The Broken Logic About Sandy’s Broken Windows

As another ironically nice day passes us by, and the reality of actually perhaps having to go to classes at some point finally sinks in, I’d like to take this chance to comment on a disturbing trend I’ve seen in some of the post-Sandy punditry.

My first priority, however, is to reach out to my family and friends on the east coast. To those who’ve had homes destroyed and lives ruined, to everyone who’s had to live through hell and high water over the past few days, and especially to those who have lost lives and loved ones in this terrible storm. This is truly a disaster of epic proportions. Whether you pray, shelter the homeless, make people smile, or donate time and money, I hope everyone finds something to help themselves and others make it through this tough time.

My second priority in this article, sadly, is a little more worldly. It deals with the vocal chorus that has arisen in the wake of Sandy’s winds and rain, to claim that the destruction of the hurricane is not all bad for the economy. That perhaps the destruction that has been wreaked on my friend’s homes and livelihoods can be an overall ‘good’ for our GDP and our economy, spurring investment and growth in the long run.

So the thinking goes: Yes the destruction and death was terrible. But basically the people who had their houses, businesses and lives destroyed were just sitting on unused cash for no reason. Now they’re going to be forced to spend that cash because they have to rebuild their homes, spurring the construction industry and the window-makers and the pipe-layers. Then those window-makers and pipe-layers will spend their new-found cash on improving their own livelihoods, and economic growth will ensue.

This type of thinking is commonly referred to as the Parable of the Broken Window or the Broken Window Fallacy (depending on who you talk to), and funnily enough, was first articulated by our main-man Bastiat himself. The central idea of it, is that if you break something, it may spur investment in one area, but it decreases investment in another. Applying it to Sandy, it means that looking at the hurricane as a boon for the construction industry ignores the opportunity cost for all that money too have been spent elsewhere.

For, what do you really get after the economy is ‘spurred’ in the wake of a disaster? After all the rebuilding is done, is your quality of life improved upon? Perhaps. But the nature of rebuilding is often just to get one back to where you began. If the disaster hadn’t happened in the first place, not only could we’ve avoided the taxing nature of death and disaster, but we could’ve spent that money on improving our condition, not just returning to it. Let’s say I have $100,000 and I’m really hungry. Somebody burns down my home. Yes I’m forced to spend that money on rebuilding my home, which ‘spurs’ a part of the economy, but I cannot improve upon my life because I do not even have the $5 now to get myself a sandwich. I’m back a hungry square one, when I could’ve been at square two with a veggie footlong and $99,995.

Let’s also take look at saving vs. spending. This idea that people and businesses were just sitting on large piles of cash doing nothing for no reason is pretty prevalent. People talk a lot about American corporations not spending their capital and ways to fix that. But what is there to fix? Is there something inherently better about spending than saving? First of all, in the days preceding Hurricane Sandy, I think most people still spent money, even on relatively ‘luxury items’ like electronics and entertainment. And for those that couldn’t afford to spend any money but on the bare necessities, I don’t think they can really afford to be rebuilding their house right now, so Sandy has more of a ruining-someone’s-life effect than a stimulating-the-spending-of-unused-cash effect.

Secondly, even if you did save, what of it? I say that our goal as a society shouldn’t be trying to get everyone to spend all their money all the time. That doesn’t create true wealth. If you invest your money, or have a bank invest it for you, and it accrues interest, that is a sign that it is helping a business (and therefore the economy as a whole) grow. If you save $300,000 over your life time and spend it to help open up your own small factory or a restaurant, that ends up creating more jobs and wealth than having had to repair $300,000 worth of broken windows over the same number of years

On a final note: this is the same kind of fallacy that makes people think war spending is positive, and makes Paul Krugman think alien invasions and more conflicts can get us out of a depression. If full employment is your goal, then yes constant war and constantly broken windows can help you achieve that goal, because we will always either be redirecting employment towards anti-laser shields and bombs, or towards fixing all our windows just to maintain our standard of living. But if you want to move ahead, if you want resources to be directed towards positive employment and improving upon our livelihoods, not regaining our destroyed ones or destroying the livelihoods of others, you must realize that wars, aliens and breaking things are bad for an economy.

That destroying wealth cannot create wealth.

And perhaps a quick look at all the suffering and destruction caused by Hurricane Sandy can give you a clue as to the validity of a theory that says it represents a positive outlook on GDP.

And with that, a prayer, and a link to the Red Cross Donations page, I sign off.