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Variations | The bright side can be blinding

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IN a recent (and superb) special report, The Wall Street Journal focused on how the Covid-19 outbreak has affected a farm-to-table restaurant called Table 20 in Cartersville, Georgia, and its owners, employees, landlord, lenders, suppliers and other vendors — and then these individuals’ families, lenders, vendors and countless others.

According to The Wall Street Journal, the first coronavirus infections in the Cartersville area were confirmed on March 11. “Amid calls for social distancing and with sales plummeting, the couple [who owned Table 20] laid off all but two of their dozen employees. They have asked their landlord and lenders for relief. They have canceled orders on everything from linens to liquor.”

Allie and Chris Lyons, the couple who owned the restaurant, “reduced their pay by 45% for this pay period, leaving enough money to cover their mortgage.” The Wall Street Journal said the couple plan to put bills they can’t defer “on credit cards and deal with the interest hit.” They recently received another medical bill for their 5-year-old daughter’s tonsillectomy this fall. “Ms. Lyons says if they can’t defer payment, she is willing to let it go into collections.”

“Each of those decisions,” The Wall Street Journal reported, “may be felt far beyond Cartersville, a working-class community of 21,000 an hour outside Atlanta, and helps show how the troubles of one small business can ripple through the U.S. economy as the virus brings commerce and capital to a halt.”

Laid-off waitress Casey Brazell, for example, “is putting off her dream to buy a new house. A family farm where Table 20 buys most of its greens is left without orders. The restaurant’s bank is losing revenue as it gives breaks to dozens of businesses. Its credit-card processor in Arizona has frozen its hiring. A tech company in San Francisco is waiving fees for Table 20 and scores of other clients.”

Now imagine the impact of declining business revenue on government revenue collection and the government’s ability to pay its obligations.

To be sure, similar scenarios are occurring elsewhere in the U.S., including the CNMI and other territories, and across the world. And this is why it is extremely important that we consider not only the immediate effects of any event or public policy, but the possible consequences of that event or policy not merely for one group but for all groups.

This is not to say that the extreme measures — lockdown, quarantine — implemented by governments around the globe are downright bad. We’re dealing with an enormous and unprecedented public health crisis, and we have to listen to public health experts. What I’m saying is that we must also acknowledge that any proposed “solution” has unintended results that are likely to create new, and often bigger, problems.

In his indispensable 1946 book, “Economics in One Lesson,” Henry Hazlitt expounded on French economist Frédéric Bastiat’s teaching regarding “what is seen and what is not seen.”

“Let us begin,” Hazlitt wrote, “with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass”:

A young boy throws a brick through the window of baker’s shop and runs away.

“A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. [$50 in 1946 is worth about $663 today.] After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.”

This illustrates our tendency to focus on an event or policy’s immediate effects and ignore its long-term consequences. Which is also why many of us believe that disasters are “good” for the economy.

Now let us take another look at the story of the broken glass.

“The crowd is at least right in its first conclusion,” Hazlitt wrote. “This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

“The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new ‘employment’ has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.”

The broken-window fallacy, Hazlitt wrote in 1946, “remains the most persistent in the history of economics.”

Perhaps more persistent than a virus.

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