The broken window.

I have to credit a friend from college with pointing this out:

Here’s President Obama on the stimulus, from his 2010 State of the Union Address:

The plan that has made all of this possible, from the tax cuts to the jobs, is the Recovery Act. That’s right -– the Recovery Act, also known as the stimulus bill. Economists on the left and the right say this bill has helped save jobs and avert disaster. But you don’t have to take their word for it. Talk to the small business in Phoenix that will triple its workforce because of the Recovery Act. Talk to the window manufacturer in Philadelphia who said he used to be skeptical about the Recovery Act, until he had to add two more work shifts just because of the business it created. [Emphasis added.]

Why add the emphasis?

Once upon a time, a long time ago, a French legislator and economist named Frédéric Bastiat wrote a book called That Which Is Seen and That Which Is Unseen. In it he describes the “broken window fallacy,” which goes something like this:

The town shopkeeper’s son breaks a window at the shop. The shopkeeper pays ten bucks to a glazier to fix it. The glazier now has ten bucks that he wants to spend on a shirt. So he buys a ten dollar shirt form a haberdasher. Now the haberdasher has ten bucks he wants to spend on food. And so on and so forth. All kinds of economic activity was triggered by a little boy breaking some glass, which turns out to have been a good thing for the town.

This fallacy is very well known in economics circles. The problem lies in forgetting that if the window hadn’t been broken, the shopkeeper would’ve had an intact window and ten dollars to spend as he pleased. Whatever economic activity might follow the breaking of the window (which Bastiat called “the seen”), the value is ten dollars lower than that of the economic activity that would have occurred if the window hadn’t been broken (which Bastiat called “the unseen”).

To generalize, the broken window fallacy is the failure to recognize that there is a cost to diverting resources away from their most productive and/or desired uses.

(There is a far more rock-solid defense of Bastiat’s argument, but I’m trying to keep this blog-length. For a longer explanation, here’s a Wikipedia entry, and Bastiat’s book is linked above. For an even better understanding of why Bastiat’s argument holds, take a really, really good econ course.)

Politicians often commit a form of the broken window fallacy when they claim that their tax-funded projects and programs are good for the economy, but they ignore the costs of those programs. I don’t mean the dollar costs of those programs, I mean the opportunity costs of those programs–how would people have spent their money if it hadn’t been taxed away? That forgone spending is the true cost of any tax-funded project or program.

So, good for that Philadelphian window manufacturer whose business has picked up due to the stimulus. But those stimulus dollars came from somewhere, and one way or another the taxpayers are picking up the cost. Who knows how, given the choice, they would have spent their money? I don’t know, but I’m pretty certain it wouldn’t be making windows in Philly.

This is not to suggest that President Obama is unique in making this mistake. He isn’t–he just happens to be the one who committed the broken window fallacy by actually referring to a window manufacturer. And with a post-stimulus unemployment rate higher than the President’s budgeteers predicted in a worst-case, non-stimulus scenario, one must wonder if taxpayers would spend their money more efficiently and productively on their own.

I am ashamed to admit that I didn’t catch the irony the first time I heard the speech.