Hurricane Sandy And The Broken Window Fallacy

Once again, a natural disaster has caused a common economic fallacy re resurface.

It seems to be a requirement that after every major natural disaster some economists must come forward and argue how the devastation caused to the areas affected, which in this case is already estimated at $20 billion and likely to climb as we learn more, is actually good for the economy. Paul Krugman has made this argument many times including, most bizarrely, in connection with the September 11th attacks. Other economists made it in connection with the massively destructive earthquake and tsunami that struck Japan in March of last year. Kevin Drum followed in Paul Krugman’s footsteps and argued that World War II was good for the U.S. economy, and argument that really doesn’t stand up to scrutiny or logic. Last year, when Hurricane Irene caused it’s own damage, Politico’s Josh Boak made the same argument about a storm that ended up causing some $15 billion in damages.   Now, with the people of New Jersey, New York City, and elsewhere just beginning to deal with the devastation that Sandy has left behind, and Pennsylvania and New York preparing to deal with its rains, the task falls to University of Maryland economics Professor, and Kyocera copier spokesman, Peter Morici:

Disasters can give the ailing construction sector a boost, and unleash smart reinvestment that actually improves stricken areas and the lives of those that survive intact. Ultimately, Americans, as they always seem to do, will emerge stronger in the wake of disaster and rebuild better-making a brighter future in the face of tragedy.

Sandy is unusual storm and complex to gauge. Coming late in the season and combining with cold fronts to the west and north, it is really a post-tropical cyclone and has the potential to deliver epic destruction. However, coming so soon after Irene in August 2011, the level of anticipation and preparedness demonstrated by federal and state officials is commendable and should mitigate some losses-especially loss of life.

(…)

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.

Regarding the latter, consider a restaurant with inadequate patronage — its owner invests the insurance settlement in a new more attractive business. On the shore, older smaller homes on large plots are replaced by larger dwellings that can accommodate more families during the summer tourist season. The outer banks of North Carolina saw such gains several decades ago after rebuilding from a storm of similar scale.

All of this is not to discount the direct costs to individuals by temporary, and in some cases permanent, disruption to lives and communities, much of which cannot be quantified. However, when government authorities facilitate rebuilding quickly and effectively, the process of economic renewal, in many tangible ways, can leave communities better off than before.

It’s a tempting argument, really. After all, every time something catastrophic happens, whether it’s a house fire, an earthquake, or a devastating storm, there is indeed economic activity created. Most immediately, the companies involved in recovery and debris removal benefit, often at highly inflated prices given the supply and demand issues involved, as do the people that work for them. However, as I’ve noted before, this is a rather short-sighted argument that ignores the costs that are incurred when a massive disaster like Sandy occurs, not to mention lost opportunity costs of the investments and purchases that would have been made if businesses, homeowners, and the government had not been forced to divert funds because of the destruction that Sandy unleashed on the United States.

What Morici ignores is the same thing that people like Paul Krugman ignore when they make this argument, and it’s a very simple one; destruction does not create wealth. The billions of dollars it will cost for New Jersey, New York City, and other parts of the East Coast will of course end up going to contractors and disaster recovery teams and the employees that work for them, but calling this wealth creation is simply wrong. The billions of dollars worth of damage that Sandy has left in its wake quite simply no longer exists, and replacing it with funds that were destined for some other endeavor before the storm simply diverts resources from one ledger column to another. No new wealth was created, and in all likelihood the full losses experienced by businesses and homeowners this week will never be paid back in full. Wealth wasn’t created by Sandy, it was destroyed by her, and it’s quite simply false to characterize it any other way.

As Cato’s David Boaz explained a year ago when Irene hit, this is an old argument that was  refuted a long time ago:

As Frederic Bastiat explained the “broken window fallacy,” a boy breaks a shop window. Villagers gather around and deplore the boy’s vandalism. But then one of the more sophisticated townspeople, perhaps one who has been to college and read Keynes, says, “Maybe the boy isn’t so destructive after all. Now the shopkeeper will have to buy a new window. The glassmaker will then have money to buy a table. The furniture maker will be able to hire an assistant or buy a new suit. And so on. The boy has actually benefited our town!”

But as Bastiat noted, “Your theory stops at what is seen. It does not take account of what is not seen.” If the shopkeeper has to buy a new window, then he can’t hire a delivery boy or buy a new suit. Money is shuffled around, but it isn’t created. And indeed, wealth has been destroyed. The village now has one less window than it did, and it must spend resources to get back to the position it was in before the window broke. As Bastiat said, “Society loses the value of objects unnecessarily destroyed.”

To take Morici’s argument seriously, one would have to concede that destruction of assets is a viable means of stimulating the economy. Like any sane person, Morici would reject the idea of blowing up an American city to “stimulate the economy,” but that’s essentially what he’s arguing and it’s why his argument is so ridiculously flawed. Why it’s so hard for some so apparently well-educated as Morici to understand this baffles me.

FILED UNDER: General
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. Modulo Myself says:

    Lots of people accept that WWII ended the Great Depression, and WWII was nothing more than a giant enterprise aimed at blowing up cities.

  2. Tsar Nicholas says:

    The Black Plague was great for business. The coffin business. Elsewhere? Not so much.

    In any event, this sort of nonsense is endemic to the reality that the tail ends of the Bell Curve have taken over the media-academe cabal. If someone’s saying or writing something that’s published in the mass media then it’s probable if not overwhelmingly likely either (a) they’re a spaced out leftist, (b) they’re an idiot conservative bomb thrower, or (c) they’re a faux conservative poseur who’s trolling. That’s pretty much about it. With the ways in which the chattering classes think there’s not too much of a market out there for sentient and experienced professionals. Sad but true.

