Thursday, October 10, 2013

Another broken-window fallacy applied to retirement benefits

In a disturbing trend, a number of organizations supporting increased retirement benefits have claimed that the benefits themselves are major boosts to the economy. Using a "money multiplier," they claim that each dollar in pension or Social Security benefits ripples through the economy and becomes two dollars--or even three or four dollars, depending on the study.
Billy Joel just contributed to the economy.

This is nothing more than the old broken-window fallacy in economics. These types of studies tout the economic activity we can see (the pension payment or broken window repair), but ignore the activity that we cannot see (how the money would have been spent if there were no pension payment or broken window).

Over at the Corner today, I wrote about the most recent broken-window study, courtesy of the AARP:
For whatever reason, organizations supporting higher levels of retirement benefits are attracted to broken-window fallacies. The latest example is a study from AARP, titled “Social Security’s Impact on the National Economy.” It tells a classic broken-window tale, in which retirees spend their Social Security checks on goods and services, then the providers of those goods and services take the money and make additional purchases, etc. The report tells us that “every dollar of Social Security benefits generates about $2 of economic output.”
Who knew that the U.S. could double its wealth by writing checks to seniors? How convenient for AARP. The trouble, obviously, is that the analysis leaves out all the economic activity that would have been generated by workers if they could have kept the taxes they paid toward Social Security.
Read the whole thing here.

1 comment:

  1. This multiplier argument always seems to be trotted out for publicly funding football stadiums or elite arts support too.