The Broken Windows of Harvey and Irma

 

Every time a big natural disaster strikes, progressive economists predict an economic boom. Between Harvey and Irma, the LA Times, CNBC, and Goldman Sachs expected a bump in the GDP once the recovery efforts got rolling.

Perhaps the best known fan of mass destruction is NY Times columnist Paul Krugman. While he has yet to weigh in on the storms of the past few weeks, I’m sure it’s coming. After all, he found economic growth in Fukushima…

I guess we have to talk about the economic impact of the Fukushima nightmare … Japan will clearly have to spend hundreds of billions on damage control and recovery, even as revenue falls thanks to the direct economic impact … And yes, this does mean that the nuclear catastrophe could end up being expansionary, if not for Japan then at least for the world as a whole.

He found economic growth in 9-11:

Ghastly as it may seem to say this, the terror attack — like the original day of infamy, which brought an end to the Great Depression — could even do some economic good … Now, all of a sudden, we need some new office buildings … Second, the attack opens the door to some sensible recession-fighting measures … Now it seems that we will indeed get a quick burst of public spending, however tragic the reasons.

He even found economic growth in an alien invasion:

If you actually look at what took us out of the Great Depression, it was Europe’s entry into World War II and the U.S. buildup that began in advance. So if we could get something that could cause the government to say, “Oh, never mind those budget things; let’s just spend and do a bunch of stuff.” So my fake threat from space aliens is the other route. I’ve been proposing that.

How famed economists can keep falling for the broken window fallacy is beyond me, so I gave them a remedial lesson in Monday’s USA Today:

A long time ago, a French guy named Frédéric Bastiat shattered this kind of nonsense, calling it “the broken window fallacy.” In his essay “That Which Is Seen, and That Which Is Not Seen,” Bastiat showed that destruction never boosts the economy.

He imagined a boy broke a window. (Something I excelled at as a kid — sorry, north Phoenix.) Now his dad needs to pay to replace it. Amateur economists in the neighborhood tell the dad that’s a tough break, but note how great it is for the local glassmaker. Why, he would go out of business if annoying kids (such as yours truly) never put a baseball through a window.

In fact, the economic growth would be even better if they sent me around to smash the windows of every house on my street.

True, the glaziers would make a few extra bucks whenever I moved into a neighborhood. That’s the economic impact that is seen.

But the impact that isn’t seen is the fact my long-suffering dad can’t spend that money on a new guitar, a dinner out, or counseling for his petty vandal of a son.

Moreover, replacing something that has already been purchased is a maintenance cost, not a purchase of truly new goods, and maintenance doesn’t stimulate production.

This idea can be broadened to all sorts of government activity. It doesn’t grow the economy to start a war, level a neighborhood for a giant arena, or tear up a rundown street to build a light rail.

If the government wants to actually grow the economy, they should end the unnatural disasters they inflict on Americans every single day through red tape, regulations, and taxes.

There are 24 comments.

  1. Member

    Jon Gabriel, Ed.: How famed economists can keep falling for the broken window fallacy is beyond me

    Yeah

    • #1
    • September 12, 2017 at 3:16 pm
    • 2 likes
  2. Member

    But if it’s put on a charge card it’s better right ?

    They told us “Stimulus” was good. And crushing perfectly good cars was better. Those where the days my friend.

    • #2
    • September 12, 2017 at 3:16 pm
    • 7 likes
  3. Member

    Jon Gabriel, Ed.

    If you actually look at what took us out of the Great Depression, it was Europe’s entry into World War II and the U.S. buildup that began in advance. So if we could get something that could cause the government to say, “Oh, never mind those budget things; let’s just spend and do a bunch of stuff.” So my fake threat from space aliens is the other route. I’ve been proposing that.

    How about a border wall to keep out illegal aliens?

    • #3
    • September 12, 2017 at 3:29 pm
    • 6 likes
  4. Member

    Kate Braestrup (View Comment):

    Jon Gabriel, Ed.:

    If you actually look at what took us out of the Great Depression, it was Europe’s entry into World War II and the U.S. buildup that began in advance. So if we could get something that could cause the government to say, “Oh, never mind those budget things; let’s just spend and do a bunch of stuff.” So my fake threat from space aliens is the other route. I’ve been proposing that.

