Hey! Did you hear the good news? Hurricane Sandy will create jobs and provide economic growth that will help drag our economy out of the doldrums. According to University of Maryland economist Professor Peter Morici, there is actually a benefit to mass destruction:
However, 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 — likely more as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive.
You can read the entire news article here.
This kind of thinking blows my mind. Mass destruction apparently is the newest tool in the Keynesian bag of economic stimulus. But it is not atypical of contemporary economic thought. On its face the argument seems plausible: people will be hired to repair the damage, money is spent to rebuild, the money flows through the local economy, and it stimulates growth.
The only problem is that it isn’t true. In fact this is one of the oldest fallacies in economic, yet it gets repeated by even prominent economists every time we have a disaster. French economist Frederic Bastiat explained this in his 1850 essay “That Which is Seen and That Which is Unseen.” In his famous Parable of the Broken Window he discusses the consequences of the lad who throws a stone through a shopkeeper’s window. A crowd gathers around and people say, well, now the glazier will have work, thus it is a good thing. Not so, as Bastiat explains:
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.
Before the broken window he had a window and six francs. Afterward he had a new window and was out six francs. There is a loss, not a gain. This concept is now referred to in modern economics as “opportunity cost”. Whenever something is so destroyed, there is always a loss, not a gain. If it were good, why don’t we just start destroying older buildings for example. Think of the benefit to the economy with all the new construction. Some people have said that even war has a silver lining. Put in such a context it’s obvious that it is a really stupid idea.
But the lesson hasn’t been learned. Even today we have similar schemes that ignore the unseen costs. The most famous recent example is “Cash for Clunkers”, that inane program enacted by the Washington Wise Men in 2009. The ostensible justification was to get older gas guzzlers off the road for the benefit of civilization. The deal was that the cars traded-in had to be destroyed. What it really was, was a government stimulus program to help Detroit. The government paid out almost $3 billion. Like most such programs it was a massive failure. This from Wikipedia:
On August 26 the DoT reported that the program resulted in 690,114 dealer transactions submitted requesting a total of $2.877 billion in rebates. At the end of the program Toyota accounted for 19.4% of sales, followed by General Motors with 17.6%, Ford with 14.4%, Honda with 13.0%, and Nissan with 8.7%. It led to a gain in market share for Japanese and Korean manufacturers at the expense of American car makers, with only Ford not taking a significant hit. Meanwhile, Japan’s own program excluded U.S. cars. The Department of Transportation also reported that the average fuel efficiency of trade-ins was 15.8 mpg (miles per gallon), compared to 24.9 mpg for the new cars purchased to replace them, translating to a 58% fuel efficiency improvement.
A study published after the program by researchers at the University of Delaware concluded that for each vehicle trade, the program had a net cost of approximately $2,000, with total costs outweighing all benefits by $1.4 billion. Another study by researchers at the University of Michigan found that the program improved the average fuel economy of all vehicles purchased by 0.6 mpg in July 2009 and by 0.7 mpg in August 2009.
The result was that 690,114 older, serviceable vehicles were destroyed with no net gain, and you and I paid $2,000 for the privilege. If you track auto sales, all the program did was to pull future auto sales into the present. Sales shot up to a 14.5 million unit rate during the program and then fell off a statistical cliff. It took until this year for sales to reach the peak achieved during the program.
They didn’t see that coming. They never do.
Hurricane Sandy was a tragic, destructive event. We will have to rebuild, but think of what was lost. Tell the victims what a great opportunity they now have to better themselves.