August 24, 2011

Economists and the Broken Window Fallacy

There has been a notable increase in the advocacy for some sort of disaster to befall the country in order to create a boom in post-disaster rebuilding.  This is an error that is known as the "broken windows fallacy", which refers to a parable in which Bastiat proved that repeatedly breaking a shopkeeper's window to force him to repair it was not ultimately economically stimulative.

For example, Paul "what we need now is a housing bubble" Krugman has been suggesting war, alien invasion, and most recently expressed disappointment that the recent East Coast earthquake did not cause more damage. I see little mention of the effects of the Japanese tsunami and nuclear meltdown.  According to the damage-is-good hypothesis, Japan should be enjoying a rebuilding boom.  Instead, its economy has been depressed since the tsunami event.  This is not surprising when you consider that massive amounts of assets and therefore capital was destroyed, but the Keynesian blind spot with respect to balance sheets prevents its advocates from understanding what really happens when you destroy infrastructure.

No comments:

Post a Comment

Spammers-B-Gone. Please keep your comments germane or inane.