Government’s Broken Windows

Mark Green
Posted October 27, 2014

Ever heard of the broken window fallacy? In economic circles, it’s a common parable used to dismiss arguments that damage – like the breaking of a window – has a silver lining: spending to fix the window boosts the window repairman, which boosts the folks who make panes of glass and so forth.

In this video below, John Stoessel uses the broken window illustration to make a point about government spending and about those who claim that more of that kind of spending is better. After all, it creates jobs and stimulates the economy, right? Stoessel:

Yet, that argument (and the one depicted in the broken window parable) misses a big unseen – there’s no free lunch in spending to repair or rebuild property. The money comes from somewhere. As Stoessel explains, the person who must buy a new window spends money he or she might have invested or spent elsewhere in the economy, with greater economic impact. Likewise with government spending. Those dollars came from taxpayers who might have invested or spent elsewhere in the economy, with greater economic impact.

We say all of this because another common argument being heard is that tossing bricks of energy regulation will invigorate the energy sector.

EPA Administrator Gina McCarthy, lauding the agency’s Clean Power Plan in a speech at Georgetown University last week, said environmental regulation has sparked innovation:

“That same success story that involves science as well as innovation has been repeated over and over through the history of EPA over the past 40 years as we’ve tackled the most pressing environmental challenges in ways that have sparked American ingenuity. … We can turn that (climate change) challenge into a tremendous opportunity, an opportunity to reinvigorate the way we make and use energy …”

Similarly, Interior Secretary Sally Jewell at the Capitol Hill Ocean Week event earlier this year:

“… I will tell you as a business person that regulation is important because regulation inspires innovation and creativity.”

We get their argument: Government regulation has driven the private sector to develop systems and technologies. Catalytic converters in vehicles have helped make the air cleaner. Yet, regulation that ensures basic health and safety is one thing. To suggest that it should function as part of a centrally planned economy goes a little too far.

Indeed, asserting that regulation spurs innovation – with the implication that economic growth follows – sidesteps the unseen. When government directs the spending via regulation, what other innovations and economic activities are being lost? When government decides to pick winners and losers, innovations that are better politically often beat out those that are better technologically. Regulation can impose costs that reduce outlays companies otherwise could have made in research, hiring, or greater energy production – including new greenhouse gas-mitigating technologies.

That’s what energy companies do. The oil and natural gas industry supports 9.8 million jobs, with employment in exploration and production growing 40 times faster than total U.S. private sector employment from 2007 through the end of 2012, according to the U.S. Energy Information Administration – even as it is reducing emissions of carbon dioxide and methane. Growth and progress are made possible by private innovation.

Indeed, that’s the power of private investment and of the market, with companies innovating and  investing in safer drilling, in further unlocking shale energy and in exploring deeper offshore – because oil and natural gas lead the energy mix that fuels our economy now and will in the future, making modern living possible.

Regulation also can distort private markets and impact private investment. That’s the case with the Renewable Fuel Standard (RFS). The program’s command-and-control approach to ever-increasing ethanol use in the fuel supply attempts to artificially create a market before there’s consumer demand for one. The RFS is an example of a market intervention that has risk for consumers and the broader economy.

The larger point here is a fundamental question about choice and the best path to dynamic economic growth:  Who controls how money is spent: Americans, as they exercise choice in the private market and that market moves to serve them, or the government? We choose you.