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LISTEN NOWThe Freedom Files Podcast Episode 42: Jim LamonListen Here


Hurricane Sandy, Frédéric Bastiat, and "Econ 101"

As the Hurricane Sandy recovery effort begins, the most recent reports put the American death toll at 88 lives. Estimates of the economic damage caused by the storm vary, but some put the figure at a staggering $50 billion. Like clockwork, however, a handful of "economists" have crawled out of the woodwork to proclaim that there's a silver lining to the disaster: Ultimately, this will help the economy!

Here's the argument, as put by (supposed) economist Dr. Peter Morici of the University of Maryland:

Disasters can give the ailing construction sector a boost, and unleash smart reinvestment... ...Rebuilding after Sandy, especially in an economy with high unemployment and underused resources in the construction industry, will unleash at least $15-$20 billion in new direct private spending.

This is an age-old argument, but does it hold up? Not at all, and I can already see those of you who have taken a basic economics class rolling your eyes. Dr. Morici is simply repeating a variation of the "broken window fallacy," which was first exposed by a 19th-century French economist by the name of Frédéric Bastiat. In his 1850 essay, That Which is Seen, and That Which is Not Seen, Bastiat expounds on the fallacy of viewing destruction as a pathway to economic growth. Due to the clarity of his enjoyable writing style, I'll allow you to read the short tale for yourself:

Have you ever witnessed the anger of the good shopkeeper, James B., when his careless son happened to break a square of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation - "It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"
Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade - that it encourages that trade to the amount of six francs - I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen."
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

Bastiat goes on, but that isn't necessary for our purposes. Here's the point: A shopkeeper's broken window does transfer wealth to the repairman, but that isn't the end of the story. Since the shopkeeper had to spend his money on repairing the window, he couldn't use that money for other purposes, such as purchasing a new coat.

While we can see the transfer of wealth from the shopkeeper to the repairman, we can't see the loss to the tailor who would've sold an additional coat. The broken window forcing the shopkeeper to spend money doesn't add to economic growth, because the shopkeeper would've spent that money anyway on a new coat or some other good. Indeed, the shopkeeper is significantly worse off. Instead of having the window and a new coat, he merely has the window. Where's the economic growth or the improvement in his quality of life that comes with prosperity?

Dr. Morici attempts to circumvent the broken window fallacy by claiming that "smart reinvestment" from the rebuilding effort will leave devastated areas better off than they were before Hurricane Sandy in the long run. However, this is merely a rephrasing of the same basic argument.

His argument is that the destruction of resources can be a good thing, because rebuilding will use up more resources and we might end up with something better than we had before. The additional use of resources may statistically appear to be "economic growth," but as we've learned from Bastiat, we'll be worse off in reality. The transfer of resources to the construction industry (the repairman) may give them a "boost," but it's at the expense of every other business who thereby lost out on future sales.

Whether or not the rebuilt towns are somehow "superior" to their predecessors, wealth destruction is not a road to prosperity. If the storm's victims wanted to "modernize" their homes and communities, they could and would have invested to do so themselves, without the massive (and often permanent) losses incurred by Hurricane Sandy.

This isn't complicated. It's not difficult to grasp. Indeed, it's intuitive. Widespread destruction is not a boon for society or for economic growth. Period.