Economic theory tells us that we increase an individual's utility by giving him cash rather than dedicated expenditures such as food stamps or direct subsidies such as the food itself. So, I guess this justified the State of New York handing out $140 million in federal “stimulus” money with no strings attached to people on welfare. They said it was for back-to-school needs.
What did the welfare recipients do with the extra cash? They purchased flat screen TV's, iPods and video gaming systems," The welfare recipients were also free to withdraw the money as cash. That led to an unexpected run on ATM's across the state. Wilson Farms stores had their ATMs wiped empty. In addition, there were reported increases in sales of beer, lotto and cigarettes.
New York state officials defended the program by saying that “no matter what welfare recipients purchased with the taxpayer funds, it served to stimulate the economy.” These officials clearly do not understand Bastiat's broken window.
http://www.downsizinggovernment.org/fraud-and-abuse
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Boyes hits the essence of the economic problem when he writes:
ReplyDelete"That led to an unexpected run"
As Hayek indicates, the economic problem is the use of knowledge under conditions of change and uncertainty. Therefore, all actions taken in a dynamic environment will lead to consequences that have a probability of an unanticipated outcome.
Therefore adaptive efficiency becomes key - which institutional environment allows for the information flowing from the consequences of an action to most quickly flow to the appropriate actors?
Boyes' example underscores the lack of flexibility, accountability, and incentive to adjust that are embedded in the command system. The state has no motivation to adjust to the problems that are created when state actors intervene.
On the other hand, failure is quickly communicated through the price mechanism, allowing agents in a system of natural liberty to operate in an adaptively efficient manner to adjust behavior.