  3. wr says:

    Only a libertarian — that is, someone incapable of imagining how people actually live, could ever write a post this naive and useless.

    No one is arguing that the storm is a good thing, or that we should work to incur more of them. No one is saying we should deliberately do $20 billion worth of damage so we can get rich repairing it.

    The argument is that the reconstruction can help the economy, putting people back to work, which is indisputably true. Until you get into the libertarian game of defining what is and what is not “creating wealth” — the same kind of silliness that leads “conservatives” to claim that government jobs aren’t real jobs.

  4. gVOR08 says:

    Jeebuz, not Bastiat.

    Please don’t go here without some understanding of Aggregate Demand, Ricardian Equivalence, Multipliers, and Zero Lower Bound.

    Also, conservatives do not get to argue both Bastiat and ‘WWII ended the Depression and saved FDR’. Pick one, fer ***** sakes.

  5. Kit says:

    The idea, to the extent that I understand it, has two parts. First, when the economy is operating below potential (i.e. when there is significant unemployment), then fixing broken windows acts as a stimulus, pumping money around in the economy. With luck, once the stimulus has finished, the economy finds itself on surer footing. Second, improvements to infrastructure should make the economy more productive in the future compared to what one could have expected with the old infrastructure.

    Of course, destroying a new window at full employment would require taking someone away from productive work and simply replacing what already existed. This is the common-sense view, the one which sees the economy as a giant household. The again, the common man is often wrong on issues outside his ken, and generally disdainful of experts. The talk of opportunity costs sounds sophisticated but really just highlights the fundamental misunderstanding.

  6. SKI says:

    @Kit: THIS! A thousand times this.

    Doug’s suggested analogy in response fails because it presumes that the spending to rebuild that will be undertaken would have happened elsewhere in the economy. Given current economic patterns and status, we know this isn’t accurate today.

  7. Me Me Me says:

    Another hurricane-related fallacy: that buying $5,000 in canned goods from a Walmart in Ohio to stage a “storm relief” event more than 600 miles from landfall is going to help anyone other than Walmart.

  8. JKB says:

    Doug, how can you deny how people feel with your logic and intellectual thought? Look at how NYC has milked ground zero. They’ve gotten over a decade of construction pay out of that deal.

    Besides, the money that will be spent was just filing the Scrooge McDuck vault pools of gold coins. It’s not like it was invested in pension funds or something.

    What we’ll see is many marginal businesses that were viable with capital loans paid off decades ago never re-open. Or older owners decide it is time to retire and not rebuild. Eventually, the Jersey shore will be replete with Benningtons and Levis stores but far fewer mom and pop stores or hippy-chick surf shops.

    Arnold Kling has come out of blog retirement to post his Outlook for New York. It is very viable as the bureaucrats close ranks in the coming weeks to arbitrarily impose new code requirement. Saw it happen in Katrina. People worked hard to clean up but when they went to get permits to just re-cover a standing structure, suddenly everything had to be raised 6-20 feet. Even if that is controlled, bringing an old building up to code, can make it a non-viable proposition to restore rather than raze.

  9. Dave says:

    @wr: Doug also completely neglects the fact that when an economy is working at less than full capacity money is not being diverted – it wasn’t going to be used. Another way to look at this is that the economic activity from the storm is displacing very little private activity due to slack demand; the storm actually creates demand. If we were at full employment the story would be different, the spending as a result of the storm would displace beneficial economic activity, but that’s not really not the case now.

  10. Vast Variety says:

    If the broken window was old and cracked in the first place then breaking it and replacing it is indeed a benifit to the economy. The Atlantic City Boardwalk was something like 50 to 80 years old (I’m guessing since I’m too lazy to look it up on wikipedia) and in places probably needed replacing anyhow. The sand burms that were supposed to protect the city were obviously insufficant and better ones can now be built. That is a benifit to the economy. The East Coast is going to see a contruction boom. In the end the only financial loosers are the insurance companies, of course they will raise rates on everyone so in the long term they will have more to waste on the stock market.

    I know that can sound calious for those facing the disaster but it does stimulate the economy.

  11. MBunge says:

    “destruction does not create wealth.”

    Then what the hell is this “creative destruction” thing I keep hearing about?

    Mike

  12. Matt parker says:

    Doug,

    I think you’re largely correct on this. However, I would like to see a study that truly compares the wealth creation affect of reserved insurance premiums vs. those dollars being spent. My thoughts are that it’s likely akin to the relative value of direct stimulus spending and tax cuts.

  13. anjin-san says:

    Seems like this is well covered ground. I think Romney’s desire to end federal disaster relief is a bit more topical…

  14. Ron Beasley says:

    We need to start asking if some these coastal areas need to be abandoned rather than rebuilt. Rising sea levels and more powerful storms will increasingly make this the norm.

  15. Modulo Myself says:

    @Ron Beasley:

    Says you and every scientist and the cumbersome Al Gore.

  16. JKB says:

    @Dave: “money is not being diverted – it wasn’t going to be used.”

    Ah, the Scrooge McDuck economics theory. Sorry to inform you but it is cartoonish.

  17. john personna says:

    There are two superficial arguments that we must revisit after every disaster, and then a common cheat.

    The two superficial arguments are:

    – disasters create wealth
    – disasters do not create wealth

    The more subtle argument is avoided by politi-trolls. That is, disasters force short term changes in spending, which affects us all in the short term certainly, but in the mid long and term as well. This can be examined as the effect of taking from column A and applying to column B.

