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

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.

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