Wednesday, July 1, 2009

Looking at Obama's "Green Jobs" through a Broken Window

If I were to urge you to grasp one principle of economics, a principle that would help you throughout your life dissect and refute virtually every government scheme to take your money in the name of the "public good", it would be the Broken Window Fallacy. This parable was created by Frederic Bastiat in 1850 and popularized by Henry Hazlitt who used it to refute dozens of economic fallacies in his famous book Economics in One Lesson. Despite over 150 years of knowledge and experience, this fallacy permeates every facet of politics today and is committed routinely by politicians and Nobel Prize winning economists alike.

I gave detailed descriptions of this principle in two past posts here and here so I will not go into full detail. Briefly, the principle is that one must focus on both the direct consequences of an action AND consequences that would have occurred in the absence of the action. In certain contexts, it could be called the law of unintended consequences. Another way to put it: in order to understand the consequences of government action, do not just look at what it does directly, but also imagine what could have happened and what did not happen as a result of government action.

For example, in the parable, when a brick is thrown through a shopkeepers window, observers are led to believe that the broken window is "good" for the economy since it increases the revenue of the glass maker. Such a view might lead someone to think that destruction is good for the economy and even to conclude that wars are actually a benefit. Perhaps someone should routinely burn the entire town to the ground to "help" the economy. Sound familiar? What is not seen by these observers, is the action that would have taken place if the shopkeeper had not had to pay for the broken window. He would have had more money to spend elsewhere on the movies, new furniture, or perhaps to expand his own business. In this instance, although the glass maker benefited, the broken window is at best a zero sum game as far as the economy is concerned since the movie theater, furniture maker, or anywhere the shopkeeper would have spent the money has lost potential revenue. (In actuality, I would argue that the broken window is less than a zero sum game - it is highly destructive to the economy to the extent that it subdues capital investment which subdues innovation and productivity.)

Once one fully grasps this principle by applying it to numerous instances as Hazlitt does, it becomes clear how futile and destructive are government policies implemented on the basis of this fallacy.

One of the most obvious applications of this principle is to the idea of "make work" jobs which are jobs "created" by the government for the purpose of employing individuals. For example, say the government announces a plan to employ 10,000 individuals digging ditches. For the 10,000 people who get this job, it clearly is a benefit. After all, they are now working and making wages which they can use to support themselves. However, is such a plan "good" for the economy?

First, where did the government get the money to pay these workers? It obtained the money through taxation which means the wages paid to the 10,000 workers is money no longer available to those who paid the taxes. These taxpayers now have less money to spend on other things like food, computers, or automobiles. Again, it is at best a zero sum game and in actuality worse since the government generally spends the money on activities that no one wants or needs.

How could anyone think that robbing money from some people and giving it to others could result in a "better" economy? If that's true, why don't we legalize theft by, for example, the Mafia. Then, when the economy needs a jolt, the government can urge the Mafia to shake people down for their money in order to spend it. Won't that be good for the economy? How is the logic any different?

If such a notion seems absurd - it is, yet, this is the exact reasoning behind the "stimulus" package unveiled by Congress earlier this year. It is exactly the reasoning behind the argument being offered that the cap and trade energy bill, despite the fact that it will increase energy costs, is actually good for the economy since it will "create" so-called "green jobs".

In this case, the stimulus bill and the climate bill are supposed to actually create jobs since the government will spend money in various areas. In fact, in this Yahoo article, seven "lucrative" new jobs from the Obama stimulus plan are highlighted. What are they? Among others include "solar panel installer", "cost estimator" to estimate costs of spending the stimulus money, and "physical therapist" since so many people are unemployed and apparently will need physical therapy (I'm not making this stuff up...). This means that individuals rather than being motivated to enter productive professions like medical research or computer science will instead be encouraged to install solar panels and to monitor the expenditure of loot that is robbed from taxpayers.

Let's ask another important question: is the government literally magic? Can it simply spend other people's money and, voila, create prosperity? Apparently, the government is magic since Nobel Prize winning economists like Paul Krugman endorse the government's plan to spend other people's money and in fact call for even more spending. Obama claims that the climate bill will create "millions of new jobs" which, of course, relies on the Broken Window Fallacy.

What creates real wealth? Making more with less effort or productivity is what leads to real gains in prosperity. "Jobs" in the sense of "people doing things" is not necessarily good for the economy nor does it necessarily lead to increasing prosperity. In other words, "activity" should not be confused with "productivity". When people make more with less effort, it frees up time so that people can work and produce in other areas. Hundreds of years ago, virtually everyone spent their time simply producing food and subsisting from day to day. More efficient agriculture due to new technology allowed the same amount of food to be produced by less people and freed people up to work on things like inventing electricity, the locomotive, and medicine. Robbing some people and giving it to others to spend does not benefit the economy in terms of creating real wealth and prosperity. Such a plan only redistributes wealth to some for the unearned benefit of others.

