I spent most of Monday and Tuesday dealing with the aftermath of having our keys stolen. This included walking home to get the spare car keys and then walking back to get the car. I then spent too much money getting a new car “clicker.” Then I had to go to Lowe’s to copy some keys (and back since they messed up). Finally, we had our locks changed which was time consuming if not expensive. I was determined to get a blog post out of the whole mess.
Dead Weight Loss
It’s time we learn a valuable economic concept: “deadweight loss” (DWL). You can think of DWL as economic transactions that would make buyers and sellers better off but which do not occur. For example, taxes cause DWL because they raise the price of a good so that some people choose to not buy that good. All the transactions that don’t happen because of the tax represent the DWL. We say there is a loss of economic efficiency.
Crime also can cause DWL. In my case, I spent both my money and time to deal with the effects of the malfeasance. This means I cannot use those resources in the ways I wanted. Believe me, I would have much rather spent the money on something other than new car keys. I wish I had been working on something productive than running to Lowe’s for key duplicates.
Since I will not spend the money on what I want to spend it on (say, a few dinners out), these transactions will not occur. Think of the costs I paid because of the crime as a lump-sum tax on the dinners I was going to buy. Taking into account this “crime tax,” I will buy fewer dinners. That is DWL.
If we think about places like Mexico where violence and crime is running rampant, there is huge DWL imposed on the population. If you must hire security guards and purchase bullet-proofed cars, this is essentially a tax on living in Mexico. That “tax” will create DWL and reduce economic efficiency in a nation. In short, it can slowly strangle an economy in the same way excessive taxation can. For this reason, economic growth is closely tied to high-quality government institutions that can restraint evil.
The Broken Window
But, didn’t the crime help Honda and Lowe’s because I spent money there? Certainly these “sectors” of the economy benefited from the crime. Yet a DWL still exists because I did not get to spend the money in the way that I judged as most valuable. I had to divert funds from something I highly valued (e.g. dinners) to something I needed but wished I didn’t (new keys).
This gets to the point of a famous essay by Frederick Bastiat. Some may judge the criminal as good for society because he caused money to be spent. Honda and Lowe’s benefited. But, Bastiat reminds us this logic ignores the unseen. As I explained above, there are transactions that don’t occur because of the crime. These are “unseen.” It would have been more economically efficient for the “unseen” rather than the “seen” transactions to have occurred.
I don’t talk about macroeconomics much, but this notion gets to the powerful critique of the idea that war spending is good for the economy. War spending means resources spent on the military are not spent on other things. Ask your grandparents and they will tell you how many things were rationed in WWII.
In the recent Keynes vs. Hayek video, Hayek makes this point in response to the claim that WWII got the US out of the Depression:
Wow. One data point and you’re jumping for joy
the Last time I checked, wars only destroy
There was no multiplier, consumption just shrank
As we used scarce resources for every new tank
Pretty perverse to call that prosperity
Rationed meat, Rationed butter… a life of austerity
When that war spending ended your friends cried disaster
yet the economy thrived and grew faster*
If wars help us out of bad times, should the government pay criminals to go around and steal cars and burn houses? Won’t destroying property then force spending which will stimulate the economy?
Why doesn’t the government go around destroying things to help the economy out? Wait, they did. It was called Cash for Clunkers.
*These last two lines are referring to the fact that many economists (Keynes’ “friends”) predicted a recession once the War ended and the US started winding down military spending. Paul Samuelson wrote in 1943: “The final conclusion to be drawn from our experience at the end of the last war is inescapable–were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties–then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced” [italics in the original]. Yet, as we know, the period after the War (1950’s) was one of the best periods of economic growth in our history.