A Stitch in Haste

Sometimes I think that Tyler Cowen and I are the only two people on the planet who understand basic economics (and sometimes I even have my doubts about him).

Tyler rightly gnashes his teeth over this monstrosity of a USA Today article on how hurricanes are economically beneficial:

Although natural disasters spread destruction and economic pain to a wide variety of businesses, for some, it can mean a burst in activity and revenue.

For that reason, economists tallying the numbers expect the hurricanes will be neutral in their effect on the U.S. economy, or may even give it a slight boost, particularly because of an expected reconstruction boom in the already red-hot construction industry.

"It's a perverse thing ... there's real pain," says Steve Cochrane, director of regional economics at Economy.com, a consulting firm in West Chester, Pa. "But from an economic point of view, it is a plus."

No.

The conceptual error is of course confusing economic activity with economic wealth. An economy is never better off after destruction, period. Not at the individual level, not at the household level, and not at the state or national level either.

The really frustrating part of reading nonsense like this is that we have been reinventing this wheel for over one hundred fifty years, when the flaws of such reasoning were first exposed by Frederic Bastiat in what is now generally referred to as the Broken Window Fallacy:

The parable describes a shopkeeper whose window is broken by a little boy. Everyone sympathizes with the man whose window was broken, but pretty soon they start to suggest that the broken window makes work for the glazier, who will then buy bread, benefiting the baker, who will then buy shoes, benefiting the cobbler, etc. Finally, the onlookers conclude that the little boy was not guilty of vandalism; instead he was a public benefactor, creating economic benefits for everyone in town.

The fallacy of the onlookers' argument is that they considered the positive benefits of purchasing a new window, but they ignored the hidden costs to the shopkeeper and others. He was forced to spend his money on a new window, and therefore could not have spent it on something else. Perhaps he was going to buy bread, benefiting the baker, who would then have bought shoes, etc., but instead he was forced to buy a window. Instead of a window and bread, he had only a window. Or perhaps he would have bought a new shirt, benefiting the tailor; in that case the glazier's gain was the tailor's loss, and again the shopkeeper has only a window instead of a window and a shirt.

The child did not bring any net benefit to the town. Instead, he made the town poorer by the value of one window.

Florida now has lots of broken windows. It is most definitely not better off, and neither are the Florida or national economies. (And of course the loss of life needs no elaboration.)

The entire Keynesian nightmare that crippled U.S. economic policy for almost half a century (and provided the lubricant for the New Deal) was nothing more than "applied broken window fallacy." Same for the urban renewal movement of the 1950s and 1960s.

So is Kerry's entire economic program, and a good chunk of Bush's too.

Every government subsidy is a broken window fallacy (and therefore so is every targeted tax); so is most government regulation, and a depressingly large portion of eminent domain condemnations.

How can something so simple be universally misunderstood or ignored?

Anyway, the next time you hear a politician or bureaucrat describe how economically beneficial some program, subsidy, tax or regulation is, how it will spur economic growth or benefit some economic constituency, ask yourself...

Are any windows being broken?