Wednesday, August 17, 2011

It's Different if SPACE ALIENS Break the Window

The broken window fallacy is pernicious. John Stossel explains, for those of you who have lived under a rock, or studied economics at Harvard, MIT, or Princeton.

(heh; heh heh; heh: he said, "Fallacious")

Most recently, of course, it was KPC's favorite deep space Keynesian, P-Kroog.

Mary Theroux has some thoughts.



Kindred Winecoff said...

I'm more critical of Krugman than the next guy, but he specifically said in the interview that WWII was destructive, not productive, and that his idea of good fiscal stimulus would involve building of infrastructure and other things that expand the country's productive capacity. Less good stimulus would involve digging ditches and filling them in, but this would still be better than nothing, in his view. And while WWII destroyed a lot of stuff in *Europe and Asia*, in the *US* it mostly involved expanding productive capacity. The postwar boom was in the US, not Europe.

More generally, the "broken windows fallacy" does not imply "employing unemployed resources is a bad thing".

I think I'm on the same side as you w/r/t more fiscal stimulus -- although I'm definitely on the opposite end of you, and on the same side as Rogoff, w/r/t more monetary stimulus -- but I don't think we have to misrepresent Krugman's position to argue the point.

kebko said...

Digging ditches and filling them in would be better than nothing? Really? I suppose there are ways you could twist yourself into a position of defending this, but I don't think there is any way you can say this with any level of certainty. And to believe such a nonsensical thing - "Digging ditches and filling them back in is better than nothing!" - should require a very high burden of proof.
I think anyone who says this should be found guilty of an intellectual crime, and their punishment should simply be that whenever they meet a neighbor, friend, fellow citizen, they have to offer their hand and say to them with a straight face, "Hello, I'm _____. I think digging holes and filling them back in is better than doing nothing."

Anonymous said...

Yes, because much like a broken window has the exact same utility as a new interstate, your characterizations of what Krugman said are as equally accurate.

John Stossel is almost as big of an embarrassment to the mustachioed as Tom Friedman.

Gerardo said...

Krugman should read Alexander Field.

Kindred Winecoff said...

kebko, I didn't say that; Krugman (kind of) said it. Whether it's true or not, Krugman's whole point is that it's a false choice. There is a lot of under-utilized capacity right now, and there are undoubtedly productive ways to use it. This is, as far as I can tell, undisputed and indeed indisputable.

What is disputable is whether the government can mobilize those resources in such a way as to be more efficient rather than less. Krugman believes that the government has that capability; others don't. It's a conversation worth having, but it's just not fair to say that his view simplifies to "let's blow stuff up to stimulate demand" or even "let's dig ditches and fill them in".

Ie, what Anon said. I'd only add that the US gov't can now borrow at negative real interest rates out to 10 years, so Krugman's view has a pretty low bar to clear.

kebko said...


Direct quote of your comment, in defense of P-Kroog:
"Less good stimulus would involve digging ditches and filling them in, but this would still be better than nothing, in his view."

This is the comment I was responding to. If you want to beg off your defense of the viewpoint, I understand.

Kindred Winecoff said...

I don't need to beg off anything. You need to learn how to attribute. "... in his view" is the operative phrase. I'd say that pretty clearly establishes room in between Krugman and me.

Norman said...

Krugman's not actually proposing breaking windows. His space aliens comment was about the political environment, and the fact that war often convinces governments to create some inflation and redistribute spending from boom times to the present. Keynesian economics suggests these things actually have benefits when there is idle capacity. It's oversimplified, at the very least, but it's not proposing that breaking windows creates wealth.

Krugman admitted that digging ditches and filling them back in again, ceteris paribus, creates zero or negative social value; but if it serves as a means to the policies he believes will end recessions, he sees it as a small negative associated with a much larger positive in our current context.

One could argue from a psychological perspective that giving money to people for doing work that ends up being useless is better for that worker than a simple handout. I'm not sure the argument is correct, but it's not obviously absurd.

Krugman is essentially arguing for the same two things he has always argued for: (1) use monetary policy to create inflation (if it can) during recessions; (2) use fiscal policy to act as an insurance policy against business cycles, redistributing spending from boom times to bust times. There are good arguments for why these policies are undesirable or won't work. But the broken window fallacy isn't one of them.

kebko said...

Sorry Kindred. I was being too snarky. But your original post seems to state that normally you're critical of P-Kroog, but that his hole-digging belief mitigates your position against him.
In contrast, if I'd written that post, I would have said, "I'm more critical of Krugman than the next guy, because, for example, digging holes and filling them in is better than nothing, in his view." So, we seem to agree that this is Krugman's position, and I have the opposite position, but I guess I'm unclear now on your position.

Actually, Krugman's position seems worse than this. He says that make-work is better than nothing, but it's worse than having aliens come here to destroy us. I'd hate to ask what he'd prefer over the aliens! ;-)

Pelsmin said...

This doesn't seem so complicated. If two free parties engage in a free-market transaction, they create value. Each person ends up with something worth more than when he started, or else he wouldn't have done the deal. If you buy $2 worth of strawberries that someone spend 90c growing and delivering, he has created a $1.10 of value, and you have ended up with strawberries worth, say, $2.50 (something more than $2) to you. The multiplier comes from the extra $1.10 and 50c created. Sometimes, a free person will deliberately enter a transaction and end up with less value. As a business or individual, if he tends to do this, he will eventually go broke, so in the long run, spending money freely ends up creating value.
When you replace a broken window, you create more value than if you left the window broken, but less than if the window hadn't been broken in the first place. You start with $100 and a window worth $100. You end up with a window worth $100, and someone else has your $100. Seems neutral at best, but if your window hadn't been broken and you had given someone the $100 to add capacity to your shop, you would still have the $100 window, someone would have your $100, and YOU WOULD HAVE A NEW ASSET WORTH MORE THAN $100 TO YOU!

If value was created by breaking windows, society would be filled with people breaking their neighbors' windows, and their neighbors would sigh and say "Sucks for me, but if enough windows throughout town get broken, I'll come out ahead," and he'd heave a rock back.
Now, when GOVERNMENT spends money on anything at all, you can be certain value is being destroyed, not every time, but in the long run -- just like playing poker without paying attention to the cards or the bets will lose you money, not every time, but in the long run. That's because the government doesn't have the incentive to maximize the value of the money spent. Sometimes they'll create value (a new bridge that really improves commerce so much it's worth it) and sometimes they destroy value (light rail between just about any two points.)
The only way you can support stimulus spending is if you believe that a negative multiplier helps, i.e. turning a dollar from next year into 40c this year will get us through the tough times, and by next year we'll be glad to pay the dollar (plus interest) back.

Kindred Winecoff said...

kebko, not that it matters, but for the record my position is that I want to know what the best empirical work has to say on the matter. And then I want to weigh that against other (normative) concerns. As it stands I think the empirical record is mostly in favor of Krugman. I think many normative concerns are not. Take that as you will.