    Right now bank savings accounts pay something like 1/2 percent interest. They pay that because there is no market for qualified bank loans. If there were loans to make, banks would be trying to get all the money they could to make them. They’d be paying savers. But at this rate, not so much:

    The average on 15-year fixed mortgages, a popular refinancing option, dipped to 2.69 percent, down from the previous week’s record low of 2.73 percent.

    I hate to say it, but if you are going to have a disaster, better to have one when borrowing costs are low and demand is slack.

    The cheat is when disasters are equated exactly to Keynesian economics, and investment in science, say, is equated with breaking windows.

  18. Ben Wolf says:

    Bastiat (and Doug) confuse stocks of wealth with flows of financial wealth. That nice valuable window isn’t generating any economic activity because it is a stock. Smashing a window and buying a new one generates incomes which = employment which = economic output. This is basic first-year economics.

    If Cato is the only source available to refute this, then perhaps some of us should rethink our positions, considering Cato recently produced this little gem of a forgery and is nothing more than a propaganda outlet:
    http://www.scientificamerican.com/article.cfm?id=fake-addendum-by-contrari

  19. michael reynolds says:

    To take Morici’s argument seriously, one would have to concede that destruction of assets is a viable means of stimulating the economy.

    Someone needs to tell Bain Capital about this.

    So, if a two lane bridge with a life expectancy of 20 more years is destroyed by a hurricane and we replace it with a four lane bridge with a 75 year life expectancy, we’re worse off? And the guys who build the bridge don’t really have jobs? They don’t really pay their bills and take their kids to Applebees for a shrimp basket?

    Interesting, because here in Tiburon we had this little pull-off parking area, just gravel, really. It had been slowly eroded. Now it’s being turned into an actual parking space complete with retaining walls and so on. Last I checked there were 11 pieces of large equipment down there and a number of men working.

    Can someone explain the difference between the slow erosion of the old parking lot and a sudden erosion should we have an earthquake? And can anyone explain why those guys working down there aren’t really working? When we’re done we’ll have a more efficient, safer parking area, and less damage to cars, so can anyone explain why that leaves us worse off? Is it because the 11 pieces of equipment and the workers were busy building mansions for rich people and were pulled off that job to do this?

    Do libertarians ever visit the real world?

  20. Ben Wolf says:

    The billions of dollars worth of damage that Sandy has left in its wake quite simply no longer exists, and replacing it with funds that were destined for some other endeavor before the storm simply diverts resources from one ledger column to another.

    Doug, you are confusing real wealth with financial wealth. Damage done to buildings is real wealth lost (materials, finished goods, craftsmanship, etc.) This is not what drives economic activity and growth.

    Financial wealth and the exchange of goods and services is what drives growth. Money is a financial asset, not a stock of real wealth. It is the act of economic exchange which creates employment and spending, not the finished product. Federal disaster spending will be a huge benefit for communities hit by the storm and, as it comes from people at the Fed and Treasury punching numbers into an account, has no downside attached to it.

  21. JKB says:

    @Ben Wolf: Smashing a window and buying a new one generates incomes which = employment which = economic output. This is basic first-year economics.

    So, by your theory, the governors and mayors in the disaster areas should ban power equpment and hand out shovels. It takes more men with shovels to do the job of a backhoe or bulldozer= more employment= higher economic output. Heck, let’s just hire more people, given them spoons then voila! full employment.

  22. michael reynolds says:

    @MBunge:

    Then what the hell is this “creative destruction” thing I keep hearing about?

    Simple. When a rich man forces a company into bankruptcy, throws people out of work and pockets the cash, that’s creative destruction.

    Uncreative destruction is anything that results in a middle class guy getting a job.

  23. john personna says:

    @JKB:

    Do you think you added anything there?

  24. Mikey says:

    @Ben Wolf: I think that mis-states Doug’s point a bit–he’s not talking about the creation of economic activity. I think there’s agreement that a lot of economic activity will occur. What he’s trying to say is the economic activity that results in the aftermath of a disaster doesn’t create any real value, and the short-term economic “boom” that occurs is an illusion.

  25. john personna says:

    FWIW, I think the best economic answer is that natural disasters don’t matter to us, because the US is too big and they have been too localized.

    Example: Hurricanes, Disasters, and GDP

    Doug throws around $20 billion above as damage. Out of $1.4 Quadrillion, that’s not much.

  26. wr says:

    @michael reynolds: “Do libertarians ever visit the real world? ”

    Generally, once. In junior high school. When they get turned down by the first girl they asked on a date. That’s when they pick up Atlas Shrugged…

  27. Ben Wolf says:

    @Mikey: A job is a job and an income an income no matter where they come from. How is spending from one source “real” and spending from another an “illusion”? There’s nothing concrete or empirical in that position, it’s just a value judgement. Doug opposes government spending. He begins with that position and everything else derives from it, which is why he has literally argued government spending cannot create jobs, even though we can see millions employed by it.

    GDP is spending. This is not arguable. GDP growth occurs when spending increases, no matter who does the spending.

  28. JKB says:

    @Ben Wolf: it comes from people at the Fed and Treasury punching numbers into an account, has no downside attached to it.

    Wait, so you feel it is better to take tax dollars paid by the middle class to fund the restoration of property owned by the 1% who can afford to own real property in southern Manhattan and along the Jersey and Long Island shores?

    Or is it your assertion that the FED should print more dollars for the Treasury to spend even though that devalues the currency raising the prices of everything denominated in dollars while decreasing wealth across the board?

  29. john personna says:

    @Mikey:

    What he’s trying to say is the economic activity that results in the aftermath of a disaster doesn’t create any real value, and the short-term economic “boom” that occurs is an illusion.

