Suppose that a strong earthquake were to destroy a sizable part of a city. The rebuilding process would involve massive investment, procurement of materials and services, and employment. But can anyone believe that the local economy would be stronger than would have been the case had the earthquake never occurred?
Obviously not. But in the timeless mindset of the Beltway, earthquake-like policies that destroy the economic value of significant parts of the physical, human, and technological stock of capital can simply be replaced with centrally planned substitutes without any loss of wealth or economic growth. Seriously?
That is the “broken windows fallacy”: If a window is broken, the need to replace it will create business for the glass producers, employment for the repair personnel, and therefore an increase in economic activity. It is a fallacy for the obvious reason that the resources used to repair the broken window could have been used to produce something else, the loss of which is the “opportunity cost” of repairing the broken window.
One might assume that even herd-like Beltway thinking would recognize something so obvious. But one would be wrong, in particular in the context of energy policy, characterized by a decadeslong display of bipartisan broken-windows silliness.
President Bill Clinton, for example, once claimed, “Retrofitting 40% of the nation’s buildings in 40 years would create 625,000 sustained jobs.” President George W. Bush: “The energy bill makes an unprecedented commitment to … promoting alternative and renewable energy sources [and] needed investment in our energy infrastructure.” President Barack Obama: “New ways of producing and saving and distributing energy offer a unique opportunity to create millions of jobs for the American people [and] to build a new foundation for lasting growth.” President Joe Biden: “President Biden’s Inflation Reduction Act … has unleashed an investment and manufacturing boom in the United States.”
Let us translate those assertions. Federal politicians are unhappy with the energy sector investments, technological characteristics, and allocational outcomes driven by market forces. Or they believe that there is a political advantage to be had from a substitution of central planning. Perhaps both. Accordingly, they will attempt to use the federal budget and regulatory, tax, and other policies to force major changes in the energy sector.
That any such “transition” will be heavily politicized — no other outcome is possible — is a given, but like the urban destruction caused by the earthquake, this means that some significant part of the energy-producing and energy-consuming capital stock will be made obsolete artificially, that is, “destroyed” economically. But bipartisan Beltway wisdom has it that increased economic and employment growth, a “boom,” purportedly will result.
Uh, no. Conventional energy resources are an important form of national wealth; for the United States, end-use energy expenditures are almost 6% of gross domestic product. The capital assets producing that stream of energy goods and services — fossil-fuel reserves, field production assets and equipment, refineries, pipelines and other delivery systems, power generation plants, labor skills, technological knowledge, and much else — are massively valuable. The same is true for the capital assets using energy: the transportation system, the stock of buildings and factories and homes, the agricultural system, and on and on.
Despite the endless efforts of the advocates of the energy “transition” to obscure reality, the substitution of central planning in place of market outcomes in the energy sector means that some substantial part of the value of the assets producing and consuming conventional energy is being destroyed. The politically driven investments and employment in substitute sectors — wind farms and solar power facilities are the most obvious examples — are economic costs rather than benefits in that the requisite resources have to come from somewhere.
And that reality is separate from their high costs and inherent unreliability and the other myriad disadvantages of these alternative energy forms. Why else would they need massive government policy favoritism to survive?
Accordingly, it is no accident that California and those parts of Europe pursuing the energy transition have experienced dreadful ensuing impacts in terms of costs. When public officials and ideologues tell us that we can become wealthier by destroying wealth, it is appropriate simply to ignore them.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
Benjamin Zycher is a senior fellow at the American Enterprise Institute.
