A fallacy of the broken windows fallacy

The Austrians have attacked Keynesian economics for about 70 years. Their blame (not criticism because what they argue is neither logical nor evidence-based at all) is based on a Bastiat's argument made about one and half century ago, which is called "the fallacy of broken window". I have found this blame very improper.
Of course, Bastiat probably did not write it to criticize stimulus programs, which didn't exist in the 1850s; rather, he seemed to criticize the people who believe destruction leads to production and we should destroy things.
If we break a window to buy another window, the entire economy will not be stimulated. It is simply to move resources from one place to another. In Bastiat's story, the glazier will appear to be better off by selling a newly produced window but the shoemaker will lose because he has to spend on what he would not have to if the boy had not broken the window in the first place. Plus, since the glazier has to spend his time and resource on something that would not be necessary, it will eventually lead to waste of his time and resources. As a result, the entire community ends up being worse off.
However, does it mean that the shoemaker must not buy a new window? It is much more stupid to leave the window broken because it can give the shop a bad image. If it is winter, the shoemaker may suffer from the cold. In summer, his shoes can be damaged by rain water through the hole in the broken window. Then, the shoemaker's rational choice is to buy another glass. He may lose some of his existing funds, but his business may not yield loss any more due to the broken window.
As liquidationists, the Austrians are supposed to say "Leave the window broken, and it will fix by itself." A broken window will be eliminated eventually (and quickly) without any further shoemaker's action. The invisible hand will fix it! Since the Austrians are liquidationist, they should believe any attempt to replace the broken window with extra expenditure will cause greater damage to the shoemaker's business.
Am I being ridiculous? Yes, I am. However, what the Austrians believe has exactly the same logic.

I do not have enough time for this right now, but I will get to this later this week.
http://youtu.be/7R3cwn6GlaA

In addition to the previous post

Somewhat Denmark and Finland are worse off than their neighbors. I didn't think about that, but their governments spend more than Sweden and Norway. Norway is a resource-economy, so it may not be fair to compare it to its neighbors. The Swedish government obviously spends much less than Denmark and Finland, but the labour market performances in terms of unemployment rate are about the same. How? The secret seems to lie in exchange rates. Sweden has devalued its Krona since the crisis while Finland has adopted the euro and Denmark has pegged its krone to the euro. As a result, the relative prices of Swedish goods have fallen and are more competitive than Finnish or Danish goods. It might give Sweden better leverage in overcoming the crisis. Since Finland and Denmark are tied to euro, their governments have had to nothing but spend more. Swedes seem to enjoy their monetary sovereignty.

A big government's failure....has not come yet.

Today, I was looking at the Eurostat to figure the correlation between unemployment rate and the government spending. The typical right wing argument on this issue is that government does not create jobs and government spending is simply moving the problem from one place to another. When I looked at European countries government expenditure data, it surely appeared so.

All these countries have well above 40% of the government spending to GDP ratio. Sweden and Greece have no significant difference. The former is doing well, but the latter is not. No correlation between government spending and unemployment rate seems to exist.

Unfortunately, it is a statistical bias from loose specifications and Type II Error. First, if you do not specify which variable will significantly affect the outcome, then your result will be skewed. In this case, if you just call government expenditure all the same thing, then you are making this mistake. This mistake causes Type II Error, which means that you are not rejecting false null hypothesis, which is that the government does not create jobs. Let's look at the next graph.

     

If you compare Sweden's social benefit spending and Greece's equivalence, then you will realize that Greece spend much more. Then, you may hastily conclude "the greater social spending, the higher unemployment rate." Then you make a fallacy of reverse causality. Actually, Greece spends more on social benefit because it has higher unemployment. Finland spend more than Italy and Spain simply because its welfare benefits are much more generous than them. It will be clearer if you look at the next graph on unemployment rate.

As you can see from the graph, all those troubling PIIGS have relatively high unemployment rate. This has driven their governments to spend more on social benefits. Then, however, still you may think government spending is irrelevant to creating jobs. I'm not one hundred percent sure, but I suspect government spending indeed creates jobs and waters down crisis in better-off countries. Let's look at the next graph. 

Those better-off countries have much greater government output level. I was not sure in the first place what "government output" means. However, I've figured it refers to anything produced by government. In those countries, the governments manage such a lot of things as research, education, transportation, healthcare, and even housing. Since all those goods and services are produced by government, they really add jobs to their economies. Somewhat a big government isn't necessarily bad.   

Tax Freedom Day?

