In a nutshell, it's the story of kids playing baseball and accidentally hitting a ball through someone's window. The fallacy is that by breaking the window, they've helped out the economy. The homeowner will now pay the glazier to fix it, whose wife will now have money to buy a new dress, etc.

It's a fallacy because it ignores the productivity that the money would have resulted in had it been used for its original intent. Perhaps his car needs new tires, or whatever -- but there was something that the homeowner would have preferred but for the necessity created by the ball.

By analogy, perhaps the hypothetical second parent, who is now staying home, might instead be a doctor helping people, or a teacher, or even a garbage collector. Whatever, it's something that we would have gotten had it not been for this disruption.

The broken window fallacy is usually used to highlight the importance of opportunity cost and unintended consequences. In the parable, the broken window results in some very visible benefits - the glazier has money, his wife has a new dress. But it's a fallacy because we don't know what the glazier would be doing otherwise. Perhaps he would've created a beautiful stain glass window, which causes his business to spike up afterwards as his skills increase, which means his wife can afford a series of socialite parties, which bring together people who would never have met, etc.

As Retric points out, I think the fallacy is more likely to work in the other direction here. The benefits of working are very obvious - you get more income, you can afford to buy more things, you live more comfortably. The opportunity costs are more subtle - perhaps your kid grows up hating you, perhaps they fall in with a bad crowd and start doing drugs, perhaps they never make it over the mathematical hump that prevents them from being a famous physicist. It's different for every kid, and you won't know for years.

Good economists admit that there are things that count that can't be counted, and recognize the limits of their models.

The broken window fallacy says that purely destructive actions don't actually stimulate the economy in a useful way. In no way is one adult staying home to perform "home work" logically equivalent (at least, not in my opinion).

It's not that something is destructive. It's also not that something involves monetary transactions or not.

The point is that some external agent forces someone to change their plans, foregoing what they originally intended. (Economics deals with making choices between the available alternatives; money is only the tip of that iceberg)

In the parable as I outlined it, the employment of the glazier is presented as a positive outcome, while ignoring that the homeowner is now unable to buy his new tires, and thus the homeowner has lost the tires and the garage has lost that business.

In the stay-at-home-parent scenario, there's a visible gain of a parent giving the child a close bond and (presumably) good upbringing. But the fallacy hides the fact that had someone else not meddled, that parent would be doing something else that also has a positive outcome (else an employer wouldn't be willing to pay for it).

We can see that in both examples, the person whose behavior was forced now must be satisfied with a plan that is inferior to their initial intent. And assuming that all are rational actors (as economists generally do), then we can conclude that the total utility thus delivered (over the entire economy) is lower than that of the initial intent.

How much money does a billionaire need to live from day to day? The same as any other normal person. Yes, they are likely to consume more luxury goods, but in the end, it does not cover the fact that the more money you have, the easier it is to get even more.

For examples of this you need to look no further than your local bank and see what premium rates they offer for people with high balances. Index funds offer ultra low expense rates for people with a lot of money. With a large proportion of money, it becomes possible for you to manipulate the markets by buying out competition, and becoming a monopoly: which is arguably the equilibrium state for any free-market. The monopoly is the most profitable situation for any business, and this is at odds with society.

So the more money you acrue, the higher your money/work rate becomes. This is a perverse incentive for the large corporation owners to not work as hard; and also to lay off workers during recessions. What sane company would be hiring when workers/consumers have less money to spend?

And the less work that is put into the economy, the worse off the economy is. This cruel cycle is why the economy was in a deflationary spiral and why "Helicopter" Ben is printing money as fast as he can.

This has a communist vibe, but in the end there is simply no argument that it is much better for the country to utilize the resources and wealth to stimulate the economy as a whole than letting a few people sit on it so they can get richer by doing nothing with it.

The poor and middle class can't just create their own wealth because they don't own "the means of production" or the intellectual property horded by megacorps and protected by megacorp lawyers and lobbyists.

It is analogous to not letting DeBeers sit on a stockpile of diamonds, except instead of diamonds, it is money, food, gas, homes, etc...

in the end there is simply no argument that it is much better for the country to utilize the resources and wealth to stimulate the economy as a whole than letting a few people sit on it so they can get richer by doing nothing with it.

Not only is it false that there's "no argument", but your statement is completely wrong.

If there were no argument, you wouldn't be seeing arguments from prominent economists like Greg Mankiw, Bryan Caplan, and Tyler Cowen. And indeed, they've got good arguments. The idea that burning through money to stimulate the economy comes from the Keynesian tradition -- but we know from the 70's double-shot of inflation and unemployment that the Keynesian model is wrong (the question is, "just how wrong?").

But your statement that they're sitting on their wealth doing nothing with it is the biggest demonstration that you're off base. As far as I know, nobody rich is doing this. If they're stashing it under their mattress, I don't think they'd have gotten rich in the first place. If they've got it invested in stocks or bonds or even banks, then it's not idle and doing nothing. It's helping other people finance their businesses, buy houses, whatever. But it's definitely doing something useful. In fact, it's doing something so useful that the people using the money are willing to rent it from them.

