I feel I have to highlight one of the rare moments when the unseen consequences of governmental manipulation of markets becomes seen:

ENVIRONMENT Minister Peter Garrett will keep his job but thousands of workers will be sacked after the abrupt scrapping of the disastrous $2.5 billion household insulation scheme yesterday.

And Mr Garrett's own department admitted that as many as 80,000 homes across the country may have been left with insulation that does not comply with the official guidelines. Source

We know that when the government distorts the price system through, for example, incentives such as insulation subsidies or grants, the higher prices - which indicate to people where the most urgent shortages as dictated by true consumer preferences currently are - lure entrepreneurs and workers like moths to a flame into that industry. When the program ends, these people are suddenly not needed - they were employed in an area not aligned with consumer preferences. We will have thousands of unemployed insulation installers who might have become plumbers or gardeners or something else actually aligned with the true demands of consumers.

The failure of this program comes as no surprise to anyone who has read Bastiat's What Is Seen and What Is Unseen but 90 per cent of the time the majority of the voting population never look beyond what is seen. It's unfortunate that it took the loss of human life to expose it this time (another unfortunate consequence these programs have a habit of causing) - no doubt the government will be calling for more money, better people and better regulation to 'get it right' the next time.

...at least not the economy, despite what Acting Victorian Premier Rob Hulls says to the contrary.

The Victorian Government says new economic modelling has vindicated its decision to pay for golfer Tiger Woods to play at last year's Australian Masters.

"Original projections were that the 2009 JBWere Masters would generate a $19 million boost to the Victorian economy but, due to unprecedented ticket sales and public interest, the actual impact was almost double what was forecast."

Woods received an appearance fee of $3.25 million, with the state government chipping in $1.5 million.

Major benefactors included major hotels, restaurants, taxis and the retail sector. 

This is a classic example of failing to take account of Bastiat's warning to consider what is not seen, as well as what is seen, when deciding where best to allocate taxpayer dollars. Yes, hotels, restaurants, taxis and retail did remarkably well for a brief period and who knows, maybe a few extra tourists will now visit as well. But this only what is seen. At first glance, it appears obvious that Woods was a boost to the local economy. Indeed, when I examine the comments on the two linked news articles above, almost all of them are full of praise for the government. But what happens when we look at what is not seen? The dollars expended to lure Woods had to come from somewhere.

If people are spending their money at local restaurants because they're there to watch Woods, there are other places - perhaps restaurants in their own neighbourhood - where they are not spending that money. The money spent by the state, whether raised through taxes or borrowing, would have been spent by someone on something else (with the expected benefits of these alternate projects being the opportunity cost of luring Woods).

The economic reports as quoted and paid for by the government always fail to apply an appropriate cost to the initial funds in their cost-benefit analysis. I don't have access to the report that Rob Hulls is quoting, but having read others I can only assume that they simply state the $1.5 million is like "mana from heaven" and does not represent a loss to the taxpayers when in reality, they should begin with a huge number in the cost bracket. Unfortunately we can never know what the money would have been spent on had the government not expropriated it for this purpose. But what we can say is it would have been used to satisfy the most urgent demands of consumers. The funds used to lure Woods, having been diverted from this most urgent - and therefore most valuable - use, must rank lower. Unfortunately modern cost-benefit analysis does not take any of this into account.

Yes, the cost to the individual taxpayer is relatively small and the benefits to large interest groups (golf, hoteliers, food, transport, retail and so on) who contribute significantly to government campaigns are enormous in comparison. But at the end of the day, if there was a profit to be made in luring Woods to Melbourne, private investors would likely have been quick to act to take advantage of the opportunity with their own funds. Instead, particular lobby groups have convinced the government to support Woods because it was not clear to them whether his arrival would have been profitable without taxpayer funding.

