Sunday, August 02, 2009

The Broken Window fallacy

You don't need to be an economist to have enough common sense to realise that pointless destruction of valuable goods and materials is pointless destruction.

In fact, only a special class of pseudo-economists and intellectuals would argue otherwise. They are fans of the broken window fallacy, which revolves around the idea that you can generate prosperity by breaking a window and paying somebody to fix it (because it keeps them employed and keeps money in circulation).

So many people have used reason, logic and sense to dispel this old myth, but it still lives on and has infected the halls of power in Washington and Canberra alike. Obama and Rudd believe in all kinds of pointless make work schemes.

Rudd believe in replacing existing school halls and playgrounds with new ones - even though the existing ones are only a year or two old, or in some cases, belong to a school with a handful of students.

A classic example of a make work program (which Keynes, Krugman, Rudd and Obama would love) involves paying thousands of people to dig holes, and thousands more to fill them in.

Pres. Obama gave the rubber stamp to the idiotic Cash for Clunkers scheme - where older cars are traded in for newer cars and the government chips in with a fat subsidy - up to $4500 per car. The older and the bigger the used engine, the bigger the subsidy.

This scheme is idiotic on so many levels, and the basic sentiment behind it is a make work / circulate money type of scheme to "stimulate" economic activity.

Failure #1 - $1 billion was allocated to Cash for Clunkers and US government forecasted it would last till November, but the funding ran out in just 6 days as thousands of car owners rushed to take advantage of this scheme.

Failure #2 - one condition for the dealership who buys the used cars, is to destroy the existing engine so it cannot be resold or recycled. Watch the following video and imagine this destructive process being repeated thousands of times across America: