Michael B. Duff

Lubbock's answer to a question no one asked

Hurricane Irene and the Broken Window Fallacy

Here it comes again, The Broken Window Fallacy.

I heard it just this morning, as a reporter for Fox News talked about the “economic stimulus” that would result from this hurricane. Paul Krugman has been beating this drum quite a bit lately, saying that America needs a disaster, a war, or even an alien invasion to “get the economy moving again.”

But destruction can’t create growth. Anyone who tells you otherwise has fallen for — or is trying to pull — the oldest trick in the book.

Let’s say I’m a shopkeeper who just had his window shattered by a little girl who was playing with a BB gun. Let’s call her “Irene.”

Irene shatters my window, so I have to pay the glass guy $250 to get it fixed.

Krugman and company will tell you that $250 becomes “stimulus,” but where did that $250 actually come from? I was planning to spend that money on a new suit, but now I have to fix my window instead.

The Keynesians are assuming that if Irene didn’t break my window, my $250 would just sit there forever, stuffed in my mattress for a rainy day. But I had plans for that $250. I wasn’t going to hoard it, I was going to spend it. If Irene hadn’t taken out my window, that money would have “stimulated” the clothing store instead.

Keynesians like to pretend that we’re all a bunch of crazy hoarders, rolling around in piles of unspent cash like Scrooge McDuck. But in a modern world, even saved money becomes part of the active economy. I don’t stuff my money in a mattress, I keep it in a bank, where it becomes capital for other people. My saved money is lent out to other businesses and used to finance productive investments.

Nothing is idle, nothing is wasted. When my window gets broken I have to withdraw $250 in saved capital and use it to replace something I already had. I can’t spend it on a suit, and the bank can’t loan it to their client who wants to open a restaurant. For the Broken Window theory to be true, you’d have to assume that I was holding $250 in cash and had no plans to spend it.

Just think about your own life. If someone broke your window tomorrow, would the repair cost come out of hoarded cash, or would you have to give up something else you wanted to buy?

We should feel bad for the people who lost property to Hurricane Irene because all the “stimulus” they’re about to spend on repairs was money they would have spent on clothes and cars and toys for their kids. Now all those plans are ruined, and they have to spend thousands of dollars just to replace things they already had.

This will certainly stimulate the construction industry, but what about the tailors and the auto makers and the toy stores who would have received that money instead?

Nothing good can come from destruction. Emergency spending doesn’t create wealth, it simply diverts resources that would have been spent on other things.

Hurricane Irene is a net loss for everybody, and it’s going to be a big one.

Written by Michael B. Duff

August 28, 2011 at 15:27

Posted in Best Of, Politics

One Response

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  1. Just to play devil’s advocate for a minute, consider the argument that “it’s different this time” because banks are in fact unwilling to lend to all but the most qualified borrowers and corporations are in fact sitting on hoards of cash.

    Interest rates are at historic lows because the demand for debt is very nearly nil because everyone is afraid that the Tea Party or President Obama or Europe or the Trilateral Commission (are they still around?) are going to pull the rug out from under in the process of creating the New World Order.

    So there is money (credit) that is not in circulation, and Irene will put it into circulation. Of course, it will do so by over-riding the sober judgment of the owners of that money, forcing them to take risks (make [re]investments) they would not have otherwise made. So what Krugman et al are saying is, “Everyone but me is WAY too risk averse!”

    I wonder how much debt Krugman carries to finance his current spending?

    TJ Radcliffe

    August 28, 2011 at 20:02

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