The earliest economic theory of discrimination proposed the subsequently neglected idea of a "vicious circle" of discrimination (Myrdal, 1944). We draw on psychological evidence (that people derive utility from believing that the world is just) to propose a behavioral economic model in which the vicious circle envisaged by Myrdal can arise. We demonstrate the power of this approach through an application to the issue of whether and how to justify penalty enhancements for hate crimes against members of disfavored groups. The crucial assumption is that individuals engage in biased inference in order to preserve their Belief in a Just World, thus attributing the disproportionate victimization of a group to that group's negative characteristics, rather than to the hate-motivated preferences of offenders. In a simple two-period setting, we show that disproportionate victimization of the disfavored group in the first period can lead to additional crime against that group in the second period. The reason is that potential offenders' inferences about the victimized group's characteristics become more negative as a consequence of disproportionate victimization, raising the net benefits of crime against that group (under the assumption that the benefits of crime depend partly on the victimized group's perceived characteristics). Our main result is that penalty enhancements can reduce the social harm due to these extra crimes.