estate was seriously over-valued due to loans given to people who couldn't afford the loan, because the feds guaranteed them. More people suddenly being able to afford houses, because of artificial means, caused an artificial bubble in real estate value. It was only a matter of time before it crashed.

Maybe there would be a time when a bubble could have burst - but Real Estate was NOT over-valued. It was priced what it was, because someone was willing to buy it for the price offered, and the purchaser had the funds to make payments in a timely fashion. I saw families who had a decent lifestyle - but lived on the duration of each project. When the current project ended - they just moved to the next project without a hiccup. Construction is like that. Electricians, tin-knockers, plumbers, carpenters, laborers, and all the others subs needed for each project worked until a job was done and then moved on to the next one.

It was not just welfare mothers who defaulted on mortgages. In the past, anyone who fell behind just sold their place and equity enabled them to get good value for it - usually more than they owed - so the banks were happy, and the family that fell behind just moved on and got something a little less expensive until they got ahead once again. This time, it was the projects that stopped - and well-off construction workers in half-million dollar homes had no income. Since the work was geographical - everyone fell in the same avalanche. When half the homes in a gated community are foreclosed, it becomes a buyer's market and prices drop. I personally know many well-to-do families who were comfortable until the projects stopped. They had good credit-ratings and were well-qualified to buy the homes they were in. They found that they owed $4,000 a month payments with no money coming in - and no one wanted to take over what they owed.

When short sales and walk-aways became the standard, the housing market was doomed. Forget about the toxic loans - they didn't amount to a big cause of the bubble. The people with the beautiful homes suddenly worth a fraction of their former value were. Homes standing empty were the problem. If toxic loans were the only problem, then why not the normal turn-over to a new homeowner? Banks couldn't sell homes regardless of whether any home-owners wanted them.

It was the money that wasn't there, not the people who wanted to buy.
Many people made out well. If you still had a job, you could pick up a $400K home for $180K. However, if you needed equity in your current home to finance purchasing the now affordable mansion, your current home was also worth less.

Equity is not toxic loans...it is the market.
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#29
(07-10-2011, 06:09 PM)Huh...What? Wrote: The garden is, itself, an investment. It didn't appear for free, out of thin air. Someone paid for the land the garden is on. Someone paid for the plants. Someone paid for the water, fertilizer, and tools needed to tend it.
So, your neighbor was sitting bored at home, and agreed to make you a shovel, in exchange for some tomatoes. All capital comes from labor, if you go back far enough. In any case, for my purposes, it is not necessary to prove that something comes from nothing - only that something comes from very little.

Quote:Except that having printed more money, each dollar is worth less, not the same amount. More of a given item in existance = less value for each item.
And then there's the demand relation: more of a given item demanded = higher price. Demand for money comes from the number of transactions; if those go up, money becomes worth more again. So if you create the correct amount of money, the new supply equals the new demand, and prices stay the same.
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#30
Quote:but Real Estate was NOT over-valued. It was priced what it was, because someone was willing to buy it for the price offered, and the purchaser had the funds to make payments in a timely fashion.

Absolutely not. The actual value of the real estate was artificially inflated because people who didn't have funds to buy it were given money by people with the money, who knew the people couldn't afford the loans, and only gave them the money because of a bogus guarantee by the federal government to make up the difference when the loans defaulted. That created a much larger than normal, or reasonable, demand for property.

If the federal government had not practically ordered them to make those loans, those people would not have been able to buy those properties, and artificially created demand would not have driven the price up to ridiculous levels. When those people began to default on those loans, which they never should have gotten, the value of those artificially over-valued (because of an artificially created demand) properties plummeted, back to something resembling real value, pre-federal interference.
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#31
(07-10-2011, 09:57 PM)Huh...What? Wrote: If the federal government had not practically ordered them to make those loans, those people would not have been able to buy those properties, and artificially created demand would not have driven the price up to ridiculous levels.
This part makes a great story, but it is just not true. While I agree with most of that, the artificial demand was not created by the (US) government. Investors were lining up for these loans, so much so that the geniuses at Goldman Sachs had to create synthetic versions of mortgage loans - which didn't help HHS one bit - just to keep the clients happy.
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#32
Investors were lining up for loans because someone told them they could make a lot of money, because the government backed the loans. If not for that no one would have touched those loans. Once more, you have government interference skewing the actual behavior.
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#33
Huh...What? Wrote:Investors were lining up for loans because someone told them they could make a lot of money, because the government backed the loans. If not for that no one would have touched those loans. Once more, you have government interference skewing the actual behavior.

