Obama Stimulus and the Broken Window logical fallacy
 

One of the arguments leveled against the Stimulus bill is the "Broken Window" fallacy. Here's the explanation for this economic fallacy: http://jim.com/econ/chap02p1.html

Do you agree? Or should we just be happy to get whatever we get? Also, isn't there an issue of the "perfect being the enemy of the good" here?

No damn way should we be happy to get whatever we get.. That's like communism.

I don't get it...

"Broken Window" fallacy = it's only an illusion that breaking a window is good

how is obama stimulus similar in any way to breaking a window?

"It fails because you don’t increase economic output by taking a dollar from one person and giving to another. The idea of “stimulus” spending falls for the “ broken window fallacy”—the allure of what is seen versus what is not seen. "

Source

I'm still not sure if I agree. What do you think?

The spending bill takes from everyone in the form of the inflation tax and will do more harm than good.

I know this stimulus package will only make things worse long term. We need to get rid of the excess debt in the system. We can not do that by adding more debt (dollars). End of story.

time will tell

Actually we will probably get serious deflation and then a collapse of the bond market. Then we either print money full tilt and destroy the dollar or it is good bye deficit spending which translates into probably a 50% or more reduction in government spending overnight.... At the same time they will probably try to devalue the dollar (by a lot) to make the huge debt the government has easier to pay off.

What do you think of the inflationary consequences of the debt accumulation?

We won't get German style hyperinflation unless wages are fixed to the rate of inflation and adjusted on a weekly or possibly monthly basis.

If the government devalues the dollar to make our massive debt easier to pay off then people saving dollars will see their purchasing power killed. Bush and Cheney both said deficits do not matter. In January Obama started saying the same thing. Clearly the government already has a plan to either kill the dollar and introduce a new currency or hugely devalue the dollar. Either way the long term prospects for the dollar are awful. That said, for at least the rest of the this year and possibly for several more years we will see the dollar index take off through the stratosphere.

The game changer here is the pound and the euro both are in a world of hurt. This could give the dollar another decade or more of life. We will likely see dollar/euro parity. We could see dollar/pound parity. 2009 is the year the world realizes how fucked Europe is.

Man, I hope there's no hyperinflation. Those old newsreels of Weimar notes being piled on to a wheelbarrow to buy a baguette are really disturbing.

That's always the risk and the temptation. Devaluation is the easier way to get out of debt than actual production/productivity increases. Americans would do well to guard against that.

Greece and Spain are hurting bad--both economies have a strong tourism focus. Do you see the same level of economic distress spreading to other more economically diversified Western European nations (GB, France, and Germany)?

That only happens when wages adjust quickly with the rate of inflation which the strong unions in Weimar Germany made happen. If wages do not inflate with the price of goods then when things get to expensive people stop buying and that forces prices to deflate a bit. You can have serious inflation without fixing wages to the rate of inflation, but you can not have Weimar style hyperinflation.

Yeah, the problem is we can not produce our way out of our debt. Oh, and another thing propping up the dollar is the fact that somewhere around 70% of the world's debt is dollar denominated. Most of the world's oil markets also trade in petro-dollars also. All this creates more demand for the dollar that would otherwise not be there.

Greece and Spain and nearly all of Eastern Europe are heading into a very very serious depression. Ireland is probably equally fucked. The citizens of Great Britian are in for some serious hard times. The only thing keeping the Bank of England afloat is the swap lines they have with the Federal Reserve. Yes, the US tax payer is propping up Great Britian. Swedish banks are nearly all technically insolvent already because of their exposure in the Baltic States. They have been getting bailed out by their central bank for awhile now. Once the Baltic States devalue their currencies that will push Swedbank et all to the brink. Austrian banks are leveraged to the max and then some also. Even Swiss banks are getting skullfucked because of their Eastern European exposure. The stongest economy in Europe is Germany and they are going to get dragged down by everyone else in the Eurozone.

