It was inevitable that with the arrival of Hurricane Sandy, various
economic pundits would speculate on its effects on “the economy.”
Needless to say, some were saying that the hurricane would boost
spending—both at the retail and then reconstruction level—and in that
sense might actually provide a lift to GDP.
The whole episode is yet another reminder that old fallacies die hard
in economics. The commonsense notion that a natural disaster is bad is
correct; only “sophisticated” analysts could think otherwise.
The basic problem here is what Henry Hazlitt called the “Broken Window Fallacy,” following the famous exposition of Frédéric Bastiat. The essential insight is that it is shortsighted to focus just on the employment given to workers who must rebuild after some act of destruction. In the present case, it is certainly true that glaziers, producers of telephone wire, and various construction crews will see more demand for their services following Hurricane Sandy. Their higher earnings in turn may lead them to spend more on restaurants, luxury items, and so forth, boosting employment in those sectors as well. This is the genesis of the notion that an act of destruction can actually have a silver lining.
But what this overlooks, explained Bastiat and then Hazlitt, is that the original people spending money on reconstruction could have spent their money on other things. Thus, instead of paying $1,000 (say) to replace his shattered store-front window, a shopkeeper might instead have spent $1,000 buying a new computer. Thus the extra employment given to the glazier et al. because of the hurricane, would merely be redirected from employment that otherwise would have gone to the software industry and all of the restaurants and so forth on which its employees would have spent their earnings.
Read more: http://www.theamericanconservative.com/articles/hurricanes-are-natures-keynesianism/
The basic problem here is what Henry Hazlitt called the “Broken Window Fallacy,” following the famous exposition of Frédéric Bastiat. The essential insight is that it is shortsighted to focus just on the employment given to workers who must rebuild after some act of destruction. In the present case, it is certainly true that glaziers, producers of telephone wire, and various construction crews will see more demand for their services following Hurricane Sandy. Their higher earnings in turn may lead them to spend more on restaurants, luxury items, and so forth, boosting employment in those sectors as well. This is the genesis of the notion that an act of destruction can actually have a silver lining.
But what this overlooks, explained Bastiat and then Hazlitt, is that the original people spending money on reconstruction could have spent their money on other things. Thus, instead of paying $1,000 (say) to replace his shattered store-front window, a shopkeeper might instead have spent $1,000 buying a new computer. Thus the extra employment given to the glazier et al. because of the hurricane, would merely be redirected from employment that otherwise would have gone to the software industry and all of the restaurants and so forth on which its employees would have spent their earnings.
Read more: http://www.theamericanconservative.com/articles/hurricanes-are-natures-keynesianism/
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