Thanks, Katrina, for Inducing Us to Buy New Cars and Houses!
I’ve not heard anyone thick enough to actually invoke the broken window fallacy yet, but don’t worry. They will.
Here’s what Slate magazine’s Timothy Noah (writing as “Chatterbox”) wrote on September 12, 2001:
Why does Chatterbox think it [the World Trade Center disaster] will benefit the economy? Simple: because we live in a very wealthy nation that responds to horrible disasters by spending large sums of money. In this case, the spending will come both from private insurers and from the federal government’s Federal Emergency Management Agency, which over the past decade has established itself as a politically unstoppable source of federal largesse. FEMA helped Southern California’s recession-plagued economy to boom after it suffered various natural disasters in the early 1990s. In that instance, of course, California benefited from a Democratic administration’s reliance on its votes in the upcoming 1996 election. Since New York is unlikely to go for Bush in 2004, this president will likely be less enthusiastic about rebuilding it. But rebuild it he must if he wants to demonstrate that terrorists can’t damage U.S. morale.
Why will the entire U.S. economy benefit, as opposed to just New York’s? Because the money will be spent in the nerve center of American finance, which is having a rough time of it these days. Chatterbox believes that the mere presence of construction activity around Wall Street will have a beneficial psychological effect on bankers and brokers. It will also provide a meaningful Keynesian stimulus to a national economy that, let’s face it, was tottering on the brink of recession well before Sept. 11. The recession may still come, but the countercyclical spending should help shorten it.
Here’s what the former economist Paul Krugman (now a hack writer for the New York Times) wrote on September 14, 2001:
“The driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I’ve already indicated, the destruction isn’t big compared with the economy, but rebuilding will generate at least some increase in business spending.”
Here’s why they’re both wrong, as are all those who will surely begin talking about the beneficial effects of Hurricane Katrina on the U.S. economy:
UPDATE: Well, the New York Times did manage to resort to the broken-window fallacy (“Damage to Economy Is Deep and Wide,” by Eduardo Porter; requires simple registration) on the day that I wrote the post above:
But economists point out that although Katrina has destroyed a lot of accumulated wealth, it ultimately will probably have a positive effect on measured growth over the next few months as vast resources from around the country are channeled to rebuilding.
Even as shuttered businesses will temporarily add to joblessness, the huge reconstruction effort is expected to create jobs in construction and a host of related sectors. Insurance companies and the federal government will pick up a significant portion of the cost.
“Longer term, in the wake of a number of hurricanes there is actually an increase in measured output that even shows up at the national level, because there is a whole bunch of rebuilding activity,” said Stephen P. A. Brown, director of energy economics at the Federal Reserve Bank of Dallas. “Though in some sense it would be easy to argue that we have been made worse by the hurricane, the process of rebuilding of property contributes to an increase in output.”
At least Mr. Brown, quoted above, had the decency to refer to “an increase in measured output” and to try to hedge against being a complete fool by noting that “in some sense it would be easy to argue that we have been made worse by the hurricane….” Maybe “a net decrease in wealth and well being” is the “sense” in which “it would be easy to argue that we have been made worse by the hurricane.” If I were in a car crash and terribly injured, Mr. Brown would note that there would be a “sense” in which I would be “made worse by the car crash.” But, of course, only “a sense.”
Not so sure I’d call Krugman an economist if he believes in the broken window fallacy. That’s like calling someone who believes that you can divide by zero, a mathematician.
I’m surprised no-one has started talking about how “great” this hurricane is for the economy. However, we can be sure it *will* occur, and we can also be sure that any businessman caught trying to raise prices during this natural disaster — as a response to increased demand for certain things — will be called a “price-gouger” and smeared, even though this is completely beneficial.
What we’ve already seen is the parade of politicians using this for their benefit, engaging in various forms of collectivist planning. There was the fiasco with the football stadium metrodome, where they put some 100,000 people, which (as it turns out) has some structural weaknesses (wasn’t built to be a shelter against hurricanes). I wonder if there will be new calls for regulation in building codes because politicians decided to house 100,000 people in the football stadium.
Maybe that’s why Dr. Palmer referred to Krugman as “the former economist Paul Krugman (now a hack writer for the New York Times).” The important word is “former”.
Tanya,
Ahhh…Thanks for the correction. I read that too quick and thought he said, “heck of a writer for the NYT”.
Tom,
Good call on Krugman being a hack.
To be fair, usually when people talk about the positive aspects of reconstruction on the economy, they don’t mean to say that the entire incident is a net positive for the economy.
Even if they do, this sort of economic stupidity is usually harmless (few suggest creating disasters).
But, the anti-gouging laws that are inevitably called-for and enforced do make people worse off.
