Beware the Broken Window Fallacy: Some Economists Still Think Disasters are Good for the Economy

On Friday morning, with Hurricane Irma having wrecked the islands of Saint Martin and Barbuda, CNBC published a story cheerily laying out the silver lining embedded in the tropical disasters:

Hurricanes Harvey and Irma actually will lead to increased economic activity over the long run, New York Fed President William Dudley said in an interview.
Speaking just as Irma is about to start battering Florida as a Category 4 storm, Dudley said the initial impact in both human and economic costs will be harmful. But in the long run, economies tend to snap back from such major events.
"Those effects tend to be pretty transitory," Dudley said. . . . "The long-run effect . . . is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms."

A few days earlier, Euronews had run a similar story: “Hurricane Harvey pushes up petrol prices, but 'economic outlook positive.'” Over at Yahoo Finance, a roundup of expert opinion quoted Goldman Sachs’s Jan Hatzius, who predicted a surge in the wake of the storms, “reflecting a boost from rebuilding efforts and a catch-up in economic activity displaced during the hurricane.” The Los Angeles Times, meanwhile, focused on one particular “glint of silver lining” in all the hurricane destruction — the bonanza it would spell for car dealers:

Floodwaters in and around Houston severely damaged or destroyed hundreds of thousands of cars and trucks, most of which will be replaced. Those new and used vehicle sales will benefit automakers and the economy, providing a glint of silver lining amid terrible tragedy.

It never fails. A terrible disaster wreaks havoc and ruin, and is promptly followed — or even, as in this case, preceded — by experts insisting that the devastation will be great for the economy.

Could anything be more absurd?

Every dollar spent on cleanup and reconstruction is a dollar that could have been spent to enlarge the nation’s reservoir of material assets.The shattering losses caused by hurricanes, earthquakes, forest fires, and other calamities are grievous misfortunes that obviously leave society poorer. Vast sums of money may be spent afterward to repair and rebuild, but society will still be poorer from the damage caused by the storm or other disaster. Every dollar spent on cleanup and reconstruction is a dollar that could have been spent to enlarge the nation’s reservoir of material assets. Instead, it has to be spent replacing what was lost. That isn’t a “glint of silver lining.” It is the tragedy of vanished wealth and opportunity, to say nothing of immense human suffering.

As a matter of theology or philosophy or psychology, there may be a certain validity to interpreting tragedy as a blessing in disguise. But as a matter of economics, it is madness. If your car is totaled in a crash, you don’t celebrate your good fortune because the insurance company is going to send you a check to pay for a new car. Sure, the auto dealer will be glad to make a sale, but his gain will not outweigh your loss. Nor will the economy as a whole be better off: The money you have to spend to get another set of wheels is money that might otherwise have been devoted to enlarging society’s stock of capital. All it can do now is restore capital that was wiped out.

Yet the fallacy that disaster is a boon never seems to go out of style. Even Nobel laureates indulge in it.

“It seems almost in bad taste to talk about dollars and cents after an act of mass murder,’’wrote Paul Krugman in The New York Times, just after the 9/11 horror 16 years ago today, but the terrorist attacks could “do some economic good.’’ After all, he continued, Manhattan would “need some new office buildings’’ and “rebuilding will generate at least some increase in business spending.’’

Ugh.

All the increased spending on earth will never bring back those who died. It will never undo the fear and trauma and sorrow of the survivors. And it can never restore the millions of man-hours required to repair and rebuild and recover.

No, hurricanes are not good for the economy. Neither are floods, earthquakes, or massacres. When windows are shattered, all of humanity is left materially worse off. There is no financial “glint of silver lining.” To claim otherwise is delusional. To make that claim in the midst of a catastrophe is callous beyond words.

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