    How about a border wall to keep out illegal aliens?

    But those aliens are an economic plus. Just ask any politician. They clean house good too !

    • #4
    • September 12, 2017 at 3:40 pm
    • Like
  5. Member

    Jon Gabriel, Ed.: (Something I excelled at as a kid — sorry, north Phoenix.)

    I never broke one at a time. I always got at least two.

    • #5
    • September 12, 2017 at 3:49 pm
    • 3 likes
  6. Member

    Let’s break Paul Krugman’s windows every day until he figures it out.

    • #6
    • September 12, 2017 at 3:59 pm
    • 20 likes
  7. Contributor

    I’m in a very uncomfortable position here of partially defending Krugman.

    GDP measures a flow of goods and services produced and sold for final use over some period of time. If you were not planning on spending money in some period and then, suddenly, you have to because you need to fix your house, GDP does in fact go up.

    Your wealth does not — you used to have a house and money, now you just have a house. That’s the Bastiat story and it’s certainly true. But house and money are assets. GDP is a flow of goods. They are not measuring the same things. GDP can go up while people become poorer; that’s what disasters do.

    Now suppose we were flying economically, using every resource we had productively. Then two Category 4 hurricanes flood places and blow building down. We stop using those resources elsewhere and start using them in relief efforts. GDP would not go up — we’d be producing different stuff, but not necessarily more. Meanwhile we’d have no new stuff, just repaired stuff. It’s pretty easy to see we’re poorer then.

    The difference between that and Krugman’s stories is that in the Great Depression, or the recession of 2001, or deflationary Japan, you are using idle resources (this is his story, which I am stipulating rather than agreeing to.) Krugman would say this use of idle resources necessarily increases GDP. If I could ask him, I’d ask if he thinks there are idle resources to be used to make repairs to Texas and Florida today with a 4.4% unemployment rate.

    • #7
    • September 12, 2017 at 5:49 pm
    • 3 likes
  8. Thatcher

    At this point I really don’t understand FEMA’s role any more. I thought they helped pulling up downed trees and fixing roads and stuff like that.

    Last week I heard a story where they were talking about a business owner, “who didn’t have insurance” who was waiting for FEMA money “to get his business going again”.

    What? They are going to take my tax dollars and give it to some guy who couldn’t be bothered having insurance for his business? How is that a good thing?

    • #8
    • September 12, 2017 at 6:02 pm
    • 9 likes
  9. Thatcher

    King Banaian (View Comment):
    I’m in a very uncomfortable position here of partially defending Krugman.

    GDP measures a flow of goods and services produced and sold for final use over some period of time. If you were not planning on spending money in some period and then, suddenly, you have to because you need to fix your house, GDP does in fact go up.

    Your wealth does not — you used to have a house and money, now you just have a house. That’s the Bastiat story and it’s certainly true. But house and money are assets. GDP is a flow of goods. They are not measuring the same things. GDP can go up while people become poorer; that’s what disasters do.

    Now suppose we were flying economically, using every resource we had productively. Then two Category 4 hurricanes flood places and blow building down. We stop using those resources elsewhere and start using them in relief efforts. GDP would not go up — we’d be producing different stuff, but not necessarily more. Meanwhile we’d have no new stuff, just repaired stuff. It’s pretty easy to see we’re poorer then.

    The difference between that and Krugman’s stories is that in the Great Depression, or the recession of 2001, or deflationary Japan, you are using idle resources (this is his story, which I am stipulating rather than agreeing to.) Krugman would say this use of idle resources necessarily increases GDP. If I could ask him, I’d ask if he thinks there are idle resources to be used to make repairs to Texas and Florida today with a 4.4% unemployment rate.

    GDP might go up with increased spending, but you’ve lost the value of an asset that’s been destroyed. Increasing GDP doesn’t mean growth or good news, in every instance. The gov’t can increase spending and all other components stay flat. GDP goes up, but the dollars in that growth come from taxes and borrowing.

