Broken Windows at the Laundromat

F. Bastiat's That Which is Seen, and That Which is Unseen is a perennial classic among economists of a certain bent (including myself) for its clever lampooning of common economic sophistry. The first essay of the bunch The Broken Window illustrates the error in reasoning made when too-clever-for-anyone's-good commentators quest for a silver lining in the midst of destruction. In Limerick form, here is the fallacy he attacked:

There once was a boy from Kilpatter
A window he happened to shatter
     The papers all say
     We're richer this day
For the glazier and setter do matter

In the tale, a broken window precipitates a flurry of economic activity in its repair. This flurry of economic activity is gainful employment, therefore it is to be cherished as contributing to human flourishing. Hold your horses, says Bastiat. Think about the alternative uses of the replacement glass, think about the time the repairman gave up to install a new pane. Think about what else the window-owner might have spent his money on. These costs are real and relevant. These days we call them "opportunity costs" in economics, and depending on which economist you ask, all costs are opportunity costs.

And this is true too for money laundering. I caught a little bit of a report on Mexican drug cartels who use an elegantly simple money laundering tactic: convert cash from sales into clothes stateside (thereby boosting sales at Macy's, eg), transport the textiles across the border, then sell them for pesos. The naif might look at this scheme and say "whoa now, this is money laundering. It's illegal, unethical, and harmful." The wise sophisticate would respond: "take a moment to think about how this helps the beleaguered JC Penney stay afloat, and consider the good common folk of Mexico who now have access to high-quality fashion at reasonable prices." The student of Bastiat would reply: "it's more complicated than that."

It's more complicated than that, because the drug prohibition statutes create the laundering opportunity. Whatever gains enjoyed by American clothing retailers by selling extra volume to the cartel, whatever gains enjoyed by Mexican shoppers buying US fashion cheaply is offset by a corresponding loss in the cocaine market. Folks tooting nose candy have to pay higher prices to feed their habit, a money laundering premium if you will. The surplus of the American retailer and the Mexican clothes shopper is not profit, but rather a transfer. And the nasty shoggoth hounding the whole sordid affair is from the bloated appendix to this trade. All the law enforcement that could be better spent tracking down murderers and rapists are wasted in interdiction. All the legal proceedings take up scarce courtroom time and talent. All the time, treasure, and effort of the Army and Air National Guards, the DEA, and the Coast Guard could be better put towards actually defending the strands and lands of the nation against actual enemies, foreign and domestic instead of opportunistic merchants seeking to sell something an American citizen is willing to buy.

Money laundering is not euvoluntary, but the only reason it's not euvoluntary is because of the underlying public decisions that gave rise to the transaction. End prohibition and the wasteful knock-on markets will evaporate like dew in the Mojave morning.