    Superficial and neither true nor false. In a national sense, as I say above, it won’t matter a hill of beans. For individuals on the ground it will vary tremendously. Some will lose all, and lose heart. Others will be offered a new chance, and be energized. Some will be winners and some will be losers.

    I don’t think any one of us would seed a Frankenstorm to shake things up that way. The result is cruel and arbitrary.

    (but again, the real reason political sites love to talk about it is that they want to paint general spending as if it is a Frankenstorm.)

  30. john personna says:

    @michael reynolds:

    When you stopped waiting tables, or whatever, that was creative destruction.

  31. Ben Wolf says:

    @JKB:

    Wait, so you feel it is better to take tax dollars paid by the middle class to fund the restoration of property owned by the 1% who can afford to own real property in southern Manhattan and along the Jersey and Long Island shores?

    Ever paid taxes, JKB? If you paid electronically or by check, the IRS contacts your bank and changes the digits in your account. If you pay cash, the IRS employee who hands you your receipt throws the money you gave her into a shredder. Your taxes pay for absolutely nothing, because you don’t actually send the government anything.

    Or is it your assertion that the FED should print more dollars for the Treasury to spend even though that devalues the currency raising the prices of everything denominated in dollars while decreasing wealth across the board?

    It’s been doing it for forty years with record low post-WWII inflation. Simply crediting accounts (the Fed doesn’t print money) does not generate inflation, devalue currency or raise prices.

    Amazing how people freak out over a 2% rate of inflation, which is lower than what we averaged while on the gold standard.

  32. john personna says:

    @JKB:

    Or is it your assertion that the FED should print more dollars for the Treasury to spend even though that devalues the currency raising the prices of everything denominated in dollars while decreasing wealth across the board?

    If a natural disaster destroyed enough wealth and spending, you might want to print some up, to compensate.

    You only devalue the currency when you get the quantity wrong.

  33. Mikey says:

    @Ben Wolf:

    GDP is spending. This is not arguable. GDP growth occurs when spending increases, no matter who does the spending.

    So, in essence, there’s really no difference in an economic sense if we buy my wife a new car because her old one had a transmission problem, or if we buy her a new one because the old one got totaled in an accident. Even if the latter instance is covered by insurance, the money is spent and economic activity created. And the same would be true if it were lost in a natural disaster.

  34. Mikey says:

    @john personna:

    Superficial and neither true nor false. In a national sense, as I say above, it won’t matter a hill of beans. For individuals on the ground it will vary tremendously. Some will lose all, and lose heart. Others will be offered a new chance, and be energized. Some will be winners and some will be losers.

    But if it’s all just a wash, isn’t Doug actually correct?

    Or have I misunderstood you, and you are speaking to the fact the whole thing is so much more tremendously complex that the “broken window fallacy” can’t even apply?

    (I’m inclined to believe the latter, but thought I’d ask.)

  35. JKB says:

    @Ben Wolf: @john personna:

    The economic ignorance is strong in this place. Terrifying strong. I am amazed either of you would write something so ignorant. You know the internet is forever, don’t you?

    Money (to include cash, cash equivalents and available credit) is not wealth. It is an exchange medium used to put a number on wealth. Increasing the money supply, increases inflation and devalues stores of cash while increasing the price of actual wealth.

  36. john personna says:

    @Mikey:

    I think we have different arguments. I’m saying that the size of the disaster and rebuilding are too small to be noticed. Doug generalizes to WWII, which was not too small to be noticed.

    It’s funny how WWII, as an end of the Great Depression, has been re-litigated in recent years. I think it was transformation in several ways. It certainly kick-started a 50’s and 60’s boom. Sure, we were the last global manufacturer standing, but we also came out of it with a whole new set of technology and GI Bill graduates.

    Kind of apples and oranges.

  37. john personna says:

    @JKB:

    Increasing the money supply, increases inflation and devalues stores of cash while increasing the price of actual wealth.

    Here’s the thing that low-information rightists fail to understand:

    With a fiat currency the government cannot NOT manage the quantity.

  38. Mikey says:

    @john personna:

    Here’s the thing that low-information rightists fail to understand:

    With a fiat currency the government cannot NOT manage the quantity.

    I disagree, John–I think they understand it perfectly well.

    They just think it’s EVIL.

  39. J-Dub says:

    Don’t we blow up old buildings, old stadiums, and old bridges to create new ones all the time?

  40. Mikey says:

    @john personna:

    It’s funny how WWII, as an end of the Great Depression, has been re-litigated in recent years. I think it was transformation in several ways. It certainly kick-started a 50′s and 60′s boom. Sure, we were the last global manufacturer standing, but we also came out of it with a whole new set of technology and GI Bill graduates.

    I don’t think it’s a bad thing to “re-litigate” all that. Any time something begins to be accepted without much question as “conventional wisdom,” like “WW2 ended the Great Depression” or whatever, it should be questioned, even if the answer ends up the same.

    I do like the GI Bill, though. Paid for half my undergrad and all of grad school.

  41. john personna says:

    @Mikey:

    The thing that was kind of transparent was that, as long as the postwar boom continued, no one cared. It was only after a Great Recession, suddenly, that it became important (in some quarters) to refute that spending helped.

    Frankly that is like the storm jumping off point. Storm! Krugmaaaaaan!

  42. Ebenezer_Arvigenius says:

    Sometimes this feels like groundhog day…

  43. Mikey says:

    @john personna: Perhaps so, but significant events are often catalysts for such re-thinking, if for no other reason than they provide a current frame for considering the past. There can be value in that.

    Of course, we have to be careful not to do the reverse and project current conditions onto past events, which I think a lot of the “re-litigators” tend to do.

