Looking at Obama's "Green Jobs" Through a Broken Window
posted by Doug Reich @ 5:50 PM
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. As a result, someone might advise routinely burning the entire town to the ground to "help" the economy. Sound familiar? Isn't this the argument at the base of the claim that World War II helped end the Depression? 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":
Later, he discusses a brilliant idea that could literally "employ" millions:
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.
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. As a result, someone might advise routinely burning the entire town to the ground to "help" the economy. Sound familiar? Isn't this the argument at the base of the claim that World War II helped end the Depression? 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.
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Comment from Daniel Rigby:
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.
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.
To explain a bit further, money is best spent (for the economy as a whole) on trying to progress in efficiency and production. The goal is to have more for cheaper. Spending money on items that don't progress the economy (reparations or zero product jobs etc) doesn't necessarily hurt the economy because it is turned around and spent somewhere else. However, the money could continuously circulate these non-producing jobs and never go anywhere useful which occurs more often with more non-producing jobs available. The more money that actually reaches researching jobs or technology companies etc. the better our economy gets. It's not about this one man and this one broken window, it's the idea that this is an example within the whole society thereby representing where much of the money is spent. Where is the money spent by the glass maker? On his broken car?
To progress we need to spend money on research and development. For example, cell phones (which increase productivity of everyone), computer software, biomedical devices, agricultural technology, pharmaceuticals, etc. Buying a TV helps that company develop cheaper and more efficient and higher quality TVs. Buying a new car helps that company research fuel efficiency to make them cheaper and better. As these items get cheaper, more of them can be bought. Then more money left over can be spent on... computers! Which also increase worker efficiency and productivity etc.
So overall, the point is that the money was spent on something with no net gain for society in this case and this case is just a demonstration of what happens as a whole over and over again.
To progress we need to spend money on research and development. For example, cell phones (which increase productivity of everyone), computer software, biomedical devices, agricultural technology, pharmaceuticals, etc. Buying a TV helps that company develop cheaper and more efficient and higher quality TVs. Buying a new car helps that company research fuel efficiency to make them cheaper and better. As these items get cheaper, more of them can be bought. Then more money left over can be spent on... computers! Which also increase worker efficiency and productivity etc.
So overall, the point is that the money was spent on something with no net gain for society in this case and this case is just a demonstration of what happens as a whole over and over again.
Comment posted by 
: 9/15/09 4:08 PM
: 9/15/09 4:08 PM
Thank you for this post. The broken window makes an apt example of this principle. When I first heard that Obama was in the business, shall we say, of job creation, I could not stop thinking of the phrases "Start decontrolling" and "Get out of my way" from Atlas Shrugged. Repeating these solutions feels as obvious as telling someone with a bleeding fist to release the shard of glass in his palm, and yet ... I also find the need frustrating to follow job creation, or welfare increase, or stimulus check politico brawls (even though I do consider it, as a citizen affected by these matters, a definite need) when you know that similar entanglements will continue to manifest time after time until people accept that goverment is not the practical dean of economy.
You are not entirely correct in your concept. When we become overly efficient, as we are becoming today, employers and more importantly corporations expect more from us. Take the current economic crisis for example. We are actually experiencing positive growth, however, we are also experiencing a rise in unemployment. This is because we are asked to do more for our jobs to be "more productive" and efficient. This increased in efficiency translates into the reduced need for my employer to hire another person that was fired last year.
As we become more productive, we eventually out produce our ability to buy. This creates a bubble in whatever market of goods or services you want to this theory to apply. The problem is the "wealth" we are creating is mainly going into the corporations hands.
Don't get me wrong, I believe in capitalism to an extend. However, if you look at the statistics, the middle class is growing and also moving further away from the most wealthy. This disproves the notion that wealth is distributed to even the most valuable workers.
In order to rectify this inherent problem of capitalism, we need to provide more social services for people in our country. No, I dont want absolute wealth distribution, but European countries get along fine and if you have visited, you would also know they are advanced.
So, we cannot just say the broken window principle is correct. Additionally, all of the money we spend on bailing out corporations is ridiculous. That money should be spent on America, and not elsewhere.
As we become more productive, we eventually out produce our ability to buy. This creates a bubble in whatever market of goods or services you want to this theory to apply. The problem is the "wealth" we are creating is mainly going into the corporations hands.
Don't get me wrong, I believe in capitalism to an extend. However, if you look at the statistics, the middle class is growing and also moving further away from the most wealthy. This disproves the notion that wealth is distributed to even the most valuable workers.
In order to rectify this inherent problem of capitalism, we need to provide more social services for people in our country. No, I dont want absolute wealth distribution, but European countries get along fine and if you have visited, you would also know they are advanced.
So, we cannot just say the broken window principle is correct. Additionally, all of the money we spend on bailing out corporations is ridiculous. That money should be spent on America, and not elsewhere.
Comment posted by : 11/20/09 8:35 PM
: 11/20/09 8:35 PM
Anon, it is ironical that you commit the broken-window fallacy in your comment by thinking that the government can "buy" without reducing some tax-payer's or debt-holder's ability to buy. More fundamentally, production is buying power. Your comment on the great European countries reminded me about this graph that shows Europe is in in a decline, compared to the U.S.
I love seeing this fallacy! I use it, too. I think that Bastiat called it "The Seen vs. The Unseen". Good work!
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