Terence Corcoran: Shattered windows and the broken economy fallacy

The annual CERAWeek meeting is underway in Houston, promoted as the world’s “premier” annual climate and energy event where a parade of corporate and political heavyweights, such as U.S. climate czar John Kerry, spar over the future of the global energy system.

A famous economic parable from the work of French economist Frederic Bastiat in 1850 outlines what is known in economic circles as the Broken Window Fallacy. In the parable, a boy smashes the window in a town shop, creating an expense and loss for the shopkeeper. But a bystander observes that there is an economic benefit to smashing windows: Glassmakers get more business, a conclusion glibly summarized in one commentary: “It’s a good thing to break windows — money gets circulated and the industry thrives.”

That’s the fallacy: Destructive acts of man or nature create economic opportunity that trumps the loss. Even acts of war have big payoffs. The Second World War has often been seen as the catalyst for American prosperity and a model for governments today. Why not use the same government interventions and policies to mobilize industry and the private sector to reshape the economy to fit some new pre-conceived idea of economic perfection. We don’t have a war, but we could act as if we had a war.

At CERAWeek, Kerry is reported to have dragged in the war-climate analogy, calling for a global mobilization to fight climate change. It was a milder replay of his claim earlier this year that the global effort to achieve net-zero carbon emissions was comparable to fighting the Nazis; it requires setting the global economy on a war footing.

Bastiat, in his summary of the original broken window parable, said his story “contains an entire theory … which, unhappily, regulates the greater part of our economical institutions.” That was 1850, but it’s even more true in 2023 as governments in the Western world attempt to smash the windows of the energy system and replace it with an all-new net-zero energy regime.

The broken window fallacy in such thinking, if I can presume to condense Bastiat, is that the real cost of breaking windows is ignored. The window repair company will make $2,000 from the repair costs and the new spending will be incorporated into GDP as a source of growth. Missing in that summary is the fact that the shop owner has lost $2,000 and has nothing to show for it. He has, moreover, lost the opportunity to buy $2,000 worth of clothing for his kids or to invest in a new lunch counter that would increase his shop’s sales and his income.

If window smashing advances the economy, why not break millions of windows and see their replacement as a source of growth — the production of glass, frames, manufacturing, distribution, installation? That, unfortunately, is exactly the plan now being proposed by the build-back-better proponents and the great net-zero energy resetters at the helm of Canada’s just transition plan and the industrial subsidy regime now being installed in the United States.

Theorists such as Mark Carney see the push to carbon net-zero, through the massive reduction in fossil-fuel use, as a golden growth opportunity. “If you are making investments, coming up with new technologies, changing the way you do business, all in service of reducing and eliminating that threat, you are creating value.”

When Ottawa recently outlined its “just transition” action plan to achieve net-zero by 2050 the overriding message could have been taken from Bastiat’s parable. Governments, workers and industry need to join together to harness the opportunity of a net-zero low-carbon energy future that “represents a generational economic opportunity for every region of this country — a shift that will secure the future of our energy sector and create more good jobs for Canadians.”

As critics have noted, the planning document is a waffling load of bureaucratese. It also neatly changes the slogan of the plan from the “Just Transition” plan to the “Sustainable Jobs” plan, likely in recognition that the “just transition” slogan has its 1970s roots in the U.S. labour movement and has been enthusiastically endorsed by the socialist left and radical environmental groups.

The fallacy also looms large in consultancy and financial institution reports that see the great transition away from carbon emissions as a grand $2-trillion opportunity. But the cost of breaking all those fossil fuel windows are rarely mentioned, let alone systematically calculated.

Some observers, though, have attempted to measure costs. In a paper last year for the Public Policy Forum, British Columbia analyst Don Wright asked: “Do We Really Want to Make Canadians Poorer? What Shutting Down Its Oil and Gas Sector Would Cost Canada.” Wright’s effort to nail the costs of decarbonization turns up some big numbers. Shutting down oil and gas production would cut GDP by six per cent, for example.

But that’s just a rough start on exposing the broken economy fallacy behind the energy decarbonization transition plans under discussion at CERAWeek in Houston. Much more needs to be done before they start deliberately smashing all our energy windows.