Archive for December, 2009

Can we retrofit our way to prosperity? Obama and the broken window fallacy

Wednesday, December 16th, 2009

The media’s review of President Obama’s recent visit to a Home Depot store focused on him referring to energy efficiency as “sexy.”  What I found far more interesting was the president’s embrace of a simplistic yet dangerous economic principal known as the broken window fallacy.

The broken window fallacy says you can generate economic growth by destroying property.  If someone breaks your window, you must buy a new window, have it installed, and maybe even pay someone to clean up the mess.  All of these actions generate economic activity and income for certain people.  But the fallacy of this analysis is that it ignores the destruction of wealth: if not for the broken window you could have used that money for a far more productive endeavor, which would have generated economic growth and also left you better off.

According to Politico44, Obama said  “The simple act of retro-fitting is one of the fastest, easiest and cheapest things we can do to put Americans back to work while saving money and reducing harmful emissions.”  While he doesn’t suggest smashing things just for the sake of rebuilding, doing unnecessary work to spur “growth” is just another version of the broken window fallacy.

If you think more insulation or retrofitting your house with new technology will be beneficial to you, then great.  But touting it as a means of putting Americans “back to work” temporarily is bad economics.  Money spent on make-work propositions gets diverted from productive endeavors that may actually lead to sustained economic growth.  If you want new windows, by all means get them.  But don’t break your windows for the good of the rest of us.

Can Government Create Jobs?

Tuesday, December 8th, 2009

Today’s Thomas Sowell column tackles a concept few politicians and MSM types seem to understand:  government can’t create jobs.  Sure, it can tax and borrow big bucks, using some of the proceeds for hiring government workers.  But productive jobs come from wealth, and government doesn’t create wealth; it redistributes it.  The more efficient private sector would likely create far more jobs than government if the latter didn’t extract so much money to pay for its schemes.  Government merely transfers workers from the private to public sector (with some no doubt lost in the shuffle) and takes credit for the jobs it “created.” Dr. Sowell notes FDR’s massive government jobs programs never put a dent in the unemployment rate.

Sowell continues that government makes hiring much more expensive with its many mandates on employers.  The health care bills being considered in Congress will send the cost of private sector hiring soaring.  Econ 101 teaches us that when you raise the price of something, people normally demand less of it.  This is no different for labor.  If government mandates make new workers cost more than they produce, a company won’t hire them.  And current employees who become a drag on profits will be fired.  If private sector workers become an endangered species as companies shrink, just who will be paying all those taxes to support an ever-expanding government payroll?