BrianGarst.com

Obama’s got the economic chicken little routine down pat, and he’s not even president yet.  We are being told every day that if we don’t act immediately with all kinds of big government programs and spending, the economy is doomed.  Not quite.

Chief among Obama’s promises is that he’ll “create or save” millions of jobs (the exact figure fluctuates).  This is fallacious economics.  Obama, like the newspapers that unquestionably regurgitate his statements, is committing one of the most common fallacies of economics: the broken window fallacy.

French economist Frédéric Bastiat described this fallacy of thinking in his classic 1848 essay on What Is Seen and What Is Not Seen.

Have you ever been witness to the fury of that solid citizen, James Goodfellow, when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: “It’s an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?”

Now, this formula of condolence contains a whole theory that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions.

Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs’ worth of encouragement to the aforesaid industry, I agree. I do not contest it in any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.

But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.

It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.

Let us next consider industry in general. The window having been broken, the glass industry gets six francs’ worth of encouragement; that is what is seen.

If the window had not been broken, the shoe industry (or some other) would have received six francs’ worth of encouragement; that is what is not seen.

The same principle applies to government spending.  In order to fund these job creation programs, money must first be taken out of the economy either by taxes or borrowing.  What is seen are the people put to work doing some activity, productive or not, that government pays them to do.  What is not seen are the people that could not be hired in the private sector because there was less capital available.  The outcome is not job creation, but job shuffling.  Jobs will move out of politically unfavored industries (most everything) and into favored industries (green, alternative fuel, etc.).

So on first analysis, the outcome would be no net change.  But it’s actually worse than that.  There is a cost to transferring this wealth.  Tax collectors must be paid, while big bureaucracies will be created to administer these programs.  This is a productive loss to the economy, so the net effect of Obama-style stimulus is actually negative.

Of course, Obama has made sure to word his promises such that they cannot be falsified by events.  Because he says that he will create or save jobs, actual employment figures can never prove him wrong.  Whatever happens, he can just claim that, had he not acted, it would have been worse.

Barack Obama Frédéric Bastiat