Paul Krugman’s Rusty-Tractor Fallacy


Nobel Laureate Paul Krugman made a stop at Wharton this week to give his assessment of the economy and the stimulus. He gave his standard message: Government spending is the only way out, but the current stimulus is too small.

What caught our eye was his prediction for how the economy would eventually recover:

Eventually, even with inadequate policy measures, there will likely be a spontaneous recovery. Goods “wear out, rust away,” and people will someday want to buy new technologies that will be clearly superior to what they have now. “Look at auto sales,” Krugman said. “At current buying rates it would take 23.9 years to replace the current stock.” Obviously it’s not going to take that long, he added. Buying rates will eventually pick up.

So wait, the economy will recover when our capital stock wears out and rusts away? This sounds suspiciously like our old friend the “broken-window fallacy” the silly idea that a broken store window is good for the economy because the shopkeeper has to replace it, helping everyone in the window and glass industries.

Nobody seriously believes that’s true, though you sometimes hear that logic trotted out when there’s a hurricane or tornado, and someone talks about all the jobs the rebuilding will create.

Under Krugman’s logic, perhaps we should sabotage our equipment so that the wearing-out could happen a little faster, bringing about our recovery.