Analysis: Broken Windows on Display in Michigan Senate Finance Committee

Mark Adler, a lobbyist for the Michigan Production Alliance, and Carrie Jones, the director of the Michigan Film Office, defended the state's film subsidy program in a Senate Finance Committee meeting yesterday. To do so they employed a long-recognized economic fallacy, the "Broken Window" theory, which only considers economic activity that is "seen" while ignoring unseen economic costs.

Michigan currently grants film producers a combination of tax breaks and cash subsidies worth up to 42 percent of the expenses they incur shooting in this state. This is the nation's richest film subsidy program.

The "broken window" argument looks at the breaking of a window and describes the benefits of extra wages paid to a glazer, the additional sale by a window factory, possibly a debt service payment made on the window factory's construction loan, and so on. And since all industries are connected in some way - some more than others - the argument concludes that breaking a window is good for the overall economy.

It is fallacious because it ignores all the other industries that might have benefited if the window owner had been able to spend the money used to replace a (formerly) perfectly good piece of glass on other goods, services and investments that he may have wanted. The source is harmed economically by the broken glass.

In their testimony, both Adler and Jones mentioned that the film industry is generating some infrastructure for the state, and cited "multiplier" effects from subsidy recipients using multiple vendors.

What was missing from their analysis are the goods, services and investments Michigan families and job providers did not obtain or make because they were forced to fork over $117 million to film producers in the form of cash disbursements and forgone taxes in this program's first two years. The cost for every resident in Michigan comes to more than $100 directly or indirectly paid out to support the film industry. All of the unseen potential uses of that money counter the activity of film producers.

As it stands, even the "seen" benefits cited by Adler and Jones are hidden: Details about the spending of film companies and the size of state tax incentives are deemed confidential by government bureaucrats if a producer asks for them to be.

As Larry Reed, president emeritus of the Mackinac Center emphasizes, sound policy requires that we consider long-run effects and all people, not simply short-run effects and a few people.