Those are the immediate problems in Europe. The long term picture is even more bleak. You have a serious declining birth rate. North Sea oil drying up. Huge social obligations coming that can not possibly be shouldered by the young generation coming into the work force. There also is not really any option to raise taxes to cover pay for all these upcoming social obligations because the tax rates in Europe are already so high.

That's not what the stimulus is though.
Stimulus is by definition deficit spending designed to re-start the supply/demand cycle by creating demand in the marketplace.

In this case government is the spender (demand) of last resort. (Keynesian economics)

If you try to balance the budget at the same time you're doing stimulus, then it defeats the purpose. This is why it failed for Japan in the nineties. They had stimulus spending, but cut spending in other areas to fund it. So what happened there is what you're referring to above, shifting money from one place to another.
Same thing happened here in the late thirties. FDR listened to the wrong people and cut spending back to balance the budget, and the unemployment rate shot up again.

In the long run it's bad. In the short run, adding 10% to our debt total to get the economy moving again isn't a bad tradeoff.
At some point the debt, along with unfunded future liabilities, need to be dealt with, but those aren't the pressing concern right now.

It's the equivalent of a guy in the emergency room losing blood, having a heart attack, and a broken leg all at the same time.
If you worry about fixing the leg first, or restarting the heart first, the patient dies from blood loss.

I read somewhere recently that one of the main reasons the dollar has been holding up so well lately isn't because of demand for dollars, but because most of the toxic assets people don't want right now are dollar denominated so people literally can't get rid of their dollars.

I predict that historians will look back at this time period and talk about how this crisis proved Keynesian economics is a failure. Time will tell though :)

We should leave it all up to you.
I'm sure you can fix everything just by posting on GFY.

That may be part of it, but there is a big increase in the demand for dollars lately.

A fallacy and a fraud.

"If we run into such debts as that must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and creeds, as the people of England are, our people, like them, must labor sixteen hours in the twenty- four, and give the earnings of fifteen of these to the government for their debts and daily expenses;

And the sixteenth [hour of labor] being insufficient to afford us bread, we must live, as they do now, on oatmeal and potatoes, have no time to think, no means of calling the mismanagers to account; but be glad to obtain [be satisfied with] subsistence by hiring ourselves to rivet [being goons for our oppressors by securing] their chains around the necks of our fellow sufferers;

And this is the tendency of all human governments. A departure from principle in one instance becomes a precedent for a second, that second for a third, and so on ‘til the bulk of society is reduced to be mere automatons of misery, to have no sensibilities left but for sinning and suffering… And the forehorse of this frightful team is public debt. Taxation follows that, and in its train, wretchedness and oppression.”
~ Thomas Jefferson

Perhaps, but for now it's the theory backed by most of the world's leading economists.

The problem I have with the way people interpret Keynes is that they think deficits don't matter, ever.
I think deficit spending should be reserved for extraordinary economic situations like this one, and of course for war, when your survival as a nation is at stake.

Otherwise, I think budgets should be balanced and debts should be paid off. Running a deficit during times of peace and prosperity is ridiculous IMO.

Broken window fallacy... interesting...
Interesting read on the "blessings of destruction". We must consider all stakeholders in the situation. (Don't forget about the tailor and the suit, and the shopkeeper).

There are a lot from the Austrian school, but Keynesian economics is the standard... for now.

I agree completely, but Obama, Bush, Cheney, and I would guess most members of the Senate and House do not agree unfortunately :Oh crap

quoting for truth

Well to be fair, Obama just got there and this is one of those extraordinary economic times when deficit spending is required.

Let's give him more than two weeks before we lump him in with the "deficits don't matter" brigade. :winkwink:

He was quoted saying exactly that in January :)

Thanks for your faith in me, bro. Much appreciated.

/tongue in cheek

You should know that no matter how Obama votes or what he says doesnt matter! :1orglaugh

Please show me the quote where Obama said deficits don't matter in January.