Friday, November 16, 2012

WSJ Gets Very Close to Promoting The Broken Window Fallacy

They do it in a sophisticated manner, but it is still very close to the broken window fallacy.

The WSJ headline in question reads: Analysis: Sandy Hits Output Now, but Rebuilding Will Boost It Later

It is very true that output fell because of Hurricane Sandy. People couldn't get to work, power was out in many regions, etc.

There was also much destruction because of Sandy and this is why WSJ says that "rebuilding will boost" output later. This is technically correct in the sense that the destruction caused by Sandy will result in much work directed toward repairs and rebuilding, and so the aggregate output number will reflect this repair and rebuilding work.

But, there is a subtle implied hint in the headline that, therefore, the hurricane was a wash in terms of output. This is not true, first because the lost output time is gone. Time moves on. The lost output time can only be made up by sacrificing other output time or leisure time. In other words, the hurricane left a big gap that will always remain in one way or another.

Second, the repair and rebuilding work that is going on, which is at the heart of the broken window fallacy, means that workers doing this work can not be working on other projects. It is the unseen projects that will never be completed because workers are spending that time on rebuilding and repairs that throws off those who subscribe to the belief that destruction and then repair is a good thing. They don't calculate into their promotion of the repair work, what other work would be going on if the destruction did not occur.

In reality, it would be a much better situation, if the destruction never occurred and more new things were built instead of having to direct workers on repair,


  1. Even at the Murdoch owned WSJ, I think they mostly analyze everything from a Keynesian view so it is not surprising their analysis distorts the picture of what is actually happening. There should be an asterisk put on GDP when it arises in this fashion (that is, from merely fixing broken windows)as it is not real GDP.

  2. So, if the WSJ is correct, then we should just destroy every house in the country and rebuild our way back to wealth and full employment?

  3. I'm pretty sure that WSJ *is* a broken window.

  4. Robert, thanks for having the perspective to create a blog posting about this. Although it seems strikingly obvious to most of your regular readers, there are plenty of other people (WSJ readers?) who don't fully understand (or maybe they've never heard of) the broken window fallacy. This was a good opportunity to mention it, well taken.

  5. "I'm pretty sure that WSJ *is* a broken window."

    ...or, as metaphors go, a broken clock.