Wednesday, January 14, 2009

The Broken Windows Fallacy Fallacy

No, not a type-o. Two fallacies, because it's a fallacy of a fallacy.

Making the rounds is the usual libertarian argument against Keynesian stimulus. It goes a little something like this:
1. Taxes destroy wealth
2. Destroying wealth is bad
3. Taxes are bad
4. Just because the economy is in recession doesn't change 3

And since debt is, essentially, a tax on the future, the stimulus will actually end up decreasing wealth.

The parable goes something like this:
A boy breaks a window of a baker. But people say this is a good thing, since the baker must replace the window, meaning work for a carpenter, who will then employ an automaker, who will employ a banker, etc etc.
But it ignores the fact that the baker would've used that money to instead hire a delivery boy, who then would have hired a carpenter for his house, who would employ an automaker, who will employ a banker, etc etc.

In essence, no matter how you look at it, the boy is still destroying wealth.

Doesn't apply in this situation, though. Because private investors are scared witless about economic prospects, they aren't willing to pump money into the economy, and are actually practically begging for government debt (which is relatively cheap in terms of interest right now). In this sort of environment, government can indeed use this to its advantage, by creating projects that will employ additional workers. There's no actual trade-off, because private investors are too afraid to invest: in fact, they actually PREFER government debt at the moment.

So, the real analogy would be more like the baker asking the boy to destroy his window because he wanted to do some remodeling anyways.

1 comment:

Mark said...

man, i spend two hours on the web looking for the article on fallacy of the fallacy, your is the first. is it so unorthodox?