Unfortunately the majority of the population never even thinks about what is not seen. Economists who prepare reports for the government to justify their various subsidies - whether through ignorance or greed - never consider what is not seen (if they did the government would stop hiring them to prepare said reports!). I personally think that every high school student, well every person, should read Bastiat's short but brilliant essay The Broken Window. So much damage could be averted if people just considered what is not seen when deciding whether economic policy is worthwhile.

[This article is excerpted from "That Which Is Seen, And That Which Is Not Seen". It was first published in 1850.]

Have you ever witnessed the anger of the good shopkeeper, John Q. Citizen, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even 30 of them, by common consent apparently, offered the unfortunate owner this invariable consolation: "It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions. Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade — that it encourages that trade to the amount of six francs — I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented.

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs: this is that which is seen. If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labor, is affected, whether windows are broken or not.

Now let us consider John Q. Citizen himself. In the former supposition, that of the window being broken, he spends six francs, and has neither more nor less than he had before, the enjoyment of a window. In the second, where we suppose the window not to have been broken, he would have spent six francs in shoes, and would have had at the same time the enjoyment of a pair of shoes and of a window. Now, as John Q. Citizen forms a part of society, we must come to the conclusion that, taking it all together, and making an estimate of its enjoyments and its labors, it has lost the value of the broken window.

Whence we arrive at this unexpected conclusion: “Society loses the value of things which are uselessly destroyed;” and we must assent to a maxim which will make the hair of protectionists stand on end—To break, to spoil, to waste, is not to encourage national labor; or, more briefly, "destruction is not profit."

What will you say, Moniteur Industriel? what will you say, disciples of good M.F. Chamans, who has calculated with so much precision how much trade would gain by the burning of Paris, from the number of houses it would be necessary to rebuild?

I am sorry to disturb these ingenious calculations, as far as their spirit has been introduced into our legislation; but I beg him to begin them again, by taking into the account that which is not seen, and placing it alongside of that which is seen.

The reader must take care to remember that there are not two persons only, but three concerned in the little scene which I have submitted to his attention. One of them, John Q. Citizen, represents the consumer, reduced, by an act of destruction, to one enjoyment instead of two. Another, under the title of the glazier, shows us the producer, whose trade is encouraged by the accident. The third is the shoemaker (or some other tradesman), whose labor suffers proportionally by the same cause. It is this third person who is always kept in the shade, and who, personifying that which is not seen, is a necessary element of the problem. It is he who shows us how absurd it is to think we see a profit in an act of destruction. It is he who will soon teach us that it is not less absurd to see a profit in a restriction, which is, after all, nothing else than a partial destruction. Therefore, if you will only go to the root of all the arguments which are adduced in its favor, all you will find will be the paraphrase of this naive question — What would become of the glaziers, if nobody ever broke windows?

Mr. Brumby yesterday announced that he will ‘stimulate’ 68,000 jobs through a capital works and training program. But in doing so he ignores the century’s old lesson of one Frédéric Bastiat; he ignores the unseen and only focuses on what is immediately in front of him.

The creation of these jobs is financed by taking money from the taxpayer. In doing so, their wages are reduced by the same amount that those of the building industry are increased by. In effect, there are no jobs created. All that will occur is a reallocation of jobs—as public spending is always a substitute for private spending. While it may well support one worker in place of another, it adds nothing to the economy when taken as a whole.

The claim that public infrastructure spending “creates jobs for the workers” is an incredibly dangerous proposition. It serves no other purpose than to automatically qualify the most absurd spending decisions. If a road or railway has sufficient utility to justify the capital outlay then that argument alone should be sufficient in justifying its creation. But if, as is the case with Mr. Brumby, that’s not possible to do, he’s forced to resort to the fallacious position of “creating jobs”.

When considering your support for these programs, ask yourself this: what would the taxpayers have done—and can no longer do—with the same billions that are now being spent on public enterprise. There’s no question that these projects will give jobs to certain workers. That’s what’s seen. But it deprives other workers of employment. That’s what’s not seen.