I was trying to post pics of Tiger Lily's Birthday, but blogger won't upload them. So. instead I'll leave you with an educational video to watch.
Monday, August 9, 2010
Broken Window Fallacy
Posted by Gardener at 3:36 PM
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4 comments:
That was a good and clear explanation, although it's a bit a stretch to go from the clearly acceptable "Destroying property destroys wealth" to "Anything the government spends money on destroys wealth." I'm certainly not in favor of the way much of our tax money is spent, but saying that everything the government does is bad is the same as saying everything rich people do is bad.
Things like defense, standardized currency, transportation networks, contract law, etc provide a huge return on tax dollars spent.
Dunno, Steve. There are two major fallacies in the "Broken Window Fallacy".
The first is that you have a choice: A. Hooligan destroys window; B. Hooligan doesn't destroy window.
In fact, that's not real. No one chose any of the material acts of international destruction; people actively tried to prevent world wars 1 and 2, as well as the other major conflicts of the 20th century.
Krugman's point, however unpleasant is still correct for the obvious reason that we (citizens of the US) didn't have the option of "not destroy World Trade Center". To assume otherwise is ignorant in the extreme.
The second fallacy is that increasing taxes to fund work programs is a net zero action. It is NOT true that all the money derived from increase taxation is taken at the expense of OTHER expenditures. The wealthy didn't get that way by blowing their money on tacos.
As an example: since the passage of prop 13 in California, even though corporations hold a LARGER percentage of land compared to 1978, the actually pay a SMALLER percentage of property tax. That's because they use corporate shells to hide when property moves from entity to entity, something the little guy can't afford, or isn't able, to do.
Thus to do things like increase taxes during economic downturns is not only a net gain, it accurately penalizes the wealthy who game the system to the disadvantage of the middle and lower classes.
And THAT ain't no fallacy.
M.G. didn't post this, I did (He's been busy lately).
I don't think this illustration is trying to say there is a choice. No one has control over hooligans. They will do what they will. What this is trying to illustrate is how people perceive the fallout of the hooligans action. (that's how I saw it, anyways)
Take 9/11 for example: How exactly is Krugman right? Two buildings destroyed, thousands of lives lost, businesses lost (that's a lot of lost productivity and $). What do we get afterward? A presidents awful advice to go out and spend, years of cleanup and a gaping hole in the ground with no plans to rebuild in sight. So yes, we were able to give people work in cleaning up the mess up, but their jobs are over now (they are now sick, unemployed or have moved on). So, how does this tragedy actually help the economy?
Okay, the whole tax thing I didn't get by watching this, so... I'll just leave it to you experts.
The part about Govt job programs...I kept thinking of the Signs I see on the side of highways now. "Putting ___ back to work. Funded by the ____Reinvestment Act. So, these workers build/fix these roads and when they are done, their jobs are done and we are left with a road or bridge. Now, how is the road/bridge going to continue to stimulate the economy?
A hooligans bad action is bad for the economy in the long run. So what did I take from this: make sure to teach child about how the consequences of their bad choices can affect the economy. ;)
Mike - You're right about the false choice bit. In reality, no one has a choice as to whether or not the window gets broken. However, when the government gets involved in choosing who gets the benefits from this "creative destruction", it becomes an unnatural allocation of capital. While WW1 and WW2 may have stimulating effects on the economy, it resulted in massive development of the defense industry. Would that have happened anyway? We'll never know because the natural direction of capital flow never had a chance to reveal itself.
The same is true for public works projects: When the government decides where capital gets to flow, that is a nail in the coffin of natural capital flows.
I recently did a consulting project where the client was a County Authority over waste collection; a highly regulated market. Those who chose to play in this market were at the mercy of the regulation authority. My new saying from working on this project is "The regulator giveth, the regulator taketh away."
As for prop 13: That has nothing to do with the broken windows. Ask yourself what your property tax percentage would be right now if there was no prop 13. I am not arguing that prop 13 is good or bad, but it is a constraint on the ability to tax citizens.
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