In April 2009, Dr. George Reisman posted Green Jobs in which he facetiously discusses how Obama's stimulus plan is capable of creating an infinite number of "jobs":

Indeed, advancing the goals of environmentalism is capable of creating a virtually limitless number of jobs. Big-rig trucks and their “polluting” emissions might be done away with by replacing them with human porters who would carry freight on their backs. Ocean-going ships and their emissions might be done away with by replacing their “dirty engines” with the clean labor of banks of oarsmen. (Sails would be a substitute too, but they are no match for oarsmen when it comes to the number of workers needed.) Automobiles and their emissions might be replaced by sedan chairs and teams of litter bearers.
Later, he discusses a brilliant idea that could literally "employ" millions:

And finally, think of all of the jobs that a program of environmental “stewardship” might make available. Thus each patch of desert, each rock formation, each clump of grass, and each tree stump, might have assigned to it one or more “stewards” whose job would be to watch over it, protect it, and “preserve it for future generations.” To carry out this valuable work, there could be a whole corps of “stewards.” They could be dressed in special uniforms displaying various ranks and medals, all gained in “service to the environment” and the defense of nature and its resources against the humans.

Indeed, once we put our minds to it, nothing is easier than to think of things that would require the performance of virtually unlimited labor in order to accomplish virtually zero result. Such is the nature of all job-creation programs. Such is the nature of environmentalism. Such is thought to be the path to economic recovery by most of today’s intellectual establishment.

When you understand the Broken Window Fallacy, programs offered to "stimulate" the economy and "create" jobs seem laughable. It's too bad it's not funny anymore.

10 comments:

Jason B said...

Bush's level of Keynesianism was bad enough, with his government expansions, wars, and bank bailouts, but Obama seems set on trumping every aspect of that economic insanity. It is quite obvious that Obama's level of economic voodoo is not only profoundly detrimental to all things economic growth, but also intellectually dishonest on an absurd scale, as such to be deemed insulting to the knowledge of the citizenry. I think his economic policy measures can purely be described by one of his campaign slogans, "Hope". I'm fairly certain there is an inverse proportionality between Obama applying such an emotion to his policy proposals and the resultant economic outcomes of those very same policies.

Thanks for the blog Doug, always thought provoking and enjoyable.

benjamin gordon said...

I believe those who wrote the so-called bailout legislation knew that it was simple theft and simply make no bones about it. The average Congressman or Woman is coerced into thinking it will be in the "best interest of the larger economy" without understanding the legislation in the first place. Actually, they were not even allowed to read it in it's entirety. Remember, many Congressman and Woman were threatened with physical Martial Law if the bailouts failed to pass.(youtube, for instance "congressman martial law threat") Again, let's call it what it truly is, theft. The architects of the bailouts were given de-facto dictatorial powers and still have refused to say where the bailout money money went. Watch Congress grilling Kashkari and Bernanke on C-Span.
The "Green Jobs" serve a dual purpose. "Green' Legislation destroys the real Economy to in turn, create a phony Government created economy of Environmental Stasi force members and ditch diggers. In fact, the actual job a Government creates doesn't matter as much as the dependency it creates, which I believe, is the plan.

Daniel Rigby said...

Maybe I'm just dense, but I still do not fully grasp this fallacy. Let me try to recap:

If the window was never broken, the shopkeeper would have money available to other outlets (movies, fine dining, etc.) and would still have an intact window (not having to incur the expense of damages). However, if the brick goes through the window, the shopkeeper must pay the glazier to replace the window. But now the glazier goes and spend the money on other outlets just like the shopkeeper would have, so the only net difference is the window is intact? Sorry if this is confusing, I'm just trying to understand this concept more completely.

Doug Reich said...

Daniel,

Yes, that is right. At best, there is no net difference from the point of view of the "economy".

The glazier is better off since the shopkeeper bought a window from him and increased his business revenue. However, the shopkeeper is worse off since he has less money to spend on other things like expanding his own business or movies, restaurants, etc.

Therefore, there is no net gain to the overall economy as a result - only a benefit to the glazier at the expense of the shopkeeper.

The fallacy explained by this parable is exactly the one committed by those who advocate "make work" schemes and stimulus among many other examples. Hazlitt's book analyzes over a dozen examples.

Let me add one other item briefly. I said this is "at best" a zero sum game because in most cases, such schemes are profoundly destructive.

For example, if the government robs a taxpayer who would have invested the money, and then spends it on consumption - the result is destruction. If the money had been saved and used as capital investment, it could have been used to fund say research into new life saving medicines or some other enhancement which would improve people's lives and increase real wages by increasing productivity. Instead, the government simply consumes the money or actually spends it on something destructive like paying the salaries of EPA employees or IRS agents who destroy private business or loot the savings of others.

The same is true when the government borrows from bond investors. In the absence of government bond offerings, the investors would have invested in say corporate bonds or some other productive form of investment. Instead, these government borrowings "crowd out" private investment and siphon it into unproductive government consumption.

Let me know if this answered your question. Thanks again for the comment.

Anon. said...

Doug,

Thanks for your quick response. I am beginning to grasp this more clearly, however I have a follow up question. You said:

"At best, there is no net difference from the point of view of the "economy".

