Waking up to the news of the terrible devastation caused by Sandy, I wondered how long it would take for someone to make the case for the economic benefits of a natural disaster. It didn’t take long. This piece called “Disaster Has Economic Benefits, Too” by Peter Morici in the Philadelphia Inquirer may not be the first but it is the first one I read. Here it goes:
However, especially in an economy with high unemployment and underused construction resources, Sandy will probably unleash $15 billion to $20 billion in private spending directly related to reconstruction.
That figure could grow as many rebuild larger and better than before. Consider a struggling restaurant, for example, whose owner invests his insurance settlement in a new and more attractive business. In areas like the Jersey Shore, older, smaller homes on large plots may be replaced by bigger dwellings that can accommodate more families during the tourist season. The Outer Banks of North Carolina saw such gains several decades ago after rebuilding from a storm of similar scale.
Being forced to spend money that people had planned to spend on something else or to save to prepare for harder days ahead in order to give an artificial boost to GDP in the construction business has benefits? No, it doesn’t other than superficially. That’s what French economist Frederic Bastiat called the broken window fallacy. Bastiat rightly noted that a country doesn’t benefit or get richer because of the destruction imposed by disasters (whether natural or man-made ones, such as wars). Destruction of wealth, buildings, streets, subway systems, houses, electric grids, bridges, and more doesn’t make a country richer even if it temporarily creates jobs in the construction business. All destruction does is destroy and divert to the reconstruction effort scare resources that could have been allocated to other things (things people actually really wanted).
Here is an extensive quote from Bastiat’s great work, That Which Is Seen, and That Which Is Not Seen:
Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation: “It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”
Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade — that it encourages that trade to the amount of six francs — I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented.
Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs: this is that which is seen.
If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.
And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labor, is affected, whether windows are broken or not.
Also, read this good piece from August 29, 2011, by Robert Murphy (where I copied the quote from) for more on the broken-window fallacy and the incredible wisdom of Frederic Bastiat.
In his piece, Murphy also addresses the Keynesian response to the broken-window fallacy argument. Keynesians argue that the broken window fallacy applies if and only if the resources needed to fix the window were already fully employed before they had to be diverted. However, today’s economic conditions are such that there are plenty of idle resources lying around that can now be put to productive use. But as Murphy correctly asks, why are there so many idle resources lying around? (Especially after years of policies meant to put them to good use.) Murphy has several good points in response to the Keynesian argument.
On that note I would add that what we have found out during the last episode of stimulus spending is that unemployment rates among specialists, such as those with the skills to build roads, bridges or schools, (basically the people who will be used during the reconstruction effort in the next few months) are often relatively low. Moreover, it is unlikely that an employee who specializes in residential-area construction can easily update his or her skills to include rebuilding bridges or electric grids and subway systems. As a result, firms receiving stimulus money tend to hire their workers away from other construction sites where they were employed rather than from the unemployment lines. This is what economists call “crowding out.” Except that in this case, labor, not capital, is being crowded out. In fact, the original work of GMU’s economist Garett Jones and AEI’s Dan Rothschild confirms that a plurality of workers hired with ARRA money were poached from other organizations rather than from the unemployment lines. The same will likely be true today with Sandy and the reconstruction effort that will follow its devastation.
Murphy’s whole piece is here.
Thanks to Caroline Baum for the Inquirer piece.
The one and only.