Contrast this to government spending, which according to Keynesian theory could be used by paying people to dig holes and fill them back in, so long as the government is doing this. In the Keynesian model (that Obama and the rest of the government is using), the money does not get used productively. When the rich guy rents his money to someone willing to pay for it, it's much more likely to find good use.

Whoa: way, way, way oversold. Your making a blanket argument on a very complicated subject from a single data point. What about the sustained growth in the 40's through 60's due to New Deal, WWII, and Great Society spending? Economics is hard, and poorly suited to ideological statements like that.

Anyone sane would look at the evidence and say that Keynesian stimulus works sometimes, and not others, and that the details matter a lot. Only political partisans would make a statement like yours.

Sure, and you quoted my qualifier, too. I did say that the question is, "just how wrong?" (Not that there isn't an ideology I favor, but I don't think I was whitewashing to sell it)

You'll note that some of the credit in the early 60s has to be given to anti-Keynesians. Kennedy's tax cuts broke from the Keynesian model, and were successful. And if you'll buy into Hayek a little, I'll assert that the WWII boom (no pun intended) can't be credited to following any particular school, but is simply because the economic question is easy when you can get the whole society on the same page, working toward the same goal.

You are absolutely incorrect. They aren't doing this. They are pulling out of the US economy and putting them in Euros, gold, or Chinese factories. Did you somehow forget the complaints of a credit crunch that banks weren't lending any money?

Do you really think they are dumb enough to keep investing in the US when dollars are being printed non-stop? If so you are way off base.

If there were no argument, you wouldn't be seeing arguments from prominent economists like Greg Mankiw, Bryan Caplan, and Tyler Cowen. And indeed, they've got good arguments. The idea that burning through money to stimulate the economy comes from the Keynesian tradition -- but we know from the 70's double-shot of inflation and unemployment that the Keynesian model is wrong (the question is, "just how wrong?").

Then why aren't they the ones making the decisions if they are so correct? And the government doesn't simply just spend money for the sake of spending it. It usually (not always of course) goes into projects that benefit the public for decades such as better roads, power, and homes.

And Keynesian model being wrong because of the 70's? That is simply naive. Inflation was due to fears of Opec increasing oil prices and moving off the gold standard. Inflation was already rising when Nixon implemented his limits on wage/price increases. US Debt as a fraction of the GDP was even decreasing during this period.

http://g-ecx.images-amazon.com/images/G/01/askville/4889596_...

Describing this as Keynesian is absolutely inane.

That would depend on your understanding of inflation. The monetarist views, which it seems to me have proven themselves out most successfully in the real world, say that nothing of the sort can happen. Inflation is caused by one thing, and that's an increase in the money supply. http://en.wikipedia.org/wiki/Inflation#Monetarist_view

and moving off the gold standard

Well, yes, but that's precisely the point. The end of Bretton Woods was already a done deal by the time we're talking about. We were well into the era that the Keynesians though they could play games "stimulating" the economy by injecting money, bringing down unemployment by so doing. The fact that this didn't achieve their goals is exactly what I was talking about, and one of the reasons you should be listening more to the Monetarists like Friedman, rather than to Keynes.

That is plain wrong.

Think about what would happen if the scarcity of crucial goods like food and shelter increased by 1000%. Would there be inflation? I'd put my money on it!

Well, yes, but that's precisely the point.

No, it is not precisely the point. The economy was already declining when Nixon moved off the gold standard. Why do you think he wanted to do it in the first place?

And if your theory was correct, then why did the economy recover? Last time I checked, we didn't move back to gold in 1980.

"Velocity of money is often assumed to be constant, and the real value of output is determined in the long run by the productive capacity of the economy. Under these assumptions, the primary driver of the change in the general price level is changes in the quantity of money."

Monetarists never claim that inflation is always and everywhere a monetary phenomena unless they're dumbing things down for the press. They claim that in the long run it's a monetary phenomena. There's still room in the monetarist model for short-term supply spikes like the OPEC oil crises of 1973 and 1979 that the grandparent poster alludes to.

I'd also take issue with your statement that "you should be listening more to the Monetarists like Friedman, rather than to Keynes." They are not diametrically opposed. Friedman accepted Keynes; in fact, one of the reasons that monetarism was successful was because Friedman was one of the first people to accept Keynes on his own terms and then point out situations where Keynesian economics was unable to explain the observed data. Monetarism should be viewed as a refinement of Keynesianism, not a replacement.

But it is not true when dealing with any one particular agent. You can often say what would have happened but for one particular agent.

PS: This also depends on how much the primary income is, how much time it takes, and how old the children are. If a family with three young children is supplementing a 140k primary income with a full time job that pays less than 50k it’s probably of little net benefit. If on the other hand it’s 40k and 40k and the children are in school it’s probably a significant net gain. Time is also a factor; one of the better and more common setups for families with school age children is a teacher parent. They share the same breaks, and the added stability can be a huge help.

Better to have people choose between two good options than to make one option lousy.