Last weekend, Freehold, New Jersey was pummeled by torrential rains and powerful winds. Power was knocked out for 30,000 residents as 2.7 inches of rain fell in one night and wind gusts hit 75 mph. Live wires covered the ground, trees were cut in half like hot knives through butter, cars were crushed, homes were destroyed, flooding blocked roadways, transformers exploded, and the much needed clean-up began for thousands. Freehold was declared a State of Emergency after what experts are calling a “supercell” storm ravaged the area. Backyards with fences, pools, and spacious patios turned into navigational mazes with fallen trees, branches, and flooding. As I drove around the town, I surveyed the damage and, as a tell-tale sign of a true economics nerd, I kept thinking about the Keynesian notion that somehow this scene of disaster would be good for economic growth. The Freehold storm is an unfortunate situation in an isolated area, but this type of economic thinking happens following any large disaster. A simple Google search turns out dozens upon dozens of articles which masquerade destruction from a storm as a positive for economic growth. When hurricanes and other large disasters such as the Japanese earthquake or Hurricane Irene bring forth mass destruction, one can always count on wise economic writers, professors, and pundits to celebrate the new economic growth that is on the horizon. Fortunately, a great man by the name of Frederic Bastiat explained the entire situation in 1850 using a teenage boy and a window.
Frederic Bastiat was a 19th century French classical liberal theorist, free-market economist, and member of the French Assembly. His essay entitled “That What Is Seen and That What Is Not Seen” explains what he calls the “Parable of the Broken Window”. The story goes as such: a boy breaks a shop window, which at first is thought to hurt the shop owner but, at second look, it seems to have the positive effect of increasing the overall demand for windows. This causes the glassmaker to profit and hire a new worker, who, in turn, uses his new salary to purchase a suit. Employment has increased and the whole town has benefited because of this one broken window. But Bastiat’s genius comes when he describes the seen and the unseen, the key difference between a good economist and a bad economist. While the bad economist sees the economic activity which has been cultivated by the above story, the good economist questions the unseen: what would the original shop-owner done with that money if he didn’t buy a window? Perhaps he would have bought the suit, or hired a new worker, or invested in new machines, etc. As a whole, society would have had one window and one new machine. Instead, society now has only one new window. Wealth has been destroyed as the money has merely been shuffled around.
How does this explain the Freehold situation? Tree-cutting, landscaping, fencing, and window companies in the Central Jersey area will see a temporary rise in work and profits (think the glassmaker). But this also means that people will not be able to afford whatever they had planned pre-storm (think the shop owner). Instead of a new patio and a new grill, residents will only be able to afford the new patio. They will have less than they would have had if the storm never destroyed their backyard. Residents are now working to just get back to where they were a week ago. Yes, there will absolutely be a spike in economic activity. But this spike does not mean wealth will enhance. For sure, cases of water, generators, and canned food definitely saw a spike in sales during the storm and subsequent power outages. But overall the Freehold area has less than it did as of last week. The increase in Freehold economic activity will drop back to normal levels soon and no magical economic stimulus will follow. Simply: Freehold has less now.
Repairs do not constitute economic growth. Temporary spikes in demand for landscaping and tree removal sectors will not spur mystical economic growth. Driving through Freehold today shows nearly all fallen trees removed from lawns, backyards, and streets. The supernatural storm of economic stimulus stimulated the tree-removal business for one week. What is the cost of this so-called stimulus? Unfortunately, the answer is millions in damage. The logic is utterly incoherent. It begs the question economist Sandy Ikeda asked following the Haitian earthquake, “If destruction is so good for an economy, why wait for a hurricane or a bombing raid? Why not just bomb your own cities?”
For the Keynesians, the biggest job creator is not the entrepreneur. Instead, it’s the rambunctious teenage boy who goes around town breaking windows, spray-painting store fronts, and destroying property. Or it’s the vicious government which decides to bomb its own cities, clearing the way for economic growth to arise from the rubble. Aside from the atrocious moral conclusions of these economists, the solutions they call for are purely backwards. The same argument is made when economists claim World War Two ended the Great Depression. The US had such unbelievable economic activity because we were producing at such a rampant pace. But building, or growing, something for the sole purpose of destroying it does not enhance wealth in society. The one place that destruction belongs is the arena of creative destruction, which occurs when innovators produce a product better than a previous product so that the former product is removed from circulation. The “destruction” of the Blackberry from the iPhone enhanced society’s technological capabilities and gave us more, not less.
It seems elementary: when property is destroyed, wealth is destroyed. Families who were eyeing a new pool are now looking at repairs to their storm-torn house. The family that had hundreds of dollars in spoiled food from power outages is not seeing any economic stimulus. Mother Nature has not created wealth in this situation. Families are now working to get back to the place they were a week ago! The overall economic situation of the overwhelming majority of people in the Freehold area is worse than it was a week ago. The false Keynesian paradigm strikes again, but our good friend Mr. Bastiat is always there to remind us of the unseen.
To read Students for Liberty’s publication on Bastiat’s best works, check out: http://studentsforliberty.org/wp-content/uploads/2010/04/The-Economics-of-Freedom-PDF.pdf
For more on the modern-day broken window fallacy check out this hysterical SFL blog from last August: http://studentsforliberty.org/news/top-10-krugmanstimulus-tweets/
It should be noted that private, voluntary solutions to problems arose during the storm. Stores opened their doors giving out free water and ice for residents without power. The family I was staying with was called numerous times by friends opening up their house for the night. We even received a call from a co-worker giving away a generator. For more information on voluntary solutions to issues, check out SFL’s newest book publication After the Welfare State at: http://studentsforliberty.org/after-the-welfare-state/