No economic silver lining to Irma and Harvey
As awful as it was, the human toll of Hurricane Harvey was not as bad as many feared. But it will take months to repair the homes, businesses and infrastructure of Houston and the surrounding area. The same will be true in Florida after Hurricane Irma.
The economic impact could be felt for years, but many economists and financial experts think there’s a silver lining.
The Los Angeles Times crowed that Harvey’s destruction is expected to boost auto sales. CNBC reported that economists say Harvey “may ultimately provide a tiny boost to the national economy because of the rebuilding in the Houston area.”
Even Goldman Sachs is looking at the bright side, noting that there could be an increase in economic activity, “reflecting a boost from rebuilding efforts and a catchup in economic activity displaced during the hurricane.”
Economically speaking, it’s great news that all this damage in Texas and Florida needs to be fixed, right? Not only does this mean big bucks for cleanup crews, but think of what construction workers and Home Depots will rake in. And what about all those windows broken by the high winds? This will be the Golden Age of Glaziery!
Not so fast.
A long time ago, a French guy named Frédéric Bastiat called this “the broken window fallacy.” In his essay “That Which Is Seen, and That Which Is Not Seen,” Bastiat showed that destruction never boosts the economy.
He imagined a boy broke a window. (Something I excelled at as a kid.) Now his dad needs to pay to replace it. Amateur economists note how great this is for the local glassmaker. Why, he would go out of business if annoying kids (like me) never put a baseball through a window. In fact, the economic growth would be even better if they sent me around to smash the windows of every house on my street.
True, the glaziers would make a few extra bucks whenever I moved into a neighborhood. That’s the economic impact that is seen. But the unseen impact is that my long-suffering dad can’t spend that money on a new guitar, a dinner out, or counseling for his petty vandal of a son.
Moreover, replacing something is a maintenance cost, not a purchase of truly new goods, and maintenance doesn’t stimulate production.
This idea can be broadened to all sorts of government activity. It doesn’t grow the economy to start a war, level a neighborhood for a giant arena, or tear up a rundown street to build a light rail. After the fact, there might be an “improvement” for that immediate area, but it doesn’t account for all the economic activity lost in the process.
Instead of looking for disasters to fix our economy, economists and politicians should stop the unnatural disasters they inflict on consumers and job creators everyday. By eliminating red tape, silly regulations and unnecessary taxes, each of us will be free to actually grow our economy instead of passing around the dwindling dollars we already have.