Before I got to the update, I was thinking “never underestimate the economic illiteracy of the popular media, Dr. Palmer. They will use the BWF sooner than you can say… Katrina”.
Obviously, they will use the broken window fallacy to help them “cope” with the after effects of a disaster because that is what they have been programmed to invoke in their formulaic training at journalism school.
What’s more disturbing, I think, is how reluctant they are to break out of the rigidity of Keynesian doctrine and open up to the ideas of “the other economists” who are so quickly dismissed in too many undergraduate economics classes. That is where we come in. We laugh at them because they are funny. But then, we should make them better.
Seriously, some of us within the movement would do well to mail a copy of “The Law” and “What is Seen and What Is Not Seen” to as many editors/newspaper columnists as possible. Or, to be more fiscally responsible, target it: send it to every reporter who uses the broken window fallacy. But we should be clever about it. They won’t read something put out by the FEE. (side note: the FEE changed my life by mailing “The Law” to me, no joke)
My proposal: change the jacket and put some pictures of environmental activists or something related to whatever the latest cause du jour happens to be (anti-obesity activists? I can just see itÃ?Â?Ã?¢Ã?¢?Ã?¬Ã?Â?Ã?¦). Then preface it with a short essay on how the activists on the cover wouldn’t have to protest against whatever they were protesting against if only we followed the principles outlined in the essay. Here’s to betting that they still wouldn’t read it, but hey — it’s an effort at outreach.
I still like to think that at least some of the ignorance in the media is just that: ignorance. That at least some of the writers at the NYT are not just being pigheaded: that they truly suffer from a lack of exposure to the life-changing ideas of Bastiat’s line of thinking that we all take for granted. Oh, the darkness.
“(…) it ultimately will probably have a positive effect on measured growth over the next few months as vast resources from around the country are channeled to rebuilding.”
Natural disasters and wars are good for the economy in the same sense that government interventionism is good for the economy.
Listened to some NPR today. In the morning, they had a discussion specifically about the oil and gas shortage, with oil rigs and (more importantly) a couple of refineries getting hit. They had one guy that was quite reasonable, saying that gas prices will rise, but that the worst response would be price regulation. Unfortunately, I didn’t catch his name. One quote, paraphrased from memory: “It’s important we let the market do its job.”
At lunch, they had another discussion, where an economist, (Mark?) Vintner, claimed that hurricanes in Florida were a net benefit for the economy there, because it is such a rich state, whereas Katrina is bad for Mississippi and Louisiana, because they are much poorer. This sounded like a new and possibly more misguided application of the broken window fallacy; why on earth would the economic impact be related to the pre-disaster state of the economy?
This misreading of Krugman is stupid. OTOH, you ignore Bush talking about making NOLA and Trent Lott’s mansion better than ever.
I’m afraid that I don’t quite understand ts’s comment. Could you please elaborate? In what way is it a misreading of Krugman? And what does that have to do with the same fallacy (which I hadn’t heard yet when I wrote the post above) being repeated by George Bush? (And by the way, remarks about making a place better than ever are not per se economic fallacies; it’s a fallacy if you say that it will “increase employment” or that the destruction “makes us all richer.” You can rebuild New York or New Orleans by sucking resources from elsewhere; someone will no doubt be richer — building contractors come to mind — but it won’t be the case that “all of us” are richer in the aggregate. But I wouldn’t put it past an administration spokesman to make that claim, but I’ve not heard it yet. If one of them does make the claim, then he or she would also be guilty of committing the same fallacy.)
I’m not TS, but if I had to venture, I’d read this:
“The driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I’ve already indicated, the destruction isn’t big compared with the economy, but rebuilding will generate at least some increase in business spending.”
Not as the broken window fallacy, but as pointing out that businesses (those that didn’t go under) who were effected did indeed increase spending in the aftermath.
Business spending is a required but insufficient aspect of economic recovery. It is clearly better that spending go to activities that offer a positive return on investment, but it is also so that a stalled economy doesn’t grow.
Anyway, that’s a very gentle reading, which I’m not sure he deserves, ut there you have it.
Quick followup: guess where this is from?
“Despite all the pictures of sinking hotels and flooded convention centres, the overall impact of natural disasters is often close to neutral: lost output (which will be large) is then compensated for by a surge in reconstruction and public spending (also large)”
(Spelling of “centres” probably gave it away.) The first Leader in The Economist, Sept. 3, 2005, page 11, third to last ‘graph.
Just found that amusing.
Ahhh, Katrina. While she certainly was destructive, I believe that overall she WAS good for the economy. Sure people can point out how that even though jobs were created natural resources had to be used….So? You also have to remember how far the job creation stretches. Now the people who are collecting and refining the natural resources will have more work, and many of the resources are renewable.