Tag Archives: broken window fallacy

The Broken Window Fallacy

8 Jun

Paul Krugman, who once said that 9-11 could do some economic good never seems to astound me. He has company. Larry Summers believes in the broken window fallacy, period. I recall Summers saying that the Japan earthquake may lead to temporary GDP increments. Firstly, this was a tragedy and our thoughts are with the people who have suffered in this quake, but this is the problem when we have a distorted view of what economic growth is.

Indiscriminate spending does not contribute to economic growth. One has to recognise that the spending that will ensue to rebuild Japan will not contribute to the productive capacity of the nation; rebuilding Japan will require increased borrowing from Japanese citizens to rebuild buildings and infrastruture that were already functioning and efficient. So this will not contribute to GDP growth but it will add to their structural deficit and heighten their bond market awakening.
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