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GHEI: Sandy’s broken windows
Classic fallacy underlies liberal economic views
Question of the Day
Northeasterners affected by Tuesday's massive storm are beginning the process of assessing the damage. Initial estimates suggest it could cost anywhere from $20 billion to $100 billion to bring things back to where they were before Hurricane Sandy struck. Bizarrely, there are some who think that's a good thing.
University of Maryland economist Peter Morici suggests it's not correct simply to say Sandy will have a devastating economic impact. The question is "more complex," he wrote in an online column, adding, "Disasters can give the ailing construction sector a boost, and unleash smart reinvestment that actually improves stricken areas and the lives of those that survive intact."
Mr. Morici isn't alone. Whenever there's a major disaster, Keynesians crawl out from the wreckage to suggest the massive effort to rebuild an affected area acts as a stimulus to the industries involved in replacing the lost goods. Ultimately, this is supposed to boost our gross domestic product. New York Times columnist Paul Krugman made a similar argument following the massive earthquake and tsunami last year in Japan. It's the classic "broken window" fallacy that French economist Frederic Bastiat explained around 1850.
In Bastiat's view, "destruction is not profit." A natural disaster ruins infrastructure, diminishing the national stock of capital. So if growth takes place as a result of the rebuilding effort, it would only be growth on top of a diminished baseline. A higher growth number would not reflect an actual increase in prosperity. The process of rebuilding merely returns us to square one.
Bastiat explained that the broken-window fallacy is based on a failure to perceive the "unseen." We can clearly see the broken window and the revenue it generates for the glazier who replaces the window. What is not seen is the other ways the homeowner could have spent the repair money -- a meal out, a new book, a new pair of shoes. So instead of the restaurateur, the bookseller or the cobbler enjoying an economic boost, the money goes to the glassmaker. Bastiat calls our attention to the man who doesn't get the homeowner's business. "It is he who shows us how absurd it is to think we see a profit in an act of destruction," wrote the economist. Instead of having a window plus a book or a shoe, the homeowner ends the day with a window and less money. The homeowner is worse off, as is the cobbler.
America's economic woes are also worsened by Sandy's wrath. The upside -- to the extent there is one -- is that the market is flexible, and businesses will respond swiftly to fix the disruption. In the wake of Hurricane Katrina, it was Wal-Mart, not the federal government, that delivered water to New Orleans. Private enterprise is resilient enough to withstand the forces of a hurricane, but that doesn't make Sandy a stimulus.
Nita Ghei is a contributing Opinion writer for The Washington Times.
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