  44. Mikey says:

    @Ebenezer_Arvigenius: I keep hearing that.

  45. Andre Kenji says:

    @john personna:

    FWIW, I think the best economic answer is that natural disasters don’t matter to us, because the US is too big and they have been too localized.

    The problem is that as far as I remember the Kobe Earthquake of 1995 did not have such a large effect on the Japanese Economy.

    http://www.reuters.com/article/2007/08/13/japan-economy-idUST4546720070813

    The 1985 Mexico City Earthquake is even worse:

    http://www.indexmundi.com/mexico/gdp_(official_exchange_rate).html

  46. Coop says:

    It’s a mistake to assume that the rebuilding efforts will necessarily lead to technological improvements, and a more efficient, productive infrastructure.

    Producers (whether private or public) want to get back up and running again as quickly as possible, since they can’t afford long gaps in production. Introducing new technology can be far more time consuming, in terms of development, installation, and incompatibility with the current organizational structure (including whatever capital was not destroyed). Producers often end up replacing their destroyed capital with the same exact technology, and sometimes even less efficient forms of technology simply to get back up and running quickly to meet the increase in demand.

  47. Ben Wolf says:

    @Mikey:

    So, in essence, there’s really no difference in an economic sense if we buy my wife a new car because her old one had a transmission problem, or if we buy her a new one because the old one got totaled in an accident. Even if the latter instance is covered by insurance, the money is spent and economic activity created. And the same would be true if it were lost in a natural disaster.

    Yes, the spending is what matters. You bought your wife a new car and contributed to aggregate demand, which created employment, income, and increased economic output.

    The basic problem in this post is macro/micro-economic confusion. For the dude who’s window got broken there’s a net loss in wealth because the asset side of his balance sheet is now minus one window. But if the Feds step in and pay for a new window, this benefits glass-makers, glass-cutters, framers, installers. People have to be employed to replace that lost window, so while the destroyed asset was an initial loss for an individual, the spending to replace it is a net benefit for the overall economy. If the money comes from an insurance company, well, that’s why the individual was paying for a policy, so instead of the money going to profits it goes toward providing employment.

  48. Ben Wolf says:

    @JKB:

    Money (to include cash, cash equivalents and available credit) is not wealth. It is an exchange medium used to put a number on wealth. Increasing the money supply, increases inflation and devalues stores of cash while increasing the price of actual wealth.

    I know you’d like to have an extremely simplistic answer to everything, but the world doesn’t work like that. There are many, many forms of wealth. An office building is valuation wealth. Money is financial wealth. Good health is a form of wealth. So is a nice vegetable garden in your back-yard.

    Increasing the money supply does not create inflation. Pushing demand beyond the economy’s productive capacity by spending too much creates inflation. I’m sorry, but it isn’t as simple as “add one dollar into circulation and all money is worth less”. Overlay the money supply and rate of inflation over a period of several years and you’ll quickly see there’s little to no correlation between the two.

    http://static2.businessinsider.com/~~/f?id=4a39162b4b5437dc00253961

  49. Ebenezer_Arvigenius says:

    The problem is that as far as I remember the Kobe Earthquake of 1995 did not have such a large effect on the Japanese Economy.

    That’s because you are following Doug’s misunderstanding of the argument. Economic activity due to destruction does not create wealth, only economic activity.

    Since this is essentially a reshuffling of assets, it is not significantly mirrored in the GDP (GDP = private consumption + gross investment + government spending + (exports − imports); since the activity comes from replacing destroyed capital (= gross investment) by liquidating assets or investment capital GDP stays more or less stable).

  50. Ben Wolf says:

    @JKB:

    So, by your theory, the governors and mayors in the disaster areas should ban power equpment and hand out shovels. It takes more men with shovels to do the job of a backhoe or bulldozer= more employment= higher economic output. Heck, let’s just hire more people, given them spoons then voila! full employment.

    Yes, it would in fact increase employment to make projects more man-power intensive. To create more jobs you have to increase demand for labor. I think we could find more efficient ways of doing so than paying people to dig holes and then fill them back up. We could employ people to preserve the Salton Sea, to deploy green energy installations, to clean up the blighted Chesapeake Bay. There’s a tremendous amount of work that needs doing the private sector doesn’t want to fund.

  51. Dave says:

    I notice Doug Mataconis has not responded to any comments in this thread. A cynic might think that the real purpose of this post was just to generate traffic.

  52. Davebo says:

    A cynic might think that the real purpose of this post was just to generate traffic.

    Except that a response would surely generate even more traffic.

  53. Liberty60 says:

    I can’t argue the economics, certainly not against people who do this for a living.
    But the notion that “stimulus is always beneficial” strikes me as wrong for the same reason that “tax cuts are always beneficial”;

    These two theories(at least at the street level where people argue about them on blogs) are mirror images- they both have as their premise that putting more cash/ leaving more cash into peoples pockets acts to stimulate the economy, in the way the story mentions.

    Both are correct, actually- under certain circumstances. Its not hard to imagine that there are times when a carefully considered infusion of cash into an economy can stimulate consumption, then leading to manufcaturing; or that a carefully considered cut in tax rates can do the same.

    But of course never, ever, are these things “carefully considered”.

  54. Ben Wolf says:

    @Liberty60: Stimulus, like tax cuts, is beneficial when you have inadequate demand to maintain full employment. If you have adequate demand then stimulus runs the risk of crowding out private sector activity by monopolizing resources (for example if government is buying up all the concrete production for projects then businesses can’t get any).

  55. anjin-san says:

    @ JKB

    property owned by the 1% who can afford to own real property in southern Manhattan and along the Jersey and Long Island shores?

    What’s up with the success envy?

