“Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousand fold by a factor that is insignificant in, say, physics, mathematics or medicine – the special pleading of selfish interests.”
– Henry Hazlitt, Economics in One Lesson (1946)
Henry Hazlitt (d. 1993) was born on this day in 1894. As has been done with other great classical liberal thinkers at MasterResource, this post celebrates Hazlitt’s birthday by applying his thinking to the current policy debate.
Specifically, Chapter 14 of Hazlitt’s book Economics in One Lesson, “Saving the X Industry,” despite being published in 1946, enlightens the current discussion about the wind production tax credit, which is set to expire at the end of this year unless Congress extends it.
I first read Hazlitt’s book while studying economics in college. It was a refreshing departure from the textbooks I was reading at the time, which were more numbers-focused and removed from reality. Economics in One Lesson is easy reading (some might say that’s because the truth is easy to understand), but for me it carried much more weight than the average textbook. It reframed my thinking and showed how widespread the broken window fallacy (the fallacy of believing that destruction creates positive net economic activity) is in our energy debates.
Economics in One Lesson traces through the many applications of the broken window fallacy, as they arose in past debates over economic policy. Those selfish interests repeated the same argument for nearly all industries that struggled to succeed in a competitive environment, so Hazlitt devoted a chapter to the “X” industry (the fill-in-the-blank industry).
Simply plugging in “Wind” for “X” in the chapter’s opening paragraph provides a shockingly accurate depiction of the arguments put forward by modern wind interests. The quote is apt because Hazlitt’s lesson is timeless:
The lobbies of Congress are crowded with representatives of the Wind industry. The Wind industry is sick. The Wind industry is dying. It must be saved. It can be saved only by a tariff, by higher prices, or by a subsidy. If it is allowed to die, workers will be thrown on the streets. Their landlords, grocers, butchers, clothing stores and local motion picture theaters will lose business, and depression will spread in ever-widening circles. But if the Wind industry, by prompt action of Congress, is saved – then it will buy equipment from other industries; more men will be employed; they will give more business to the butchers, bakers and neon-light makers, and then it is prosperity that will spread in ever-widening circles.
In our case, however, the wind industry has been on some form of life support since 1978, and on the same tax-credit subsidy since 1992. The argument tends to be that the Wind industry will be sick. The Wind industry will die. It must be saved. It can be saved only by extension of the production tax credit. If it is allowed to die, workers will be thrown on the streets.
American manufacturing jobs are coming back, with tens of thousands of new jobs from wind power… But these jobs could vanish if Congress allows the Production Tax Credit to expire, in effect enacting a targeted tax increase, and sending our jobs to foreign countries. Congress must act now to keep this American manufacturing success story going.
And again, “[f]ailure to extend the PTC would cost 37,000 jobs immediately, and put the brakes on the progress America has made to diversity its electricity portfolio.”
I should note that the writers at MasterResource dispute these job numbers and challenge the all-of-the-above (centrally-planned/government-selected) energy strategy. But, putting aside those perfectly valid arguments for a moment, we can take some comfort in knowing that Hazlitt refuted AWEA long before its founding. All that is left for us to do is fill in the blanks by paraphrasing Hazlitt:
[A direct subsidy] would be nothing more than a transfer of wealth or income to the Wind industry. The taxpayers would lose precisely as much as the people in the Wind industry gained…
It is obvious in the case of a subsidy that the taxpayers must lose precisely as much as the Wind industry gains. It should be equally clear that, as a consequence, other industries must lose what the Wind industry gains. They must pay part of the taxes that are used to support the Wind industry. And consumers, because they are taxed to support the Wind industry, will have that much less income left with which to buy other things. The result must be that other industries on the average must be smaller than otherwise in order that the Wind industry may be larger.
But the result of this subsidy is not merely that there has been a transfer of wealth or income, or that other industries have shrunk in the aggregate as much as the Wind industry has expanded.
The result is also (and this is where the net loss comes in to the nation considered as a unit) that capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been. These results are virtually inherent, in fact, in the very arguments put forward to subsidize the Wind industry. The Wind industry is shrinking or dying by the contention of its friends. Why, it may be asked, should it be kept alive by artificial respiration?
Happy birthday in memory of the greatest economics writer of his generation, Henry Hazlitt.