Jellybean Jars and Green Jobs Tax Credits

September 11, 2008

While I was in Raleigh for the lottery case, one of my colleagues accidentally shattered the jar of jellybeans on my desk. She's already graciously ordered a new one for me, and it's on its way now. One of our economists joked that in breaking the jar, she actually did all of us a favor, because she has created jobs. The jellybean company now sells two jellybean jars instead of just one, the shipping company gets some business, and all those jellybeans that landed on the floor must now be replaced as well.

This, of course, is a fallacy (it's known as Parable of the Broken Window, first described by Bastiat). Instead of my office having a jellybean jar and my colleague with the slippery hands having some money, in the end the office will just have the jellybean jar. We are poorer by the cost of one jellybean jar, not richer. While the jellybean company is a bit richer, other companies where we might otherwise have spent money are not. It's an economic loss. Instead of spending money to create new things, it instead is diverted to replace something we already had. The error is common; even commentator Paul Krugman made it when suggesting economic gains following the attacks seven years ago today.

A related use of the fallacy is part of a marketing campaign to advocate renewal and expansion of alternative energy tax credits by Congress. Essentially, the credits are subsidies designed to shift energy production from coal and oil to wind, solar, and ethanol. Unfortunately, what it means is that we will expend more resources to produce the same amount of energy, by subsidizing a less productive way of doing it. One of the repeated justifications for the renewal of these tax credits is that they "create jobs." This is true, just as breaking jellybean jars would create jobs at the jellybean company. But that doesn't change the fact that by "creating work" we become poorer off. The tax credits, by subsidizing an otherwise unviable product, shift resources from more productive uses to less productive ones. We'll have jobs in the alternative energy industry, but at the unseen loss of investment and jobs in other areas.

My new jellybean jar is en route, and hopefully soon it will go back to its regular role as the office's tragedy of the commons.

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