Green Jobs and the Broken Window Fallacy

“Green jobs”, the idea that spending tax payer money on alternative energy research and development will be a boon to the economy because it will create many new jobs. We’re hearing about “green jobs” a lot these days, mostly from politician and global-warming activists. The problem is that the idea that these "green jobs" will benefit the economy is just another version of the Broken Window Fallacy and that the added jobs would not be a boon at all.

The Broken Window Fallacy comes in the form of a parable that goes something like this: A girl breaks the window of a baker’s shop with a stone. At first everyone thinks this is a bad thing but after some time they see that the baker, to fix the window, employ’s a window maker to make a new window for the shop. The window maker then proceeds to spend some of her unexpected earnings on bread from the baker, as well as other places around the town. The baker thus gets some of her money back and the other people that have benefited from the window maker’s purchases then spend their extra money on their own needs...and so on. In effect, the people see that the small bit of destruction caused by the girl has ended up as a stimulus to the local economy. The fallacious conclusion is that the destructive act of breaking the window was good for the economy.

Why is this a fallacious conclusion?

Because the people do not see the costs that have been incurred. It is easy to see the benefit but hard to see the costs. In the case of the parable, the costs come from the baker having to spend money she would have spent elsewhere (on supplies, or advertising, or a new cash register) just to put her shop back into its original state. The money she would have spent elsewhere would also have stimulated the local economy, to the same extent that employing the window maker has stimulated the economy. And, what’s more, she now doesn't get any new benefit from the money she’s spent. When everything is said and done, the economy around her comes out even but she’s out the intrinsic value of the stuff she didn't get to buy – which just happens to be equal in value to a new window. So, the total change in value within the local economy due to the breaking of the window is negative – by the cost of a new window.

How does this apply to “Green Jobs”? Well, spending money on alternative energy R&D will create jobs, just like spending money on just about anything would. But because of the hidden costs, the net change to the total value of the economy will be negative. The money for every “green job” must come from somewhere and because we are talking about government sponsored “green jobs” the money comes from us in the form of extra taxes that we will have to pay. In essence, the value associate with the “green job” is being taken from us (just as if we had to pay a window maker) and we have less money to spend on other things. Then realize that our buying these other things would have created jobs as well -- which would have made up for the “green jobs” that weren't created -– and we have a situation that’s much like the Broken Window Fallacy parable. Everything is even except that we are now out the value of what we would have bought with the taxes we had to pay –- a net negative to the economy.

But, you object, no windows have been broken? Doesn't something have to be destroyed for the Broken Window Fallacy to apply? No, the fallacy concerns the act of only counting the benefits and not counting the less tangible costs. The cost doesn't have to be due to pure destruction, it can also be due to a loss of efficiency. The taxes one pays are the equivalent of a broken window except that there is generally some benefit returned in the form of a government service (paved and lit streets and sidewalks for example). The problem is that the value of the returned benefit is usually a fraction of the taxes paid. This is because, and you should not be too shocked to learn, Governments spend a big percentage of their revenues on things that don't benefit the taxpayer much. And even when the government does spend your tax money on something that may be of value to you, it will invariably do so in a very inefficient way. In terms of the Broken Window Fallacy, the benefit you get back from your tax payment is the equivalent of having the girl who broke your window give you back a candy bar -- it falls far short of what you would have bought otherwise. The net effect on the value of the economy is negative. So, it’s possible we may see some benefit as a result of these “green jobs” (which would come in the form of cheaper energy) which could make up some for our tax loss but it will not equal the value we missed out on and will have a net negative effect on the economy. Claims to the contrary are wrong.

Now, one could argue that in the long run government paid for R&D will produce knowledge that could result in new and/or more efficient industries and that therefore “green” R&D should be done (I wouldn't argue this). Or, maybe you could argue that we need to develop alternative fuels for strategic reasons (I might go for this). But what you can't do without running afoul of the Broken Window Fallacy is argue that the “green job” paid for with taxes in-and-of-themselves will be a net positive for the economy.
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