But isn't there a negative difference in all cases? If the window is never broken, the shopkeeper can spend elsewhere and have an intact window. However, if the brick goes through it, the spending the glazier does is the only positive. Aren't there 2 positive aspects (consumption & an intact window from the shopkeeper) vs. 1 (only consumption from the glazier)?

Maybe that's what you meant when you said that the broken window fallacy "is "at best" a zero sum game because in most cases, such schemes are profoundly destructive", but isn't it destructive every time (seen from my example above)?

Thanks for your patience,

Daniel R.

Doug Reich said...

Daniel,

No problem at all. Thanks for your good questions.

Consider a really contrived example.

Let's say Peter was going to buy a candy bar. Along comes Paul who steals his money (or better yet, say the IRS takes it from Peter and gives it to Paul). Now, say Paul goes and buys the very same candy bar.

In essence, you could say this is a zero sum game from an economic perspective. Of course, a profound evil has also taken place, but let's leave the implications of that alone for now.

In the original case that you cite, I tend to agree that it is destructive and not just a zero sum game. Let's take an extreme example and say that no windows ever get broken because there is no crime. In that case, we would not need glass makers. Far from being "bad" for the economy, in reality this is great. People could devote their spending and saving to other enterprises that are more productive and life serving than repairing broken glass. In effect, maybe the glass maker would find employment researching drugs or making computers faster.

Consider the example of war which is our example on steroids. Is massive destruction of buildings and infrastructure "good" for an economy since it will have to be rebuilt? This argument is made constantly and was, in fact, most recently made by Sen. Harry Reid when he argued that "green jobs" would result from having to retrofit buildings to comply with cap and trade regulations - which he regards as a positive! Of course it is not as you have observed.

Spending time, labor, and capital devoted to doing something such as rebuilding a house that does not need to be rebuilt sucks time, energy, and capital away from other possible activities.

What Obama and Harry Reid literally believe is that if we knock down a building, break glass, pass environmental regulations that force "retrofitting" it will all be "good" for the economy because it creates work for someone to do. This view shows utter ignorance of the role of capital and production in an economy.

The more we can do with less effort, the higher our standard of living. Generationa ago, people had to spend most of their life devoted to the problem of food. That left little time for scientific research, art, or leisure. If we only have to spend 1 hour of a work per week devoted to food, we now have time to fulfil all sorts of other human desires in myriad different fields of endeavor. This process increases "real wages" by making things cheaper in real terms. Food is a lot cheaper now in real terms than it was. Computers are faster and cheaper, etc.

Getting on a ramble but hopefully this helped. Please write back with more follow up if I'm missing something.

Doug

Anon. said...

Doug,

I believe I understand it now. I guess I was assuming that in every case there is a window to be broken and I was allowing that to get in the way of the true issue Bastiat was trying to articulate: the misuse of capital and its unseen consequences. Thanks for your time.

Anon. said...

I have one more question (maybe!). When you said the broken window fallacy is a "zero sum game from an economic perspective", isn't it considered a zero-sum game only if the glass-maker's work is equal to the amount that the shopkeeper buys (movies, dinner, etc.)? Aren't they to be categorized as two different categories of economic "progress" (I couldn't find a better word to convey what I'm trying to say)? Removing the moral element for a second, wouldn't someone say that giving that person a job is more important for the economy than having the shopkeeper buy stuff? I'm just trying to make sure I know thing inside-and-out in case I ever get into a debate with someone about it. Thanks again.

Daniel

Doug Reich said...

Daniel,

I think I get the gist of your question but let me know if I do not. I think you are saying is there a difference in "category" between (a) the revenue that goes to the glass maker (as a result of the broken) window which enables his employment and (b) the economic activity generated from the shopkeeper otherwise spending the money at a movie theater, dinner, etc.?

I think you might be trying to distinguish the "employment" of the glass maker from the potential purchases made by the shopkeeper.

There really is no difference. The revenue to the glass maker does allow him to stay employed but the correspondingly reduced revenue to the movie theater or restaurant means less employment for them. Perhaps, if glass was never needed, and more money could be spent at the movies or at restaurants, the now unemployed glass maker could find work at the movie theater or restaurant.

In the short run, this change in the composition of consumer spending does affect particular businesses differently. The glass maker might be more or less happy than the movie theater owner depending on how the money is spent. But, in aggregate and in the long run, there is no difference to the economy.

As I pointed out in the past comments, there would be a difference if the composition of the spending is not consumer spending but capital spending (for all the reasons I gave before). This is even more of an argument for trying to limit consumption (on stupid things like junked cars and the like) and encouraging saving. For example, if the shopkeeper didn't buy glass AND didn't consume the extra money but instead saved it - then it becomes capital to be used for more productive purposes. We are assuming in this example, that he either spends the money on repairing his glass or he spends it somewhere else.

Let me know if that helps.

Doug

Anonymous said...

"But, in aggregate and in the long run, there is no difference to the economy."

If there is no difference, then why bring up the broken window fallacy in the first place?

Steve F.