More Broken Windows

More economic plans on the horizon but will the impacts create net benefits?

Aside from the central planning tendencies implicit in the desires of the forthcoming administration, it appears that much of the thought process for their economic recovery has been built upon a fallacy. President-elect Obama's regurgitated notion that government "make-work" programs will steer the economy in the right direction is simply more "broken window fallacy".

In Frederic Bastiat's essay, That Which is Seen and That Which is Unseen, written in 1850, he describes the event of a shopkeeper who has his window broken by a little boy. It was perceived by the town people that the boy, as a result of putting a window glazier to work, created a net benefit for the town. The unseen, as Bastiat describes, is the loss of income by the shopkeeper that could have been spent on something else - possible more productive. The town, as a result, did not receive a net benefit from the broken window. Henry Hazlitt also greatly expounded upon this concept in his book, Economics in One Lesson.

The following government economic plan, as part of the American energy resolution scheme, represents a "broken window" fallacy:

“[W]e will launch a massive effort to make public buildings more energy-efficient. Our government now pays the highest energy bill in the world. We need to change that. We need to upgrade our federal buildings by replacing old heating systems and installing efficient light bulbs. That won’t just save you, the American taxpayer, billions of dollars each year. It will put people back to work.” (link)

The first problem with this economic plan is that spending more government money cannot possibly save, in net benefits, American taxpayer dollars. If the government would like to help us, those in charge will need to cut total spending and taxes (e.g. corporate tax, income tax, dividend tax) to spur private productivity. It would seem evident that if we reduce the size of government the American taxpayer will spend less in housing those employed by government.

The second problem, and congruent with the first, is the idea that "make-work" programs can spur economic growth. Again, we cannot achieve net benefits as a result of any government reallocation of resources. Increasing employment in one sector of the economy, at the expense of another - possibly more productive sector, is merely a transfer.