  56. anjin-san says:

    We could employ people to preserve the Salton Sea, to deploy green energy installations, to clean up the blighted Chesapeake Bay.

    Are you some kind of hippie-save the owls-commie?

  57. anjin-san says:

    Generally, once. In junior high school. When they get turned down by the first girl they asked on a date. That’s when they pick up Atlas Shrugged…

    You da man…

  58. superdestroyer says:

    @wr:

    The economic harm caused by lost business, destroy businesses, and damaged business more than offsets any economic benefit from repairs. Look what happens to a damaged area when most people do not have insurance to cover the costs such as New Orleans.

    Also, if people have to pay more for insurance in the long term, there is less money to spend on consumer spending.

  59. superdestroyer says:

    @Kit:

    The money spent removing debris and fixing broken windows is lost on something else. The bigger economic impact is that days that businesses were closed, the businesses that were damaged, and the homes that will not be rebuilt because there was not adequate insurance coverage. That idea that insurance money is free money is false.

    Progressives have fallen to a fantasy where they can get whatever they want and they never have to give up anything.

  60. superdestroyer says:

    @JKB:

    NYC lost a decade of economic activity that would have occurred in the world trade centers were still there. Why can’t progressives understand that is something is damaged that it is no longer there to produce economic activity?

  61. stonetools says:

    @Dave:

    I notice Doug Mataconis has not responded to any comments in this thread. A cynic might think that the real purpose of this post was just to generate traffic.

    To be honest, I’m not sure I want him to respond.I think its good that he raised the issue. Then folks who know more about the economics thing can respond to and straighten out his errors.

  62. Steve Verdon says:

    @wr:

    That is idiotic wr, you don’t improve the economy by first destroying wealth and assets.

    @gVOR08:

    WTF does Ricardian Equivalence have to do with this? Nothing. Ricardian equivalence has to do with the timing of taxes/spending and the impact on the economy. Thus it is irrelevant to this issue.

    Really, STFU.

    @Ben Wolf:

    Bastiat (and Doug) confuse stocks of wealth with flows of financial wealth. That nice valuable window isn’t generating any economic activity because it is a stock. Smashing a window and buying a new one generates incomes which = employment which = economic output. This is basic first-year economics.

    No. The window is providing economic value (otherwise why have it or even bother fixing it when broken?). The idea that destroying something that provides economic value is a good thing in that it will lead to increased economic activity is to ignore the opportunity cost. Which is also a first year economics concept….which I really doubt you’ve ever taken Ben. Your periodic misuse of terms is the give away.

    Really, I just can’t believe this topic keeps coming up over and over again. It is like the liberals creationism. No matter how many times it is explained, the same people keep coming back with the same dumb claims.

  63. Steve Verdon says:

    @Ben Wolf:

    Doug, you are confusing real wealth with financial wealth. Damage done to buildings is real wealth lost (materials, finished goods, craftsmanship, etc.) This is not what drives economic activity and growth.

    Uhhmmm no. More capital goods today (i.e. real wealth) means more output tomorrow and more economic activity.

    Financial wealth and the exchange of goods and services is what drives growth. Money is a financial asset, not a stock of real wealth.

    No. Ultimately what drives economic activity is people’s desire for real wealth. People want cars, houses, computers, air conditioning, and even services like going to a restaurant they like. Money is merely a means to that end…a facilitator. Fiat money has no intrinsic value. From an intrinsic value stand point a piece of college ruled lined notebook paper has more value. You Ben, of all people, should know this.

    As for capital goods, they enhance economic activity by allowing for even greater levels of output in the future.

    It is the act of economic exchange which creates employment and spending, not the finished product.

    No, it is the desire for the goods that lead to exchange. People ultimately care about real wealth not financial wealth (aside from financial wealth enabling the acquisition real wealth).

    Federal disaster spending will be a huge benefit for communities hit by the storm and, as it comes from people at the Fed and Treasury punching numbers into an account, has no downside attached to it.

    Of course it will be a benefit in that it will allow for the replacement of lost wealth, but it wont result in a net gain for society.

    As for the notion of punching numbers into an account, why stop with the disaster aid. Why not punch a billion into everybody’s account?

  64. Ben Wolf says:

    @Steve Verdon:

    The idea that destroying something that provides economic value is a good thing in that it will lead to increased economic activity is to ignore the opportunity cost. Which is also a first year economics concept….which I really doubt you’ve ever taken Ben. Your periodic misuse of terms is the give away.

    It would be difficult to misuse the term “opportunity cost” when I never used it at all, and your insistence on lying in order to attack me is the real “giveaway”.

    No, it is the desire for the goods that lead to exchange . . .

    This in no way addresses what I wrote.

    People ultimately care about real wealth not financial wealth (aside from financial wealth enabling the acquisition real wealth).

    Nor does this, other than to agree with me. You aren’t paying a bit of attention to what you’re arguing over. Your angry, superior shtick is getting really old.

  65. Ben Wolf says:

    @Steve Verdon:

    Money is merely a means to that end…a facilitator.

    At this point you’re arguing to argue. This agrees with what I wrote.

    @Steve Verdon:

    As for the notion of punching numbers into an account, why stop with the disaster aid. Why not punch a billion into everybody’s account?

    I already answered this:

    Pushing demand beyond the economy’s productive capacity by spending too much creates inflation.

    In fact I’ve answered it a hundred times on other blogs when challenged by you, yet you continue to ask it. What do you think that demonstrates?

  66. Steve Verdon says:

    @Ben Wolf:

    I wasn’t referring to opportunity cost, but previous discussions where you don’t appear to know the difference between a neo-Keynesian and a new-Keynesian, for example. It indicates a severe lack of knowledge of a topic you regularly hold forth on as some sort of expert.