    • #9
    • September 13, 2017 at 3:51 am
    • 6 likes
  10. Member

    Why do they fall for this fallacy? It logically follows from the Keynesian model. Under Keynesians, savings is non -pending and spending spurs economic recovery, so using savings is supposed to spur recovery. Notice I say recovery. It was never supposed to lead to growth, just recovery. It doesn’t do that either. The fact is all of the Keynesian model and thinking is nonsense. Why do folks cling to nonsense? Politicians get to spend the money when it’s government “pump priming” so they have to apply the same logic in situations where the nonsense is obvious. And economists. why do they cling? They spent all those years getting a Ph.D. They get to build models and sell their output. They get hired by government and other fraudulent entities to make meaningless predictions. Real economists seldom have much to offer other than, good god don’t do that, you’ll make matters worse. Who wants to hear that?

    • #10
    • September 13, 2017 at 4:26 am
    • 2 likes
  11. Member

    Chris Campion (View Comment):
    Your wealth does not — you used to have a house and money, now you just have a house. That’s the Bastiat story and it’s certainly true. But house and money are assets. GDP is a flow of goods. They are not measuring the same things. GDP can go up while people become poorer; that’s what disasters do.

    You are right, although we do account for corporate depreciation, in this sense the numbers on our national income statement change, but not wellbeing and nor economic growth. However, we use savings to pay for recovery and since our national savings are below our gross investment we borrow those savings from abroad and import goods even if we spend our recovery money in ways that employ idle resources. The impossibility of our Congress doing this is one the fundamental flaws of the Keynesian theory. Paying for recovery from natural disasters has a better chance of hiring idle resources than our Congress could but in this economy is unlikely.

    • #11
    • September 13, 2017 at 5:28 am
    • 1 like
  12. Member

    Here’s a “broken windows” illustration most everybody can understand:

    I am self-employed. In order to better do the work I do and, presumably, get more work, I need to invest about $10,000 in new gear (computers, software, SSDs, etc.). I’ve needed to make this move for nearly two years, having stretched my current system to its limits.

    However, thanks to medical expenses (My wife had a heart attack and open heart surgery two years ago), along with the ongoing exorbitant rise in the cost of medical insurance, money that would have purchased that new gear (and a whole lot more, btw) is being spent on health insurance and medical care.

    In fact, health insurance is now our 2nd most significant monthly expense, barely behind the cost of our mortgage/insurance/property tax payment. And it’s about to get worse in 2018, here in Tennessee.

    Now, I am truly grateful for the care my wife has received. Full stop.

    But I would have much rather she had not experienced this health crisis. (Talk about some “broken windows”). I would have much preferred to put that money to a different use.

    • #12
    • September 13, 2017 at 6:36 am
    • 9 likes
  13. Coolidge

    Not surprising that economists who view the wealth of the world as a fixed pie would see no problem when nature destroys a chunk of it. Is this the Krugman law of theromodynamics, “Wealth can neither be created nor destroyed”?

    • #13
    • September 13, 2017 at 6:57 am
    • 3 likes
  14. Coolidge

    King Banaian (View Comment):
    I’m in a very uncomfortable position here of partially defending Krugman.

    Yes, that would be uncomfortable. You seem to be saying that Krugman’s argument is somewhat defensible because he is speaking of specifically increasing GDP and not the general economic health of the country. There are a couple of problems with that defense. First, he never uses the term “GDP” in the quotes above (although he may use it in the full articles.) Second, and more important, is that while there’s a very specific meaning to GDP, a lot of people (mis)use it as a general catch-all term for economic growth. As you point out, there is a difference. One would think that Krugman, being the Nobel prize winning economist he is, would only use that term when that’s exactly what he means. I think he uses it knowing that many people will interpret it incorrectly as meaning more than it really does. Technically he’s not incorrect, but he is very aware that the impression most readers will have is that disasters are good for everything in the economy and not just something that can make one statistic look better.

