The Broken Window Fallacy

Sasha Volokh writes:

I’ve seen various bloggers attack the assertion that Japan’s earthquake will be good for the economy (see, e.g., David Bernstein’s post below) as an example of the broken window fallacy.

Now I like the story behind the broken window fallacy as much as the next guy. Yes, GDP might go up, but this only shows how meaningless GDP is. GDP is just, roughly speaking, the sum of prices in transactions, so anything non-market goes uncounted. If you bomb a building and then hire people to rebuild it, the bombing counts as 0 for GDP (not a negative) and the rebuilding counts as a positive; so you can bomb the building ten times and have it rebuilt each time for a super boost to GDP! But clearly, from a real point of view, you’re just using up real resources without creating anything on net. Or, in Bastiat’s terms, consider the “jobs created” by the bombing; without the bombing, that money would have been spent in other ways, perhaps creating jobs elsewhere, but that’s unseen.

On the other hand, Volokh adds, “if there’s a valid distributional argument in favor of the people who would get the post-destruction money; if counter-cyclical expenditure is a good idea; if infrastructure spending is a good idea and the disaster causes an upgrade; or if the disaster diverts funds from worse government projects to better ones — and if those problems couldn’t be better addressed in other ways because of political barriers, then, indeed, disasters, wars, etc., may have beneficial economic effects on net.”

Last year, Sam Selikoff released a well-produced YouTube clip quickly outlining the basics of the Broken Window Fallacy. It begins with a rather timely opening statement from Paul Krugman, arguing on a Sunday morning chat show that “it took an enormous public works program known as World War II to bring the economy out of the Depression.” Note what’s unstated there — that the New Deal was an utter failure as an economic program;  and as James Taranto responded when Krugman made a similar argument in his column last year:

What Krugman calls “the miracle of the 1940s” is more commonly known as World War II, a ruinous conflict that cost some 60 million lives, including more than 400,000 American ones, and that entailed the near-extermination of Europe’s Jewish population.

World War II is sometimes called a “good war,” meaning that few dispute American intervention was necessary or that we fought on the right side. But this easy moral clarity is possible only because the Axis actions that started the war were unambiguously evil.

In April 2009 we noted that David Leonhardt, a Krugman colleague at the Times, had praised the economic policies of Germany’s National Socialist Party. Now Krugman calls World War II itself a “miracle.” The Old Gray Lady is in the grips of utter madness.

So will the enormous rebuilding efforts after the Japanese earthquake demonstrate yet again the Broken Window Fallacy, or as New York Times readers are wont to say, “this time it’s different?”

Of course, the end of World War II created an enormous uptick in the American birth rate — hence the phrase, the Baby Boomer Generation, which greatly increased consumer spending from the late 1940s onward. The Japanese earthquake isn’t going to stop that nation’s demographic death spiral, as CNBC notes.