Not so much. The people with bad credit ratings didn't buy homes to make money...they did so because they could, and they then had a home to live in and not some cardboard box in an alley.

People always try to stay within their income. But they also want to maximize the value of what they own. If a ditch-digger can get a $400,000 home and pay his mortgage on time every week, the only long-range plan he had in mind was the fact that if he lost his job - he could always sell it and have a big equity check to fall back on. Sure, you can say why didn't he buy a $100K home instead - so losing his job wouldn't matter as much? But the same situation existed for those in a $100K house in a bad neighborhood as for the guy in a $400k home in a gated community with good schools. If the job stops - so do the mortgage payments. Both examples are forced to abandon a good house that quickly falls into disrepair standing empty. What value was first caused by economic intrigue becomes actuality as the homes crumble.

Now, investors, Per se, who liked loans with government backing certainly used the system - but that is more of the same. It was legal and appeared safe. Failing equity affected those invested in Real Estate. The term "property poor" was used extensively in the sixties and seventies to sum up their predicament.
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#34
Once more around the circle...

Quote:The people with bad credit ratings didn't buy homes to make money...they did so because they could,

And why could they? They never could before. When they showed up, they got told they didn't qualify. Then the government told the lenders to ignore bad credit, low income, etc., and just make the loans, because the government would back the loan. That is the government manipulating the housing market, by creating a demand for houses that didn't previously exist, because the people with bad credit/low income couldn't get loans, and rightfully so. That artificially created demand drove up prices, something that wouldn't have happened, ahd the government not stuck their noses in where it didn't belong.
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#35
(07-11-2011, 12:51 PM)Huh...What? Wrote: Once more around the circle...

Quote:The people with bad credit ratings didn't buy homes to make money...they did so because they could,

And why could they? They never could before. When they showed up, they got told they didn't qualify. Then the government told the lenders to ignore bad credit, low income, etc., and just make the loans, because the government would back the loan. That is the government manipulating the housing market, by creating a demand for houses that didn't previously exist, because the people with bad credit/low income couldn't get loans, and rightfully so. That artificially created demand drove up prices, something that wouldn't have happened, ahd the government not stuck their noses in where it didn't belong.
Yes, and it worked pretty well if it would have been run scrupulously without political intrigue. Remember, the people who couldn't afford the homes could sell them without a calamity occurring. It was the failing equity that killed the golden goose. An expanding system allows such common-sense situations where families got to live in decent housing. It was the artificial brakes applied to the system that started the cascade of events.

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#36
Quote:Yes, and it worked pretty well if it would have been run scrupulously without political intrigue.

It didn't, and couldn't, work well. The government guaranteed huge numbers of horrible loans to people that couldn't afford the loans, or people who had no intention or track record of paying bills. This is a recipe for disaster, no matter what the circumstances. The immediate result was a foregone conclusion. Lots of people had money they couldn't, or wouldn't, pay back, there was a huge spike in demand for real estate, which caused a spike in real estate prices. Now keep in mind these people didn't want to sell the homes. They wanted to live in them.

Lots of really stupid investors, seeing that spike, invested in real estate they didn't need, and couldn't afford by taking out loans that they couldn't pay back without reselling the properties at a profit. The people who didn't pay their bills were foreclosed on. The people who couldn't afford their loans got foreclosed on. Suddenly the artificially increased value of those properties, along with that of all those "investment" properties started dropping, due to a sudden glut of houses on the market (a combination of foreclosed homes, and a huge over-supply of new homes built by really stupid builders who got sucked into the false housing boom).

What you are calling artificial brakes was the real value of those homes, absent of the government's interference, reasserting itself. Here goes the house of cards crashing down. Suddenly investors can't pay their loans back, because they can't sell the properties for anything like what they paid, because they paid way more than the house was worth, since they assumed the bubble was solid, and they'd be able to sell the properties for a profit. Now the investor properties are foreclosed on, and the values drop even more because of the new increase in available properties, and a dearth of qualified buyers. On top of which, the banks, who are now out ungodly amounts of money from the bad loans they made stop loaning money, because they haven't got it to loan. They wrapped it up in bad loans and have foreclosed properties, not cash. Some of these banks go out of business, or are bought out by rivals.

Here comes the federal government. They sling some money out to the banks (not nearly as much as the banks are out), which does nothing, because the banks don't loan it out, they continue to sit on it, using it to offset the bad loans they made at the governments urging.