    Nor does this, other than to agree with me. You aren’t paying a bit of attention to what you’re arguing over. Your angry, superior shtick is getting really old.

    My point is you are confusing things. You are confusing financial wealth with what really drives the economy. It is not financial wealth or the desire for financial wealth. It is the desire for real goods and services….which were destroyed. So, even if we go and replace all that was destroyed we end up back where we started–i.e. no net gain. Here is a very simple model,

    You have $1,000 of “real wealth” (houses, cars, televsions).
    A natural disaster destroys $100 of that real wealth.
    We provide disaster relief of $100 so now we are back at $1,000 of “real wealth”.

    There is no improvement, no growth. Merely a return to the status quo.

    Now, if we complicate things a bit by adding in real capital goods (plant and equipment) real economic growth might actually decline due to the natural disaster. We eventually replace the real capital goods along with lost real wealth (cars, houses, etc.) and we might return to the old growth path. We might end up on a growth path that is a bit higher, but if it is not sufficiently high enough we’ll never get “back to where we were”. You’d have to argue that the replaced capital goods are “better” than those destroyed. Which is kind of hard for you to argue since you treat output and capital as these glop like constructs. You do realize that aggregate demand really does not exist. It is a theoretical construct that makes things a bit more manageable when developing models…right?

    At this point you’re arguing to argue. This agrees with what I wrote.

    I'm sorry, but you explicitly said that financial wealth is what drives economic activity. Here, I'll reference the post for you:

    @Ben Wolf

    That is where you claim that financial wealth and economic transactions are what drive economic activity. It is a silly claim because it is a tautology (i.e. true by definition since economic transactions are economic activity) and tautologies really don’t tell us much of anything useful. Let me show you. You would argue the following, there isn’t enough economic activity because there are not enough economic transactions. I’d reply with, well yeah, but why aren’t there enough economic transactions? Answering that question is where the rubber meets the pavement and it is a behavioral question–i.e. one you can’t answer by looking at a tautology.

    In fact I’ve answered it a hundred times on other blogs when challenged by you, yet you continue to ask it. What do you think that demonstrates?

    Link please (should be easy if you answered it a hundred times). I have no recollection of you ever answering this. You keep saying that punching numbers into accounts has no downside….so, what is wrong with punching a billion into everyone’s checking account? Or for that matter why not a trillion? Is there a functional limit?

  67. Ben Wolf says:

    @Steve Verdon:

    I’m sorry, but you explicitly said that financial wealth is what drives economic activity.

    No, I wrote that, “Financial wealth and the exchange of goods and services is what drives growth.

    Link please (should be easy if you answered it a hundred times). I have no recollection of you ever answering this. You keep saying that punching numbers into accounts has no downside….so, what is wrong with punching a billion into everyone’s checking account? Or for that matter why not a trillion? Is there a functional limit?

    I’ve already answered this:

    Pushing demand beyond the economy’s productive capacity by spending too much creates inflation.

    We have repeatedly discussed the differences between hard constraints and soft constraints on the government’s capacity to spend on Dave’s blog. If you want to do a search there for “soft constraint” be my guest.

    I wasn’t referring to opportunity cost, but previous discussions where you don’t appear to know the difference between a neo-Keynesian and a new-Keynesian, for example. It indicates a severe lack of knowledge of a topic you regularly hold forth on as some sort of expert.

    There are no significant differences. That you think there’s a world of diversity in the mainstream speaks volumes. Furthermore switching from a claim of misusing “opportunity cost” to a claim of misusing of new/neo-Keynesiansim is called “moving the goalposts” and it’s not the most honorable tactic.

    You have $1,000 of “real wealth” (houses, cars, televsions).
    A natural disaster destroys $100 of that real wealth.
    We provide disaster relief of $100 so now we are back at $1,000 of “real wealth”.

    Missing from your model is (as always occurs when dealing with the mainstream) employment.

    $1000 of car sits in a driveway. Building it created employment. Employment means incomes and increased economic output. Once the car is built, however, that labor is no longer required because the buyer’s desire for a new car has been satiated.

    Now destroy it. Give the owner $1000 to buy replacement new car. His desire to do so (what people like me who ain’t never taken a class and iz ignurt call “demand”) means additional labor is now required to build more car. That labor means new incomes, which means spending beyond the $1000 spent replacing damaged car. Labor is needed in auto construction, steel mills, glass making, transportation, mining etc. to produce that $1000 of car. In fact if you blow up that car every year and give the owner cash to replace it, so long as sufficent real resources are available you get non-inflationary growth!

  68. Ben Wolf says:

    @Steve Verdon: Finally, I have never claimed, suggested, implied or even hinted that I am an “expert” at anything. People are free to disregard everything I write, argue with me (I enjoy the exchange) or call me a douche at will. I have on more than one ocassion stated that (when I get a call right, such as bond yields after the credit downgrade) I’m not really all that bright in my own opinion. I’ve simply taken time to understand the work of men and women which provides explanations and predictive power superior to that provided by the mainstream.

  69. Steve Verdon says:

    @Ben Wolf:

    No, I wrote that, “Financial wealth and the exchange of goods and services is what drives growth.

    So….: economic activity is what drives economic activity.

    Or do you not consider economic transactions = economic activity?

    Regarding ‘soft constraints’ at Dave’s blog: result.

    Now maybe you responded when the post in question slid off the first page (I rarely look beyond the first page and never past the second). Maybe you replied on a Friday (I rarely check blogs on the weekends) and/or maybe Dave’s search function isn’t that good, but I think you can forgive me for not thinking you’ve responded.

