Friday, November 27, 2015

"Broken Windows Create Wealth" Fallacy explained


  1. Yes! Sort of! Keynsian economics, which this video tries to debunk, lies at the base of progressive economic theories. Simply put, the argument Krugman was trying to promote is that wartime spending can increase economic productivity but only if there is slack capacity, as was the case in the Great Depression. To take the analogy of the video: the hooligan breaks the window, and the baker gets a grant from the town to fix it. The baker can have both a suit AND a new window. But where did the government get the money for the grant?

    Government investment only adds to economic growth when it makes investments with high economic returns. The Golden Gate Bridge, for example, had a huge stimulative effect on economic growth in the Bay Area. Marinwood would not have been built had the bridge not been built. When this is done with tax money, then the gain from spending must offset the economic loss from the taxation.

    In the case of the Bridge, however, it was done using the government's borrowing power. Since the government isn't going anywhere, generally the interest rate on loans it takes out is much lower than what an individual or business can take out. At the moment, for example, the feds have an interest rate that's lower than inflation. In real terms, that means it's actually negative.

    There is a limit, of course. A nonprofit called Strong Towns is firmly conservative and firmly against this path of economic growth. In fact, he calls it a Ponzi scheme:

    In short, if the debt we incur does not generate enough economic growth to offset the debt and to pay for whatever we invested in, then it was worse than a waste of money. Too often, that debt does not generate enough economic activity to offset the debt's cost, and it's a net loss.

  2. an asset like the Golden gate bridge brought new economic activity and opportunity because of the increased efficiency of travel. One of the core reasons for government is to provide common infrastructure for a civil society. Networking hubs of economic activity improves efficiency to create wealth. Interesting video that you link to but I disagree with its conclusions. Walkable streets actually are expensive places to do business in on modern retail scale. As much as I dislike them, the strip mall offers the best combination of efficiency and ease of access. The comparison of suburban development to a Ponzi scheme is hyperbole and ignores free market economic factors driving growth.