That's where we're at now. Literally hundreds of thousands of houses (if not millions) sitting vacant because there are no buyers who the banks are willing to lend money to. Last I heard there were something like 20,000 new homes sitting empty in Phoenix alone. That doesn't include all the foreclosed properties, which the banks won't put ont he market, because they are desperately hoping for the real estate bubble to come back so they can not lose quite so much money on their own stupid decisions.

And it's not going to come anywhere close until the economy starts recovering, which it is not doing, no matter what the government "experts" say. And it's not going to happen until the federal government stops being a pack of horse's asses and stops spending money they haven't got, and stops taking money out of the economy so they can spend it on more utter stupidity, like bailing out failing companies.
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#37
Not really, You said:"...The government guaranteed huge numbers of horrible loans to people that couldn't afford the loans, or people who had no intention or track record of paying bills. This is a recipe for disaster, no matter what the circumstances. The immediate result was a foregone conclusion."

Actually, it didn't matter if they couldn't afford the home. The bank didn't care. Reselling the home would get the home back onto the market. Their note would be satisfied with enough left over to give the delinquent homeowners some walk-away money. Who cares if it was one home or ten thousand? They all would just change hands and everyone walked away from the deal with a smile on their faces.
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#38
Same old song, next verse.

Quote:The bank didn't care.

The bank didn't care specifically because the government guaranteed to make up the difference of what they lost by foreclosing on a bad loan. If the government had not done so, the banks would have cared very much, indeed.

Quote:Who cares if it was one home or ten thousand? They all would just change hands and everyone walked away from the deal with a smile on their faces.

Except it didn't work that way did it?

See, you appear to be saying that the banks acted the way they did, no matter what the government did, therefore the government's actions had no real effect on the crash. I am saying that the banks would not have acted the way they did without the government's actions, because those actions appeared to remove the bank's risk in making those risky loans.

We're getting nowhere here. I'm done.
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#39
Some of you are forgetting the emotional impact of investing or buying things. When there is a mania (emotional) for a good, the price will soar. Demand is high without due diligence (or realism) on the part of the buyer. The world has seen quite a few manias (bubbles), and they all end the same way.

Certainly the government laid conditions that lead poor folks to buy homes that they could not afford. Government guarantees and repackaging of loans lead the banks to think they were off the hook. The greed of the banks to get into the frenzy without regard to the consequences lead them to foolishness. Just look at the situation of Bank of America today, after they foolishly bought the California home lender and ended up with a mess on their hands. Don't forget the endless repackaging of housing loans which got sold to an endless amount of suckers who did not do due diligence, although they were supposedly wise investors. Don't forget the derivatives mania supposedly protecting the buyers of these repackaged loans. And lastly, don't forget the greed of the average nitwit when they borrowed on the equity of their house, expecting the prices to go up forever.
Jefferson: I place economy among the first and important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our choice between economy and liberty, or profusion and servitude. If we can prevent the government from wasting the labors of the people under the pretense of caring for them, they will be happy.
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#40
The Obama Jobs Bill was defeated in the senate yesterday, with both Republicans and a goodly number of Democrats, up for reelection, who knew this would usher them out the door. Never intended to pass, it was used as a campaign ploy to blame 'do nothing' Republicans and gain a talking point for the 2012 election.

The New Yawk Times actually came close to getting things right:

Quote:In a major setback for President Obama, the Senate on Tuesday blocked consideration of his $447 billion jobs bill, forcing the White House and Congressional Democrats to scramble to salvage parts of the plan, the centerpiece of Mr. Obama’s push to revive a listless economy.

And the AP, performing political prostitution, blamed it all on the GOP. And note how they twist the facts to make it look that way, when there were really many more Democrats who would have opposed the bill, had it made its way to the floor:

Quote:United against Barack Obama, Senate Republicans voted Tuesday night to kill the jobs package the president had spent weeks campaigning for across the country, a stinging loss at the hands of lawmakers opposed to stimulus-style spending and a tax increase on the very wealthy.

Forty-six Republicans joined with two Democrats to filibuster the $447 billion plan. Fifty Democrats had voted for it, but the vote was not final. The roll call was kept open to allow Sen. Jeanne Shaheen, D-N.H. to vote. The likely 51-48 eventual tally would be far short of the 60 votes needed to keep the bill alive in the 100-member Senate.

But there was really far more here that was not discussed, and represented the main reason why so many Republicans opposed the bill. It was Bastiat's "Seen and Unseen". Government stimulus does not create jobs, and further government jobs don't produce wealth.

