Remember the old “broken window” fallacy in economics? The idea is that a broken window is actually good for the economy because someone has to hire a glazier to fix it, and then the glazier uses the payment to buy meat from a butcher, and the butcher takes his fee to the baker, who then pays the candlestick maker, and so on. But, of course, the owner of the window would have put the money toward more productive ends had it not been broken in the first place.
The fallacy seems to crop up a lot after hurricanes, when some public figure will inevitably say that the spending on clean-up is an economic boon for the area that was affected. (If only we had more hurricanes!)
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.
The omission is acknowledged forthrightly on page 10 of the report. The authors say that they are looking at a “gross effect” rather than a “net effect,” and they note that the de-stimulative payroll tax offsets at least part of the Social Security impact they report. So why publish half an analysis (at most)? AARP is using the results to bolster its case against reducing Social Security benefits, but without considering the net effect, the report has no policy relevance. This research does not balance the discussion or fill a void. It just misleads.