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Breaking Iraqi Windows Won’t Help the Economy

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The record-shattering bombardment of Iraq hasn’t begun yet, but that doesn’t mean it’s too soon to think about which American companies will get contracts to rebuild the soon-to-be devastated Arab country. According to the Washington Post, the Bush administration is “preparing what would constitute the most ambitious U.S. rebuilding project since the aftermath of World War II.” Any time now contracts worth “hundreds of millions of dollars” will be awarded.

The usual well-connected companies were invited to bid: Bechtel Group, Halliburton Co., Fluor Corp., and more. More often than not, these companies share one of two characteristics and sometimes both: directors or officers who used to hold high-ranking positions in the defense or state departments, and former directors and officers who currently hold such positions. Just a coincidence, of course.

No one should draw any adverse conclusions from these developments. After all, the U.S. government has to bomb Iraq and someone will have to rebuild it. Why not good loyal American companies? You cynics should be ashamed of yourselves. No one of goodwill could suggest that the Bush administration would go to war merely to help these friendly corporations prosper. Just think of it as a fringe benefit to the moral crusade about to be launched to bring peace and democracy to the Arab world. Doing well by doing good … who can complain?

While no one would suggest that the purpose of the war is the reconstruction, a few people seem to believe that the reconstruction will be good for the American economy nonetheless. At first glance it might appear that building new buildings, roads, power plants, and the rest will revitalize what now looks like a moribund U.S marketplace. Those American firms, stimulated by the lucrative contracts, will have to hire workers and buy equipment and materials. That will in turn have various ripple effects, as suppliers see their business increase and workers have new income to spend on an array of consumer goods. We might must conclude that war is the best economic stimulus of all.

But it’s not true. As a 19th-century economist, Frédéric Bastiat, pointed out, wealth cannot come from destruction. It may appear to do so because we are focused on a specific economic interest. But when we look at everyone concerned, we see that the benefits accruing to one company have come at the expense of others. There is no net gain.

Bastiat called this the “broken window fallacy” because he illustrated the idea with the fable of a shop window broken by a mischievous youth. Someone in the gathering crowd tries to look at the bright side of the incident by pointing out that when the shop owner pays for his new window, money will circulate through the town and bring new prosperity.

The fallacy, of course, is that if the shopkeeper didn’t have to buy a new window, he’d have used his money to buy something else. Instead of a window, he might have bought a suit of clothes. His spending to replace the window doesn’t enrich community. It just brings it back to the condition it was before the window was broken. There is a loss not a gain. Bastiat’s point was that you have to consider the “unseen” effects — namely, the spending that will not occur because the window has to be replaced.

Now think of Iraq. All the money that is going to be spent rebuilding that country would have been available for other things that people want. That’s true no matter where the money comes from. If the government raises taxes, the cost to the taxpayers is obvious. If it borrows the money, that amount will also be unavailable for investment in consumer projects. If it creates money through inflation, the devalued money in our pockets will buy much less.

The Bush administration hints that the reconstruction costs could come from Iraqi oil revenues and from allies. Don’t hold your breath. The American people are not likely to get off the hook. Besides, without war and under free trade, those oil revenues would be buying products made by Americans (and others). There’s no such thing as a free lunch.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.