Here is an earlier short essay, written a couple of years ago, which covers this nicely.

Quote:What Is Seen and What Is Unseen: Government “Job Creation”

by Larissa Price



Barack Obama says his roughly $800 billion American Recovery and Reinvestment Plan could save or create between three and four million American jobs by 2010. Many of these proposed jobs—building or repairing roads, bridges, and buildings—recall the New Deal. There is a modern twist, of course, with the promise to develop “alternative energy sources” such as wind farms, solar panels, fuel-efficient cars, and the like. “The jobs we create will be in businesses large and small across a wide range of industries,” Obama promised, “and they’ll be the kind of jobs that don’t just put people to work in the short term, but position our economy to lead the world in the long term.” (emphasis added)

First, one may ask: how can Obama and his economic advisers know what kinds of jobs will position our economy to “lead the world” in the long term? Indeed, how can we expect anyone to know what kinds of jobs will be able to offer such a guarantee of wealth and security, considering the enormous complexity of our world? Billions of individuals are constantly making decisions based on their own expectations about the future. Potential ideological shifts and their inevitable changes to policy funding and support complicate matters further. This is without considering technological advancements that can turn the best-laid central plans into white elephants. There is little an individual or group can possibly know or predict for the future, particularly on such a large scale as three to four million jobs.

However, assuming Obama and his advisers are right—that his plan will indeed save or create that many jobs—what proof do we have that it will leave us better off than if it’s not implemented at all?

In his essay “What Is Seen and What Is Not Seen,” the French classical-liberal economist Frédéric Bastiat explained that there is a tendency to recognize only the intended consequences of an action (what is seen). However, there are often other, subsequent effects that are not perceived as connected to the action (what is not seen). Furthermore, the short-term effects of an action can sometimes be quite different from the longer-term, unseen consequences.

In the case of public works, Bastiat explained that government produces nothing independent from the resources and labor it diverts from private uses. When government borrows money to create jobs, what is readily seen are people employed and the fruits of their labor. However, what is generally not considered are the many things that could have been produced if the capital had not been removed from the private sector to fund the government programs in the first place. Such policies necessarily benefit some (the favored workers) at the expense of others (those who would have had the jobs that were not created) and eventually the taxpayers, who have to repay the debt.

What is Seen

New Deal public-works projects provided plenty of evidence for Bastiat’s theory. They not only failed to help lift the economy out of the Great Depression but also served to make it “great.”

First, many jobs created under FDR benefitted few besides those employed—in things like studying the history of the safety pin, collecting campaign contributions for Democratic Party candidates, chasing tumbleweeds, and cataloging 350 different ways to cook spinach. (See Lawrence Reed’s Great Myths of the Great Depression.)

In addition, much of the “job creation” was directed according to political preferences, rather than where jobs were arguably needed most. For instance, a disproportionate amount of public relief went to western “swing states” expected to help Roosevelt win votes in future elections, rather than to the poorest states, such as those in the South, which were already solidly Democratic during this period. Relief and public-works spending also seemed eerily to increase during election years, and it has been shown that votes for FDR correlated closely with jobs and other special government benefits given. (See Burton Folsom’s New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America.)

What is Unseen

New Deal job-creation projects also impeded productivity by discouraging private firms from adopting new technologies. A prime example is a government farm in Arizona where a dairy crew discovered that it could turn a profit only by using milking machines, rather than milking by hand, and eliminating some jobs. But that would have violated the terms of a government loan. So the machines were not brought in, and the staff members who made the suggestion were fired. (Amity Shlaes tells the story in “The New Deal Jobs Myth.”)

Roosevelt is still celebrated for his job-creating measures because the people who gained employment were easily seen. However, what wasn’t (and isn’t) so easily recognized is that to pay for his public-works experiments, the government sucked up much of the available capital by selling bonds and collecting taxes, including a 5 percent withholding tax on corporate dividends and ever-rising income taxes. The top income tax rate hit a staggering 90 percent. Thus the New Deal had the unintended consequence of prolonging the Great Depression by diverting resources that could have been used to create wealth.

Barack Obama and his advisers should take a lesson from history. The New Deal and its public-works projects were a disaster, and it would be remiss to think they should be given another try. As Bastiat explained, government doesn’t create wealth; it only diverts it. When government controls wealth it inevitably tends to serve political ends rather than consumers. FDR’s New Deal policies are a testament to that, and if they are repeated in response to our current economic crisis, it will only hinder the recovery.
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