Wednesday, October 31, 2012

"In the case of Hurricane Sandy, it is true that money will be exchanged in the process of cleaning up the mess, but that doesn’t mean that true economic growth is taking place."

Keynesian Economics Professor Tells Hurricane Victims “It’s Good For The Economy”

By JG Vibes

In the midst of a storm that has the whole east coast torn apart, a mainstream economics professor and Columnist took the opportunity to provide the world with a perfect example of “the broken window fallacy”.

In his new article “The Economic Impact of Hurricane Sandy … Not All Bad News“, Professor Peter Morici puts forward the idea that the clean up following Hurricane Sandy will stimulate economic growth, and thus be good for the economy.

Unfortunately, it seems that the the broken window fallacy is missing from Mr. Morici’s mainstream economics curriculum.

“The broken window fallacy” is used to debunk the popular but false argument that the destruction of property stimulates economic growth by creating messes that people will eventually be paid to clean up.

This is one of the arguments that we typically hear to defend war. People say that war is good for the economy because it creates jobs.

However, the fatal flaw in this logic is that it fails to consider that a better outcome could have been possible, had war resources been used for creation instead of destruction.

In the case of Hurricane Sandy, it is true that money will be exchanged in the process of cleaning up the mess, but that doesn’t mean that true economic growth is taking place.

If the hurricane never came in the first place, that money would be exchanged elsewhere, and it would probobly be spent on far more constructive projects.

In his article Mr. Morici says that:

“rebuilding after Sandy, especially in an economy with high unemployment and underused resources in the construction industry, will unleash at least $15-$20 billion in new direct private spending — likely more as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive.

Regarding the latter, consider a restaurant with inadequate patronage — its owner invests the insurance settlement in a new more attractive business.

On the shore, older smaller homes on large plots are replaced by larger dwellings that can accommodate more families during the summer tourist season.

The outer banks of North Carolina saw such gains several decades ago after rebuilding from a storm of similar scale.”

Not to discount the drive of the human spirit to rebuild bigger and better than before, this perspective overlooks the people who have a tree fall on a car that they don’t have insurance on, or the people who loose property that they are heavily invested in.

There are an infinite number of counter examples to the claims that Mr. Morici puts forward, because of the many lives that are impacted negatively by these events.

The trade that takes place following a disaster may be a good thing, and a beautiful example of human resilience, but that doesn’t mean that the disaster contributed to a better end result.

The only way to know that for sure is to have the ability to tell the future, and know exactly what events would have taken place had the disaster never happened to begin with.

The broken window fallacy was coined by French economist Frederic Bastiat in the 19th century in his essay “That which is seen, and that which is not seen”.

He used a parable about a broken window to describe the situation that we are talking about here.

In his story the witnesses of the destruction assume that the broken window is good for the economy because they are only thinking about the profit of the window maker, but overlooking the potential loss incurred by unseen third parties, primarily the owner of the window and the businesses he would have invested in otherwise.

War is the most obvious example of this fallacy, but it can also be seen in the recent financial bailouts or in the example that we used today.


1 comment:

  1. The broken window fallacy is an odd yet interesting one, at that. I, for one, find that it to be a growth and good thing. Glass businesses need to make money somehow, along with all of the tree removers and such.

    -Solomon Berkovitch