I have thought it is simply ridiculous because the concept of Tax Freedom Day contradicts what the Fraser Institute has supported. This is how they calculate it. Divide an individual's income by annual work days. Then times by the number of days until the value equals that individual's tax amount. The number of days is the time of the year you work for the government. In that time you nothing but pay taxes. This is simply wrong. First, how can we live in that time if we nothing but pay taxes? I have never seen a Canadian die because all the income is used to pay taxes and he can't buy a piece of bread. We all receive some disposable income every paycheck. You may choose one-shot payment option, but we are not all that stupid. We choose installments. Second, even if you choose one shot payment option, you are still eligible for a lot of government services, for example, primary and secondary education, universal healthcare, non-tolling roads, etc. You must take that into account because you receive that from the government. According to the government, the Government of Canada is running primary deficit this year, too. It implies it actually return more to us. Therefore, our 'net' Tax Freedom Day is supposed to be in the past. Does it mean budget deficit is okay? No, that's what we owe to the future. We better not do that. However, the logical sense of the Tax Freedom Day necessarily leads us to some greatness in deficit spending. What a socialist Fraser Institute!

On unemployment continued

However, do those methods I mentioned at the end of the previous post ever help unemployment rate fall? I'm skeptic about that. The theory so called "paradox of minimum wages" has a significant caveat. Unemployment is not just employers' not hiring; employees' quitting. Of course, involuntary unemployment should be much more important, but voluntary unemployment has significant impact on businesses. There are quite a lot of evidences that the higher minimum wage is the lower hiring rate is; at the same time, the lower the minimum wage is the higher quitting rate is. Overall, hiring rate and quitting rate cancel each other, so minimum wage's effect on employment becomes minimal. Businesses' labour costs are not just salaries they pay for their workers; recruiting process also incur quite a bit amount of costs. If workers quit too often, accordingly, these costs will rise. What is worse, too often quitting can cause production disruptions, as well, if the former employer cannot find the replacement workers right away.

Is the unemployment a structural problem

Some people say so and that is true sometimes. For example, Alberta still has 4.7% unemployment rate, even though its economy is booming. I don't believe that number will go down any time soon. Some of those are in structural unemployment. That is, their skills and labour market demand do not match, so they are unemployed. Therefore, one may conclude the solution has to be to eliminate structural barriers in the labour market such as unions, minimum wages, and other legislations related to employment protection or labour standards.

Why does tuition keep rising? A flypaper effect?!

Just a brain-storm. Let's assume a very inelastic demand of university education. Consumers, i.e, students do not decide where to go based on price, i.e., tuition; other factors, such as fame, quality, and reputation of the institution matters more. Producers, i.e., universities, have substantial market power because there are only one or two universities in a city and information asymmetry exists in favour of producers. Its marginal cost curve is very flat, which means even if it has one more student, it does not incur such large extra cost. Without government intervention, the monopoly quantity of university education will be determined where marginal cost equals marginal revenue. Students should pay much higher than reservation price to the university. Now, the government offers every student with subsidies that have to be used to reduce tuition burden. As a result, the demand for university education will shift right. The new equilibrium output should be greater than monopolist quantity (but by a little because of inelastic demand). At the same time students' burden for the tuition will decrease. What if the government provides the equivalent amount of subsidies to the school. It will depend on how that money is assigned. If it is solely used to reduce tuition, the result will be the same as above. If it is unconditional, i.e. completely up to the university's discretion, things could be different. The university may use that money to reduce tuition, but it may use that money to renovate its old buildings, build more parking lots, hire more instructors to reduce the number of students per instructor or just raise employees' salaries. If these things happen, the marginal cost of university education will increase, and accordingly students' burden of tuition will remain the same or may rise. It may reduce the enrollment rate, but given the inelastic demand, the drop rate may increase by a little.

P.S. The flypaper effect, by the way, refers to a distortive effect of unconditional grants, summarized by "Money sticks where it hits."

The ECB's Outright Monetary Transactions

The ECB will implement something called "outright monetary transactions."

http://www.ecb.int/i/index.html

Several people are skeptical of this. I think it is better than nothing but am skeptical, too, because of some fuzzy things, especially, sterilization part. It is very brief and not so detailed. Well, my macro textbooks only show the sterilization cases related to foreign exchanges market operations, eg., the central bank sells foreign exchanges for its currency to defend its currency and then buys its government's bonds to keep money stock constant; either, buys foreign exchanges with its currency and sells its government bonds to keep the money stock constant, too. Is there any other way of sterilization? I'm not sure. Maybe in this case, the ECB will sell its existing foreign exchanges to offset the expansionary monetary policy's disturbing effect on FX market?! Given the argument of several prominent economists such as Rogoff, Krugman, and even Friedman would support that the Eurozone needs some inflation, this policy seems contradictory to achieving internal balance because as a result, its money stock will stay the same. Some argue it is a compromise with Germany, whose central banker has resigned as a member of the executive right after the decision was made, arguing central bank debt financing would cause hyperinflation. That is, the ECB will sterilize to lower inflation pressure, but I am still not sure about this sterilization's impact if it means the ECB will sell the FXs it holds at the moment. It may keep money supply constant and reduce inflation pressure, which I don't believe it is necessary right now, but Euro will appreciate and it will harm competitiveness of the troubling countries. Another possibility is to sell German bonds, which are considered relatively safe assets. Still, it will keep monetary stock constant and offset stimulative effects of OMTs. In this sense, this policy seems just buying a little bit more time.