You are walking in Manhattan with your nephew, and carelessly you toss an ice cream wrapper in the street. Your nephew questions your action, as he has been told by his mother that this is not nice. As a future economist you will tell your nephew, that you are helping the economy by throwing trash on the street rather than in trash cans because the extra expenditures necessary to clean up the streets will increase GDP. Are you right or wrong? Explain.
Answers (1)
That is incredibly stupid, and yet a lot of people don't know what's wrong with it. A few years ago the USA had a program called "Cash For Clunkers". The thesis was that people should crush their old cars and buy new ones with a federal subsidy, thereby stimulating the economy. The first effect of that program was that people mostly bought imported cars, so a big portion of the money went to stimulate some other country's economy. After a while Americans noticed that parts for their cars were very expensive or not available at all because so many old cars had been crushed.
That is called "The Broken Window Fallacy": if you break a window, is the economy enriched by the cost of its replacement? Here is an analysis:
mises.org/library/broken-window-fallacy