    Pushing demand beyond the economy’s productive capacity by spending too much creates inflation.

    Okay, so there is a limit on deficit spending. What about debt? Here is my concern. Your above criterion for the limits on deficit spending could allow for large amounts of debt to be accumulated. Is there a limit on the amount of debt a country an incur? I don’t recall any response by you on this. Maybe you did and the above problems with deficit spending occurred or maybe my memory on this is just crap.

    There are no significant differences.

    Actually there are. The new-Keynesians took seriously the objections of the New Classicals and incorporated their criticisms into their models. For example, Solow (a neo-Keynesian) does not hold much regard for new-Keynesian models and ideas.

    Missing from your model is (as always occurs when dealing with the mainstream) employment.

    I did say it was a simple model….

    $1000 of car sits in a driveway. Building it created employment. Employment means incomes and increased economic output. Once the car is built, however, that labor is no longer required because the buyer’s desire for a new car has been satiated.

    Unless that car allows me to:

    1. Travel to a job.
    2. Travel to stores.
    3. Travel to the airport.
    4. Maintenance and repairs.
    5. Fuel costs.

    All of the above are examples of economic activities/transactions and will have positive effects on employment (given the all else being equal thingy of course).

    Now destroy it. Give the owner $1000 to buy replacement new car. His desire to do so (what people like me who ain’t never taken a class and iz ignurt call “demand”) means additional labor is now required to build more car.

    Yes, but we can’t spend that $1,000 on something else can we? That is where opportunity cost comes up and bites you (and just about everyone else in this thread) in the arse.

    I know, I know you may respond with, well so long as we are below our peak capacity in terms of output we can have the $1,000 for the car and the other spending. Sure, but in that case, assuming away debt issues I raise above, we should have had that level of deficit spending to begin with absent the natural disaster. In this case, the politicians were incompetent in not “spending” enough, using your “model”.

    See, it all boils down to opportunity cost, which is probably the single most valuable insight economics has to offer. Even if you are right that we should engage in deficit spending up to the point where we approach the economy’s peak level of output, we should have been doing that even before the natural disaster. So, the only way for a “natural disaster to be a boon for the economy” is if policy makers are sleaze buckets who deliberately keep the economy below its potential just in case we have a natural disaster. And even in this case, I’d argue we are merely going to where we should have been without the disaster–i.e. we are going to our potential which whatever jackass is sitting in the White House decided we did not need to be at.

    In fact if you blow up that car every year and give the owner cash to replace it, so long as sufficent real resources are available you get non-inflationary growth!

    Not really. You are merely replacing that which was destroyed, you are replacing a stock that was lost. You only get growth in the sense that GDP, which counts only “new economic activity” but does not factor in economic losses would report it as a gain. In other words, your economic growth is due to a reporting gimmick/error/deficiency.

  70. Steve Verdon says:

    By the way Ben, yes I positive repped your posts. Thanks for the replies….really, no snark or sarcasm or the like.

  71. Ben Wolf says:

    @Steve Verdon: Well I broke my rule and spent thirty minutes crafting a response on an iPad only to have the browser crash and wipe it. So I’m commenting again in a more hurried fashion.

    So….: economic activity is what drives economic activity.

    The simplest expression of this I can conjure is the model:

    Spending = employment = incomes = output.

    Okay, so there is a limit on deficit spending. What about debt?

    I can’t think of a reason to be concerned about it. The government is supplying the very money used to purchase the bonds. What’s happening is the Federal Reserve is funding the bond market, which then buys Treasurys on the primary market and thereby funds the expenditures of the Treasury. The bond market is being used to circumvent the rules forbidding the central bank from directly funding government. In this case I believe Warren Mosler’s analogy of a married couple apt. The husband can borrow from the wife or vice versa with no increase in net external liabilities.

    Not really. You are merely replacing that which was destroyed, you are replacing a stock that was lost. You only get growth in the sense that GDP, which counts only “new economic activity” but does not factor in economic losses would report it as a gain.

    I don’t necessarily disagree with this. Opportunities are certainly lost when the man who loses his car must then go out and spend resources (particularly time) replacing it. But there are also opportunities created by renewed spending. People might expand production, start a new business to satisfy the demand, create a new product. Furthermore I believe it can be argued that initial $1000 in spending results in more than $1000 of exchange. Assume an average tax rate of 25%, a savings rate of 5% and an external deficit of 5%.

    $1000 – 35% = $650, with $350 lost to the above financial leakages. The remaining $650 will then become someone else’s spending. So:

    $1000 – 35% = $650

    $650 – 35% = $423

    $423 – 35% = $275

    And so on until the remainder becomes zero, With three iterations more than $1000 has already been spent although this is heavily dependent on the variables. Note the above model strongly favors low rates of taxation as an amplifier for the effectiveness of spending.

    Note also I do not think the above dynamic always results in a net benefit. It is a benefit in an economy mired in deficient demand, but can be a detriment if the capital goods destroyed are being utilized at maximum productive capacity (because demand is abundant). If this occurs then productivity is lost while at the same time more spending is required to replace it when spending is already hot. This is a recipe for inflation and should be avoided/attenuated if possible.

  72. Tony W says:

    TLDR: The problem with ‘broken windows’ is they redistribute wealth from the capital holders (e.g. insurance companies) to the workers. This is the reason the Libertarians love to discredit the notion – the wealthy are forced to put their money into productive use.

  73. Janis Gore says:

    The great tolls are emotional — fear, sorrow, anger. It takes a lot of strength just to maintain sanity in the midst of such a disaster.

    All of that energy could have been put to more productive use.

    God bless them all. They’ll need all the grace they can find.