Yesterday, Washington Post blogger Ezra Klein presented his readers with a parable of a broken window:
When Tom Coburn and John McCain released their list of wasteful stimulus projects, the first item was “$554,763 for the Forest Service to replace windows in a closed visitor center at Mount St. Helens.” Assuming the description is right, it seems dumb, right? Why does a closed service center need new windows?
But from the point of view of stimulus, that project wasn’t wasteful at all: We paid people to replace windows, we paid window-makers to produce glass, and we put $554,763 of new demand into an economy that was operating far below its potential.
Klein’s story, however, stops short of it’s natural conclusion. 19th Century classical liberal theorist Frederic Bastiat told a similar story, although much more completely. Bastiat traced out the full story in his essay Ce qu’on voit et ce qu’on ne voit pas, meaning “That which is seen and that which is unseen.”
In Bastiat’s parable of the broken window, a shopkeeper’s window is broken by a young hoodlum. He hires a glazier, who receives six francs (<$554,763, even when adjusted for inflation…) of business. The glazier is gainfully employed and six francs richer and the shopkeeper has a new window. However, Bastiat goes on to note that the shopkeeper has six francs less to spend on shoes, books, or other forms of valuable consumption. Consumption and employment are not increased, but merely diverted to a different use.
In the case of the government, public works mean taxation. Every dollar that the government spends must be financed through present or future taxation, or inflation, a particularly dangerous and inefficient form of taxation. The belief that government can solve the unemployment problem by spending is one of the most famous economic fallacies.