Even Nobel laureates forget their economic fundamentals sometimes. Paul Krugman, who knows better, recently fell for the broken window fallacy in a post at his New York Times blog. He argues that the tsunami that hit Japan last year has boosted the economy. An error that basic demands correction; my attempt ran today in The American Spectator:
Imagine for a minute that the tsunami never happened. Japan’s GDP growth would probably be slower; Krugman is almost certainly correct on that. And yet, a tsunami-less Japan would be better off. For one, the survivors wouldn’t have 15,000 holes in their hearts where their families, friends, and neighbors used to be.
As far as the economy goes, all that reconstruction spending would instead go to creating brand new wealth, as opposed to merely replacing what people already had to begin with. It is better to build than to rebuild.
Read the whole thing here.
Huricane Irene largely spared the East coast’s larger cities from the worst of its wrath. It still cut off power to about 4 million people. And it cost 25 lives. But there is a sunny side to the billions of dollars of destruction! Politico’s Josh Boak quotes the University of Maryland’s Peter Morici:
Morici said there could be some economic growth at the end of this year and the beginning of next year, because with the rebuilding, “largely what we’re going to get is a private-sector stimulus package.”
Morici fell for the broken window fallacy; if a kid (or a hurricane) breaks a window, it creates a job for the repairman. He then spends his wages on other things, and the economy gets a boost. Why not break every window in the entire country, then? Think how much wealthier everyone would be if only a hurricane would come along and level the entire nation!
Morici could well be right that Irene could cause a small GDP boost. But that doesn’t mean that America is richer for having endured a natural disaster; hurricanes are not stimulus packages. St. Lawrence University economist Steve Horwitz draws a useful dichotomy that can help us understand what’s going on here:
GDP measures a flow of activity, not a stock of wealth. Destroying things and then rebuilding them might increase economic activity in the area affected (by drawing resources from elsewhere), but leaves us with less wealth than we would have had without the disaster. That is the real meaning of the Broken Window Fallacy.
Irene destroyed billions of dollars of America’s stock of wealth. Getting back to where we were before the hurricane will probably give a boost to GDP. But we aren’t wealthier for it, even if GDP does look better. If nothing had been destroyed, all the time, energy, and materials put into playing catch-up would have been put into making something new.
Good stuff. If the embedded video doesn’t work, click here.
Tragedy struck Japan this morning. It will be some time before we know just how many lives the tsunami took, and how much damage was done. But pundits are already saying dumb things.
Larry Summers, who should know better, committed the economists’ cardinal sin this morning: he fell for the broken window fallacy. The sunny side of the destruction is that it will boost the economy. Just think of all the jobs that will be created by the rebuilding process!
Over at the Daily Caller, I gently correct Summers. Natural disasters are bad for the economy. All the rebuilding activity in the next few years will only get Japan back to where it was. If the tsunami had never happened, all that energy could be put to creating new wealth. Disasters are just that: disasters.
Posted in Economics, International, Publications, Stimulus
Tagged bastiat, bastiat broken window fallacy, broken window fallacy, cnbc, daily caller, earthquake, economic growth, japan, japan earthquake, japan tsunami, larry summers, lawrence summers, natural disaster, Stimulus, tsunami
Ever hear the old canard that war is good for the economy? Or that natural disasters create jobs? Those arguments illustrate one of the oldest fallacies in economics: Bastiat’s broken window fallacy. The video below, by Tom Palmer and his colleagues at the Atlas Economic Research Foundation, explains why in two minutes and change. Worth watching.
Here is a letter I sent recently to The New York Times:
February 17, 2010
Editor, The New York Times
620 Eighth Avenue
New York, NY 10018
To the Editor:
Michael Cooper’s article, “Stimulus Jobs on State’s Bill in Mississippi” (February 16, page A1), lists several people who have directly benefited from the stimulus package.
The article names none of the roughly 300 million people directly hurt by that same stimulus package. The money that pays for Roshonda Bolton’s factory job was taken away from other people. They would have spent that money in other job-creating ways.
The stimulus doesn’t actually create jobs. It rearranges them. The best possible result is no net effect. Stories touting jobs saved or created by government are at best incomplete.
Warren T. Brookes Journalism Fellow
Competitive Enterprise Institute
Posted in Correspondence, Economics, Stimulus
Tagged bastiat broken window, bastiat broken window fallacy, broken window, broken window fallacy, creating jobs, econ 101, Economics, economics 101, economy, jobs, mississippi, new york times, roshanda bolton, saving jobs, Stimulus, the new york times, unemployment
“Public spending is always a substitute for private spending, and that consequently it may well support one worker in place of another, but adds nothing to the lot of the working class as a whole.”
-Frederic Bastiat, Selected Essays on Political Economy, p. 16 (emphasis in original)