Will a broken window increase prosperity? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 5 November 2012
Will a broken window increase prosperity? A  A  A

Last week ended on a sour note. The Dow lost 139 points. Gold fell $40.

On Thursday investors happily anticipated all the building, renovation, and infrastructure repairs that would follow Hurricane Sandy...

...by Friday, they saw only muddy water and broken, water-logged houses.

Just to be clear about it...Sandy destroyed wealth. Perfectly good houses were ruined. Passable roads were wrecked. Decent boats were sunk.

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But this is just another way that economists give you the wrong idea. They tell you that the GDP will go up as people rebuild ...and that jobs will be forthcoming in the construction sector...Associated Press:

    The homes of as many as 30,000 to 40,000 people were significantly damaged by Sandy, officials said at a news conference, and require long- and short-term housing. FEMA director Craig Fugate said 86,000 New York area households have already registered for federal disaster assistance, at a cost of $97 million.

    "Our first concern is to make sure they have food water and security at the same time as we are working on more long term solutions," Bloomberg said. "My recollection is numbers may have been similar in Katrina."

    Some of the city's largest housing developments are going to be "out of commission for a very long time," Bloomberg added.

    U.S. Sen. Charles Schumer said that there are very few hotel rooms on hard-hit Staten Island, making relocation of families costly and difficult. "What we've asked, we've asked for some real flexibility, and our costs of housing are much greater than anywhere else in the country. We may have to have some unique solutions here, in terms of what's allowed for reimbursement,' he said. "Tens of thousands will need to be relocated."

    "This is a massive, massive housing problem," Cuomo said.
As a result, you might think we'd all be better off. Damage is good because it "puts people to work" or it "increases demand."

But losses do not become gains just because people try to make them up. Now, people in the NY/NJ affected area (as well as taxpayers all over the nation) will have to spend about $40 billion just to get back to where they started.

Frederic Bastiat dealt with the issue more than a century and a half ago. Even then, some economists thought that a broken window might increase prosperity...because it provided work for the glass maker, the glazier, and so forth. Bastiat, in his essay on 'things seen and unseen:'

    "It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

    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 [who broke the window]. 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.
Thank you, Frederic.

You have given us more than a rebuttal of the 'broken window fallacy." You have given us an explanation for what ails America...and the entire developed world.

Yes, dear reader, the shopkeeper...the janitor...the banker...the carpenter - no matter who you put in the protagonist role in this story - he only has so much money. If you force him to spend it unwisely...to use it to repair something that shouldn't need repair...or to invest it in a harebrained scheme...the money will be lost. It will not contribute to the poor man's well-being...nor to the well being of the economy in which he lives.

It is amazing how little progress has been made since Bastiat described the obvious. Poor Bastiat. He got tired of trying to explain this to his fellow Frenchmen. He moved to Rome...and died at age 49.

Here we are 162 years later, and you hear the same errors and imbecilities repeated.

In the matter of the nation's finances, for example, almost everyone still believes that the government should 'stimulate' the economy. But how? It has no money. So, it must borrow it. From whom does it borrow? The same carpenters, painters, butcher and bakers whose own resources - like the shopkeeper in Bastiat's example - are limited. In other words, in order to stimulate Paul it must de-stimulate Peter. The stimulus to Paul is seen. The de-stimulus is not.

Naturally, Paul is all in favor of it. But taking money from Peter doesn't add a penny of real demand. It only shifts resources from their lawful owners...to the lucky, conniving zombies who are close to the politicians.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "Will a broken window increase prosperity?"


Nov 5, 2012

Kudos to EquityMaster who reported this fallacy few days before Bill himself in their Nov 1st 5 minute wrap up "Absurd! Natural disaster can't be good for economy?".
Though EM didn't explain it, they recognized it is clearly absurd.
Good job EM.

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