Why we can’t vandalise our way to growth
Arguments in favour of boosting the economy simply by ladling out cash are utterly misconceived
Asurprising number of commentators think that Hurricane Irma will end up boosting the American economy. The destruction, they argue, will be more than offset by all the repair work. There will be “a slight pick-up in GDP”, reports the cable news channel CNBC, as well as a rise in wages. “The long-run effect of these disasters,” avers William Dudley, president of New York’s Federal Reserve, “is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms.”
It’s a curiously mainstream view in economics. Larry Summers, who served as Bill Clinton’s treasury secretary, made a similar argument when a tsunami hit Japan in 2001. Paul Krugman, grandest of liberal grandees and winner of the Nobel Economics Prize, said much the same thing after the 9/11 attacks, which, he wrote a couple of days later, “could even do some economic good”.
You probably feel intuitively there is something wrong with this line of reasoning, but you might not be able to put your finger on what. After all, it’s true that there is a lot of extra economic activity in the aftermath of a catastrophe. Houses have to be rebuilt, and the construction workers have extra wages to spend on more things. Victims get insurance payouts, which go to businesses that are in turn able to hire more people who will pay more tax, and so on.
So why doesn’t it work? Why doesn’t destruction pay? Why, to take the argument to its logical extreme, can’t governments stimulate their economies by organising bands of unemployed people to go around vandalising property?
The answer has implications that go well beyond disaster relief. Once we grasp it, we see why socialism never works. It was offered in 1850 by the French economist Frédéric Bastiat. In a pamphlet called Ce qu’on voit et ce qu’on ne voit pas (“What you see and what you don’t”), Bastiat imagined a shopkeeper whose windows were smashed. The shopkeeper would have to pay a glazier to replace them, and the glazier would then have money to spend on other businesses and so on. So why, Bastiat asked, doesn’t breaking windows make everyone better off? Because, he explained, we make the mistake of focusing on what we can see (the payment to the glazier) rather than what we can’t (the more useful things the shopkeeper might otherwise have spent his money on).
There will be an unseen cost to every bit of work carried out in the aftermath of Hurricane Irma. The builders who are restoring damaged property are in consequence not building new things. The victims must take time off work. The payouts mean that insurance premiums rise for everyone else. The lorries carrying materials to Florida have less space, and so are more expensive for other clients.
Bastiat argued that, if the glazier were paying boys to go around smashing panes, we would see it for what it was: not an alternative economic policy, but a crime. That much, as I say, is intuitive. But try extending the logic a little further. Every government intervention that takes wealth from taxpayers at large to promote a particular interest is doing the economic (not the moral) equivalent of paying boys to break windows.
That’s not to say that governments should do nothing. Almost everyone agrees that the state should, for example, pay teachers and police officers. But let’s not pretend that those payments are a growth policy. They are, rather, a way of buying services that we collectively recognise as desirable, such as better-educated children or safer streets.
That argument, though, is not enough for the public sector unions. All week in Brighton, the TUC has been arguing that the pay cap must be lifted, not because state employees deserve the extra money (many do) but as some sort of stimulus strategy. Austerity, the unions tell us, has failed, and only extra government spending can kickstart growth.
That is equivalent to arguing that you can give yourself a blood transfusion from one arm to the other. It makes the fundamental error of seeing higher growth as a consequence, rather than a cause, of higher consumption.
Human beings tend to see what they want. Economists in state-funded universities and Whitehall departments are adroit at finding arguments for higher state spending. Almost all, though, are variants of the broken windows fallacy.
How many times, for example, have you heard it claimed that the Great Depression came to an end because of rearmament and war? It’s simply not true: Snowden and Chamberlain responded to the crash with sharp spending cuts and, in consequence, the 1930s saw some of the strongest growth in British history.
A currently popular version of the broken windows fallacy is the idea that we can prosper through governmentsponsored “green jobs”. Again, we ignore the unseen: the ways in which that money might have been more productively used elsewhere. There may be a case for spending money on environmental protection, just as there was a case for building more Spitfires. But let’s not pretend that doing so makes money.
Once you convince yourself that governments can spend their way to wealth, you see austerity not as what happens when Britain is borrowing a billion pounds a week, but as some sort of sadistic punishment. Many Corbynistas do indeed see it this way. If we don’t understand in principle why their argument is wrong, we may end up – God help us – learning in practice.
‘We ignore the unseen: the ways in which money might have been more productively used elsewhere’