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

Foundation for Economic Education ^ | 09/12/2017 | Jeff Jacoby

[SeekAndFind]

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.

[riverdawg]

“Well heck, then let’s replace all items everywhere. We will be rich!”

Exactly! This topic confuses even some normally clear-thinking FReepers.

[suthener]

I said basically that in a previous thread. Who has a successful economy based on tearing stuff down and then rebuilding it?

[sparklite2]

The depression ended a couple of years after the war

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The common view among economic historians is that the Great Depression ended with the advent of World War II. Many economists believe that government spending on the war caused or at least accelerated recovery from the Great Depression, though some consider that it did not play a very large role in the recovery. It did help in reducing unemployment.[11][101][102][103]

When the United States entered into the war in 1941, it finally eliminated the last effects from the Great Depression and brought the U.S. unemployment rate down below 10%.[105] In the U.S., massive war spending doubled economic growth rates, either masking the effects of the Depression or essentially ending the Depression.

https://en.wikipedia.org/wiki/Great_Depression#World_War_II_and_recovery

[sparklite2]

Of course. Escaping one of the highest corporate tax rates in the world can have that effect. Not to mention escaping unions, regulatory handcuffs, and much more.

[sparklite2]

The same countries that taxed themselves into prosperity, ie, none.

[Forgotten Amendments]

Isn't this one of the big reasons why post-WW2 Europe and Asia saw such phenomenal economic growth?

Europe & Asia didn't recover until the '60s. Japan was 3rd World.

[from occupied ga]

I believe disasters to be a net positive in the long run.

So burn down your house and everything in it if it's so good in the long term.

[central_va]

Unions are basically dead. Less than 10% of the manufacturing workforce is in a union. The sole driver of offshoring is to NOT pay first world wages for labor. Labor is only a small part of manufacturing costs, less than 8% in most cases. More like 5%. But 5% is a lot to add to a bottom line, regardless of the destruction it causes in the USA, socially, politically and economically for the individual and taxpayer with little or no benefit.

[1Old Pro]

I believe disasters to be a net positive in the long run.

Wealth transfer from Insurance companies to the construction industry

[sparklite2]

5% for the unions.
35% corporate taxes.
~10% regulations
~15% health benefits

So far we’re up to 65%. Businesses have no patriotic duty to lose money.

[Forgotten Amendments]

If you define depression by unemployment rates, yes, WWII ended it.

But living standards DECLINED during the war. What good is lower unemployment if you can’t buy things, travel, etc.? That’s Soviet economics. The USSR & Cuba bragged about their full employment.

[TBP]

Disasters can have beneficial effects for certain segments of the economy, but they are not good for the economy overall.

The Broken Window Fallacy is about hidden costs.

[sparklite2]

I can only reiterate what I’ve already cited.

“massive war spending doubled economic growth rates”

[az_gila]

I disagree

I believe disasters to be a net positive in the long run.

Everything damaged will be replaced with new items even aging infrastructure that otherwise would have sat continuing to decay.

---

I think in this case you might see some giant tourist resorts or masses of off-island summer homes getting built.

These projects probably would have had local islander opposition (the NIMBY effect) in the past but will simply get ram-rodded though now.

The description of "net positive" may depend on your viewpoint.

[TexasFreeper2009]

Assuming you have good insurance and were able to save the sentimental irreplaceable stuff then, yes.

I am not attached to most of my stuff I guess.

[central_va]

Unions are dead, corporations still pay taxes whether the factory is in China or in the USA.

>>>Businesses have no patriotic duty to lose money.

If corporations cannot use American materials an labor to make a product for domestic consumption then it is the obligation of the government to tariff imports to offset wage differences between the USA and the 3rd world. Duty has nothing to do with it.

Fortunately we now have a President that understands that simple concept.

[BfloGuy]

Although some economists say the Depression was not ended by WWII, it seems to me it was.

It really wasn't.

It's true that the rampant unemployment of the Depression disappeared, but that will happen when the government forces 9 million men into the Armed Services.

Virtually all production of consumer goods was halted and what remained was severely rationed. Though the nation certainly pulled together, very few lived well during those years.

And though the production of war goods was incredible, virtually all of it ended up destroyed, sunk, or rusting away in mothballs at the end of the war. An economy that produces only to destroy its production isn't going to boom.

Now, we did what we certainly had to do, but it was the removal of the New Deal era government regulations in 1946 that enabled the country to switch back over to consumer production and employ those 9 million young men returning from the Pacific and Europe.

It was then that the Depression ended.

[dangus]

It depends what you mean by “good” for the economy. You have to replace what was destroyed. That cost of replacement is counted as production, but the destruction isn’t subtracted from production. So yes, any statistic of economic growth will be inflated by the destruction. But that inflation isn’t something good; it’s just something that looks good because of misleading statistics.

Of course, the money spent replacing what was destroyed will come out of money that COULD have been spent building something new and productive. (This is the same flaw with Keynsian spending.) So if you take the size of the economic product and subtract the cost of replacement, you get a value significantly lower than what the size of the economic product WOULD have been without having to make the replacement. But I expect if you don’t make that correction for destruction, you would have a value higher than if there hadn’t been the destruction, unless the destruction was so devastating and widespread that you hamper economic activity down the road, such as after the Japanese or Indonesian tsunamis, the Haitian earthquake, etc.

[from occupied ga]

I am appalled to see such massive ignorance.

... you have good insurance ...

Insurance simply spreads the loss around. Suppose EVERYOE insured decided to burn their house down to get "new stuff" The insurance pool would not be able to cover the loss and everyone would be out the economic loss of their possessions. Would you destroy all your possessions if you had to cover their loss? Try reading Bastiat and if that doesn't convince you of your fallacy read this

[PGR88]

Then what you suppose ended the Depression?

That's a good question. Or asked another way - why did the Great Depression last all the way until WWII? IMHO, the biggest reason was the New Deal's socialist interventions and assault on property rights throughout the 1930's. We saw the same phenomenon with Obama.

How did things change from 1929 to 1946 (the start of demobilization)? That's the debate. The US population went from 122 million in 1930 to 161 million in 1950. That's a 30% increase in population in a period of Depression and war, for most of which almost no new houses or consumer goods were being built, so there was huge pent-up demand. Moreover, the world was destroyed, and their huge loss (their broken windows) were the USA's massive gain. Price and wage inflation also reduced outstanding debt.

Don't also discount the fact that FDR was dead, and his radical schemes were in the past.