Why we can’t van­dalise our way to growth

Ar­gu­ments in favour of boost­ing the econ­omy sim­ply by ladling out cash are ut­terly mis­con­ceived

The Sunday Telegraph - - Sunday Comment - DANIEL HAN­NAN

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’

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