By Amity Shlaes
On his blog at the New York Times, Paul Krugman recently evoked the "Broken Window" parable to illustrate the merits of government spending in bad times.
Krugman contends that such spending generates economic activity that otherwise wouldn't occur, and thus creates growth. President Barack Obama essentially endorsed the same idea in the jobs plan he announced last week. CNBC's Larry Kudlow, among others, makes the contrary case, that such spending reallocates economic activity to less efficient areas, thereby slowing growth.
This month, we mark an anniversary for the philosopher who first articulated the Broken Window concept -- and a few other suddenly relevant economic ideas.
The anniversary is that of a desperate trip to Paris made in September 1850 by a French politician and economist with an unshakeable cough named Frederic Bastiat. France was a republic -- that month. But for more than half a century, the country had lurched from revolution to republic to coup or revolution again. By 1850, many Frenchmen believed that, economically and politically, their country had only two choices.
The first was anarchy and guillotines. The second was an authoritarian government, preferably led by someone named Napoleon, whose job was to keep the streets quiet by playing the hero and handing out bribes, directly or indirectly, to businesses, farmers and public officials. Government spending was the necessary tool of such a system.
There was a third way, Bastiat argued to officials, legislators and anyone else who would listen in Paris that September: smaller government, more freedom for individuals, and fewer grants to interest groups. That might yield a more stable economy and so a more stable France.
Bastiat got precisely nowhere; the president, Louis Napoleon, mounted a successful coup the next year. And today Bastiat himself is scarcely discussed. People skip over him because they are unsure how to pronounce his name (it's "Bast-ee-YA") or confuse him with Basquiat, the 1980s graffiti artist. Besides, Bastiat lived long ago, in the era of candlesticks.
Still, he's worth going back to. His old ideas actually resemble candles, shining so brightly they help us sort out murky proposals made today.
In the summer of 1850, just before going to Paris, Bastiat laid out the now-famous parable. Disaster happens. A thief breaks a man's window, or a storm does. The man has to pay the glazier to fix it. The glazier spends his money at the store. When enough windows are smashed, voila: a visible benefit, new jobs for the glass industry.
True enough, noted Bastiat. The window replacement is what is seen. What about that which is not seen? "Since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library."
The same holds for a government: when it repairs windows -- cleans up hurricane damage -- it is not using the same money for other causes that might be more worthy, such as reducing government debt or taxes.
"What Is Seen and What is Not Seen" was how Bastiat titled his essay. The corollary "not seen" today is all the businesses that can't be started because of taxes or regulatory and legal uncertainty. The corporate-tax cut that the president proposed would benefit those unseen businesses or individuals.
Another debate raging today is over the role of law and lawsuits in recovery. The suit brought by the Federal Housing Finance Agency against banks over the value of mortgage-backed securities sold to Fannie Mae and Freddie Mac is one example. Will it spur future growth by meting out justice and discouraging dishonesty, or will the legal action merely bog the economy down?
Bastiat noted that over time laws and lawsuits come to accrue more importance than the people and activities they govern. That was exactly backward, he opined in his treatise "The Law."
"Life, liberty and property do not exist because men have made laws," Bastiat said. "On the contrary, it was the fact that life, liberty and property existed beforehand that caused men to make laws in the first place." The perversity was that laws often legalize plunder, or "spoliation," as Bastiat put it. Laws take from someone, and give to someone else, even though this was not always the intention of their authors. Such plunder could hurt an economy by reallocating resources from productive areas to ones that were politically rewarding.
The most obvious example of legal plunder is taxes. Others that Bastiat listed: "benefits, subsidies, encouragements ... public schools, guaranteed jobs, guaranteed profits, minimum wages, a right to relief, a right to the tools of labor, free credit."
This all sounds familiar. Benefits: think of proposals to lower Social Security payments, which plunder future generations who must pay for this year’s payroll-tax holidays. Subsidies and guaranteed jobs: think of expanded federal infrastructure spending, which sustains the construction industry. Another form of legal plunder is military spending, which my last column described as a lesser evil. Bastiat mocked the argument:
"If there is a national profit in increasing the size of the army, why not call the whole male population of the country to the colors?"
These outlays all amount to plunder because they replace the invisible hand of the market with the hand of the state, and place political goals ahead of productive ones.
The Paris campaign in 1850 proved to be Bastiat's last; tuberculosis killed him in December. Still his candle of insight illuminates our troubles as no current politicians' ideas seem to. Bastiat for president in 2012.
(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg View columnist. The opinions expressed are her own.)
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-0- Sep/12/2011 18:51 GMT