The Broken Window Fallacy is ALWAYS a Fallacy

I just happened upon an article by Professor Paul Krugman, who moonlights as an op-ed columnist for the Times.  Generally, I don’t agree with Professor Krugman all that often, and today appears to be no exception.

Krugman has written an article about Obama’s recent decision to scrap the new EPA air quality regulations.  These regulations would have forced businesses to become compliant with a stricter set of regulations.  The green groups, unsurprisingly, are ticked off at Obama’s decidedly political move, and the Republicans are happy with what they perceive as a victory.  I agree that regulation kills job, on the whole, although I would guess that I probably feel that way for different reasons than most Republicans do.

Krugman makes the argument (see link below) that, given the scenario today, Frederic Bastiat’s Broken Window Fallacy suddenly ceases to be a fallacy.  For those readers who are new to the idea of the broken window, I will give you a quick run-down.  Let’s say that a boy breaks a shopkeeper’s window.  That shopkeeper is forced to replace the glass, and this gives business to the glazier.  One might argue that this improves the economy because it gives money and work to the glazier.  According to Bastiat, this is what is seen.

However, what is not seen is that the money that has gone to replace this broken window may not be spent elsewhere.  For example, it is possible that the shopkeeper also wanted to buy a new suit or replace something else in his shop.  Had the window not been broken, the man would have had the benefit of both the window and the money or whatever else he chose to purchase with that money.  With a broken window, the shopkeeper would only receive the benefit of the new pane of glass, and therefore the shopkeeper derives less benefit.  We can also see that other shops or industries have been deprived of possible business from that shopkeeper.  Pretty simple, right?

Apparently, Krugman thinks that, because we’re in a recession, the laws of economics can somehow change or be suspended.  He makes the argument that, because firms would have to replace obsolete equipment, this would generate new jobs.  I suppose he’s right, in the sense that it creates new jobs for those individuals who have to replace the equipment.  However, there are other factors to consider.

The first is, in my opinion, the most important question: what will it cost for these firms to become compliant with the new standards?  Is it possible that, in order to comply, the firm would have to reduce staff, wages, etc.?  Is it possible that the firm would be unable to comply and, faced with noncompliance, be forced to pay fines or close its doors?  If the firms in question cannot afford to comply with the new standards, it seems silly to think that the regulations would do anything except create more paperwork for the government firms in charge of their oversight.  I can’t see how this would create private sector jobs.

Now, one might make the argument that many of the firms being forced into compliance are large firms that could certainly afford it.  That may be true.  One also must take into consideration the possibility that, if we regulate even larger companies too much, that they will simply elect to set up shop in countries where the regulations are less stringent.  Another issue that we need to look at is, if the smaller firms are forced to shut down, we are left only with the larger companies.  In this scenario, not only are jobs lost, but customers lose choice in the marketplace for whatever those products or services provided may be.  If the government regulates so stringently that only the wealthiest companies are allowed to stay in operation, it seems rather ridiculous to keep throwing around the term “free market.”

I suppose I can understand where Professor Krugman gets the idea that more regulation might be good for the economy, but to my mind, it just doesn’t make sense.  It has been my own experience that government regulation tends to disproportionately harm small businesses.  And unfortunately, this also hurts the consumer.

Please don’t misunderstand and think that I’m in favor of pollution and dirty water and air.  It would be silly to accuse anyone to prefer a dirty environment to a clean one.  However, I don’t believe that legislating businesses to death is going to accomplish much, in terms of economic revival and job creation.  Krugman’s idea that regulation can result in job growth seems like it might have been sitting out under a depleted section of the ozone – half-baked.

Check out the article here: “Broken Windows, Ozone, and Jobs”