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Are Disasters Really Good for the Economy?

The Fallacy of the Broken Window

Written by Brian Hicks
Posted September 13, 2005

Dear Wealth Daily reader:

In the middle of the political nonsense being debated among the political parties over Hurricane Katrina is the notion that there's an economic silver lining. The silver lining is that what has been destroyed will be rebuilt bigger and better.

As a result, many analysts and economists predict that New Orleans will experience a building boom, and that this will be good for the economy of the city.

Well, of course.

But will the construction boom in NO be good for the nation as a whole, since most of the nation is going to pick up the tab?

Maybe. Maybe not.

But as you'll read, the 2nd universal law of economics still applies in 21st Century America: there's no such thing as a free lunch.

Spending money in the reconstruction of New Orleans will take away resources from something else.

There's no better example of this thesis than the fallacy of the broken window.

Here's your garden variety explanation:

The Broken Window Fallacy

The basic flaw in the logic behind the "economic boom" in New Orleans was attacked a century and a half ago by French thinker Frederic Bastiat who referred to the "fallacy of the broken window."

Imagine a boy who has broken a window, he said in his 1850 essay "That Which is Seen and That Which is Not Seen." Onlookers inevitably find a silver lining in the added work for the window repairman: "What would become of the glaziers if no one ever broke a window?"

Yet this thinking fails to take into account that the boy's family, which will be paying to replace the window, will have to divert funds that could have been used to buy new shoes or a book instead.

"Everybody falls into that same fallacy all the time on just about everything," said Bob McTeer, former president of the Dallas branch of the Federal Reserve and a fan of Bastiat's work. "They look at what is happening without looking what would have happened."

Simply take the broken window example to its logical extreme: If every window in town were broken there would be plenty of work for glaziers but few resources for other projects like building new houses or shops.

Similarly Katrina will suck away workers, materials and funds that otherwise could have been gone to other, potentially more productive uses elsewhere in the country.

-Brian Hicks

For more on the Fallacy of the Broken Window, see:
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