The stimulus package won’t stimulate the economy because it won’t create real demand. It will create artificial demand where none would naturally exist and it will draw resources from areas of real demand to pay for it. A allegory that helps us understand what is meant by this is the “Broken Window Fallacy” by Frédéric Bastiat in his 1850 essay Ce qu’on voit et ce qu’on ne voit pas (That Which Is Seen and That Which Is Unseen).
Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—”It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”
Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.
If breaking windows stimulated the economy by increasing the velocity of money and by putting glaziers to work, the answer to recessions would be to break windows and have the government pay to replace them. It wouldn’t work, of course, because there would be no real demand for new windows. The demand artificially created by throwing bricks through windows simply displaces other demand. In any case, why break the windows at all? If creating work is the goal, you wouldn’t actually have to go to the trouble of breaking them. Just mandating that they be replaced would be adequate. What the Democrats are doing is the same thing. Of course, they attempt to make it less obvious.
The stimulus bill replaces 600,000 government automobiles with new, “greener” cars. The demand for new vehicles doesn’t actually exist because the 600,000 cars now in service are still functional. Replacing serviceable automobiles is no different than replacing a window that was serviceable. Designating the replacement autos “green” has the same distracting effect as actually breaking the window as opposed to simply mandating its replacement. It makes the current state seem unservicable. The law passed in the stimulus package creates artificial demand but it adds nothing to the overall wealth of the nation. Sure, it helps the auto makers in the same way that a broken window helps the glazier but, as in the case of the window, somebody is going to have to give something up to pay the bill.
That somebody is our children and grandchildren. The money being used to buy the 600,000 autos will either be paid with debt that must be paid later with interest or the bill will be paid for with inflation created by the printing of money today. Buying 600,000 autos that are not needed is a net negative for the economy and is essentially the equivalent of a brick thrown through the American window.