    • #14
    • September 13, 2017 at 7:03 am
    • 1 like
  15. Member

    If the fallacy were true then maybe destroying North Korea would turn it into an economic powerhouse. Or perhaps we should bulldoze residential neighborhoods and business districts in the States every three years or so. Think of the construction jobs and the window replacements, and the lumber production jobs that would skyrocket. Wait a minute, I forgot, trees are our friends, we don’t want to cut down any trees.

    Oh well back to figuring out how to pay for the new $900 dollar I-phone, and finding that free plug-in station for my Tesla, and I suppose the trip to Key West will have to wait. Too bad my Tesla tax break is burning a hole in my pocket.

    • #15
    • September 13, 2017 at 7:04 am
    • 4 likes
  16. Thatcher

    Jon Gabriel, Ed.: Moreover, replacing something that has already been purchased is a maintenance cost, not a purchase of truly new goods, and maintenance doesn’t stimulate production.

    I get the rest of the argument, but I don’t see the relevancy of this one. A new window, or at least the replacement glass, had to be produced whether it’s called “maintenance” or not.

    • #16
    • September 13, 2017 at 8:23 am
    • 1 like
  17. Member

    drlorentz (View Comment):

    Jon Gabriel, Ed.: How famed economists can keep falling for the broken window fallacy is beyond me

    Yeah

    Same genius economists who think the solution to economic downturns is to dig holes and bury money…

    • #17
    • September 13, 2017 at 8:24 am
    • Like
  18. Thatcher

    When it comes to the disaster areas, they aren’t really experiencing a boom. It’s areas not affected, with the resources to offer, that are experiencing economic benefits.

    • #18
    • September 13, 2017 at 8:27 am
    • 2 likes
  19. Contributor

    I Walton (View Comment):
    Why do they fall for this fallacy? It logically follows from the Keynesian model. Under Keynesians, savings is non -pending and spending spurs economic recovery, so using savings is supposed to spur recovery. Notice I say recovery. It was never supposed to lead to growth, just recovery.

    So that’s the point. Keynes described this as paying one group of workers to bury bottles filled with currency in the ground, then paying a second group of workers to dig it up. Useless unless you want to have something for the unemployed to do. You might want that, if you thought work gave dignity no matter its qualities. As I said initially, I don’t agree with this, I’m just trying to explain Krugman and GDP measurement.

    • #19
    • September 13, 2017 at 5:41 pm
    • 2 likes
  20. Thatcher

    How about I hit an idiot columnist in the knee with a baseball bat?

    Some doctors, nurses, physical therapists, hospitals and artificial joint manufacturers would get a boon; in addition, he’d get a knee that might work a little better and not jerk as often.

    • #20
    • September 14, 2017 at 1:27 am
    • 6 likes
  21. Member

    My Uncle Fred’s brilliant article describing the seen and the unseen should be required reading in high school. Every year.

    This is the only way that progressives continue to get elected. The benefits to their programs are seen. The enormous damages they cause are unseen.

    • #21
    • September 14, 2017 at 7:04 am
    • 2 likes
  22. Member

    I Walton (View Comment):
    Why do they fall for this fallacy? It logically follows from the Keynesian model. Under Keynesians, savings is non -pending and spending spurs economic recovery, so using savings is supposed to spur recovery.

    Exactly! You nailed it. Government spending. One-size-fits-all-from-Washington-who-knows-best-how-to-spend answer to everything. In one word, Socialism.

    • #22
    • September 14, 2017 at 9:18 am
    • Like
  23. Thatcher

    Dr. Bastiat (View Comment):
    My Uncle Fred’s brilliant article describing the seen and the unseen should be required reading in high school. Every year.

    This is the only way that progressives continue to get elected. The benefits to their programs are seen. The enormous damages they cause are unseen.

    Not entirely true. Some of the evidence is quite stark, out, in the open.

    http://cabrini-green.com/

    Image result for cabrini green chicago

    • #23
    • September 16, 2017 at 9:14 am
    • 2 likes
  24. Member

    Chris Campion (View Comment):
    Not entirely true. Some of the evidence is quite stark, out, in the open.

    http://cabrini-green.com/

    I think that might be a different Broken Windows Theory, the one applying to law enforcement.

    • #24
    • September 17, 2017 at 10:32 am
    • 3 likes