The parable is overly simplistic, as all such devices are. It describes a small closed system and assumes a zero-sum game.

But what if the baker had insurance? Then there'd be an injection of money into the local economy from outside it, and a net gain. The baker would have his new window and his new suit. The glazier and the tailer would both benefit.

The new suit might enable the baker to make a better impression on a banker, and help the baker get a loan to expand the bakery. Or suppose that the original vandalism had damaged a piece of machinery too, and when the baker replaces it with the insurance money he buys a better machine and increases his productivity and profit. The effect of outside aid doesn't have to be limited to simply restoring things to the way they were; it can also make things better than they were.

The other side of your argument also assumes a zero-sum game: "the loss would be in terms of other places billions in Federal funds could be put to use, or even smaller deficits." (I like that, an "even smaller deficit"--nice Orwellian double-speak when talking about a record-breaking deficit.) Since you think all Federal spending is unproductive spending, then wouldn't shifting some of it from unproductive use such as welfare into economic reconstruction be a good thing? What if rebuilding Florida's economy resulted in greater tax revenues down the road? Federal spending on demand-side stimulus would clearly result in the same effect as voodoo economics' supply-side stimulus promises, but the result would come much more quickly--people spend their paychecks immediately, while the investor class holds on to their money until the stars are perfectly aligned to maximize return.

Even if the baker had the money to buy a new bread machine that would double his output, he'd be foolish to spend it unless he could count on his market doubling. Unless the general economy in his neighborhood is already growing, he won't want to be the first to gamble on expansion, and that's the general problem with supply-side economics: Demand must precede an increase in supply. Doing it the other way round is a gamble that few smart businesspeople would take.

You might suggest that the baker's strategy is to take away market share from his competitors--playing within the zero-sum game. But of course his competitors would respond to take back their market share, and if demand remains flat over the long run the situation would probably return to equilibrium...after the supply-side had spent capital to ratchet up competition to no long-term benefit, and reduced all their profits. Is that a productive allocation of capital?

No, there's no way around it: Demand-side stimulus is a better way to restore an ailing economy to health.