Once, as a kid, a friend of mine was littering the street. He said it was ok because he was “generating work” for the city’s street cleaners. Another time, in the midst of the 2001 recession, an acquaintance urged me to go on a Thanksgiving shopping spree on the grounds that “it would be good for the economy”.
I’m sure you have heard arguments like this before, oftentimes to justify acts of destruction or wasteful behavior. Although I am sure that some people who use this rationalization have never thought about the meaning of it, this argument is so ubiquitous and so deeply flawed, that I can’t help writing a few paragraphs to help clarify things.
Let’s take a very clear and simple example. Suppose that the government hires 100 unemployed people to dig holes in the middle of the desert. This project will create jobs. It will also contribute to GDP growth, since the workers will eventually spend their money on goods and services. On the other hand, the project is perfectly useless: digging a pointless hole does not increase anybody’s wealth or well-being.
“How about the workers? They got a job!” somebody will say. Yes, but by having those people digging holes in the desert we are keeping them from doing things which actually have some value: they could have been making clothespins in a factory; driving cabs in the city; baking cookies at home; or bathing their kids at home. Any of these alternative activities produces a good or service with economic value. Digging holes in the desert does not.
We can look at it from a public finance perspective too: the tax revenues that the government spent to pay those workers could have been used to produce something that people actually use. For example, to repair a road or to build a park.
The “it’s-good-for-the-economy” fallacy that I am describing was first pointed out by the French economist Frédéric Bastiat, who created the “broken window” parable in 1850. In this parable, a boy breaks a window. His father bursts in anger because he will have to spend six francs to repair it. His neighbors console him by arguing that the mishap will actually be good because it will generate business for the glazier, who will repair the window.
Bastiat proceeds to write that the fallacy comes from not being aware of “what is not seen”. In less cryptic words, from the failure to realize that the father could have done something else with his six francs if the boy had not broken the window. These “hidden” costs are called opportunity costs by economists.
Individuals and businesses, as well as the government, often ignore the opportunity cost of their actions. I once had a roommate who used to say that leaving the lights on all day, even when there was plenty of sunlight, was “good for the economy” and that it “helped to create jobs”. Maybe he helped boost ComEd’s profit, but my roommate could have turned off the light, saved some money on electricity, and used it to buy himself something he actually wanted, like a trip to San Francisco: he would still have “helped the economy” and he would have enjoyed himself a lot more on vacation than staring at the light bulb.
Notice that some of the opportunity costs I have mentioned do not have any market value. Making cookies at home and bathing your child satisfy some want, and therefore contribute to economic well-being, even though they are not market goods and do not add to GDP. On the other hand, digging holes in the desert or leaving the lights on all day do not satisfy any want, but they do add to GDP. This leads us to the conclusion that not everything that adds to GDP is “good for the economy” (or at least for economic well-being). But this should be the topic of a blog entry of its own.
Beware of anybody using the phrase “it’ll be good for the economy”. Chances are they’d be happy to break your windows.
Bastiat, broken window, opportunity cost, good for the economy