So there’s this thing called the broken window fallacy that states that going around and breaking windows (or, on a larger scale, committing acts of terrorism) is good for the economy. Given that the word fallacy is right there in the name, it shouldn’t surprise you that breaking windows is not actually good for the economy.
The original broken window theory goes something like the following: Yeah, a window got broken, but that means that whoever’s window it was has to pay to fix the window. This is a cost to the guy with the broken window, but it is an equal benefit to the guy who gets paid to fix the window…and a benefit to the guy that makes the stuff that the window fixer buys with his newly-found profit, and the guys that make the stuff that that guy now buys, and so on. The argument is then the the benefits to these people outweigh the cost to the original dude with the broken window, so overall the economy is better off.
Is this line of reasoning valid? Some creepy dude here seems to be saying no: (Warning: fast forward the first bit if you don’t like watching planes fly into buildings, but be warned that you will miss some quotes from the likes of Paul Krugman and Nick Kristof that may or may not have been taken out of context.)
How do I say this tactfully…Dear video dude: You’re not wrong, you’re just being creepy and sensationalistic enough to make people suspicious. I felt like you were trying to recruit me into Scientology or something (with Bastiat in the role of Xenu of course), and you can see how well-received the people offering stress tests in the park are. As such, you might want to try a different approach. xoxo, econgirl
Creepy video dude’s reasoning is spot on, for the most part- what the original explanation of the broken windows idea doesn’t take into account is the notion of tradeoffs or opportunity cost. It assumes that the choice was between using money to fix the broken window or, I don’t know, not breaking the window and burning the money that would have been used to fix the window. In this situation, fixing the window is the better choice. The more realistic argument, in his view, is that the resources put toward fixing the broken window are resources that were taken away from other productive uses that would have had at least the same effect on the economy without the broken window.
Now, creepy dude quotes some pretty intelligent and well-known folks- Paul Krugman, Timothy Noah, and Nick Kristof– as espousing this broken windows argument. So what’s going on? Have these people just not done their homework? Or are they blindly pushing their liberal big-government agendas with no regard for the principles of economics? *smirk*
The explanation isn’t quite that simple…if you read closely, the fallacy of the broken windows argument rests on the idea that the money used to fix the broken window could and would be spent in another productive use. The could part is hard to argue, since fixing the window just gets you back to where you started, but the would part is questionable in some cases. When times are tough, people and companies tend to hunker down and limit their spending as much as they can. Unfortunately, this compounds the problem, since tough times are going to persist if no one is buying anything. In this case, the assumption of “well, the shop owner would have bought a new suit with the money if he hadn’t had to use it to fix the broken window” is called into question, since if the shop owner is scared about what the future is going to hold he’s probably socking his money away rather than buying a new suit. See how that affects the tradeoff at hand?
Let’s think about this in a larger context- are terrorist attacks or natural disasters a boon to the economy? The result of these events is that both private citizens and governments increase their spending because they really have no choice. This increased spending *is* helpful for the economy (in the short run) in as much as it represents an increase rather than just a shift. However, spending to repair something that is broken is certainly not better than spending to improve things and not have things get broken in the first place, it’s just more palatable from a political perspective since it’s viewed as more necessary. It’s worth noting that all of the quotes used in the video were referring to recessionary periods, i.e. times where people weren’t going to go buy the new suits instead if they didn’t have to pay to repair their houses. So is an earthquake and the follow-on spending better for the economy than people hunkering down and refusing to buy anything? Yes, strangely enough. Is an earthquake and the follow on spending better than no earthquake and equivalent spending on improvements? Of course not. Is an earthquake and follow on spending better than no earthquake and increased consumer confidence? Again, no. Therefore, the statement of whether a broken window or a natural disaster “improves” the economy depends on which situation it is appropriate to use as a comparison.
Why do people in general not understand these concepts? Maybe it’s because they are often taken out of context and applied bluntly where they don’t belong. Here’s John Stossel doing just that on 20/20, and also looking particularly creepy in the process:
Dear John Stossel: Please don’t use the broken windows fallacy argument to argue why government spending is bad overall, since that is not what the concept is about. There’s a big difference between spending with no net benefit (i.e. replacing what got broken) and spending to improve infrastructure. I know you really wanted an excuse to hurl baseballs (softballs?) through windows, but it’s hard to take you seriously when you are purposely destroying property while arguing (with no sense of irony whatsoever) that destruction of property is in fact detrimental to society. Also, try not to sound condescending while you’re doing it. That’s my job.
Note that I am not ignoring the fact that the money that the government spends comes from taxpayers. And yes, paying money to the government in taxes does prevent me from making some purchases that I would otherwise make. It is, however, important to realize that this trade is not always bad. There are certainly cases where my money is better used to contribute to fixing a pothole on a street that I drive down every day rather than used to buy one more Starbucks latte. (This is different from arguing whether it is economically beneficial to create the pothole in the first place.) Yes, it increases employment of hole-fixers and decreases employment of latte-makers, but I value the paved street more than I value the latte (as do others, hopefully, if the government is acting in the interests of the people). Furthermore, fixing the street is not something that I could have done myself. If I was just sitting on my money* rather than buying a latte with it, there’s not even any decrease in employment to be had. (This is not to say that the government should have the right to tax money that I am not using in the interest of the greater good. =P)
The overall point is that these concepts, which are often brought up in arguments about government spending, public policy and the like, are more nuanced than most people make them seem. Yes, we would prefer that there be no terrorism or natural disasters and people spend their own money in the most productive ways in order to stimulate the economy, and yes, we would like government spending to be limited to those socially beneficial items that we cannot provide in private markets. And yes, we could have gotten out of the Great Depression if people had decided on their own to start spending again, but until we can pass a law requiring people to spend money (yes, I see the irony in that point), government spending is one of the main levers available.
Note to all you sticklers out there: By “sitting on my money” I mean putting it somewhere where it doesn’t enter into the market for loanable funds, since that would affect interest rates and investment and such. I make this simplification because the incentives for businesses to invest are limited, even with low interest rates, if no one is buying anything.