Tsunamis good for the economy? (Broken Window fallacy)

[shanek]

Well, never underestimate the power of pundits to try and manipulate a disaster into supporting their own views. But I'll let this article make most of the arguments:

http://www.mises.org/fullstory.aspx?Id=1712

Are Tsunamis Good for the Economy?
by Chris Westley

I didn't think anyone would dare to apply the Bastiat's Broken Window fallacy to the human tragedy that is still playing itself out along the rim of the Indian Ocean, but sadly, faith in economic fallacies is even more common than deadly tsunamis.

That is why I was surprised to hear the Institute for International Economics' C. Fred Bergsten (known affectionately as See Fred) this morning (December 29th) on National Public Radio's Morning Edition explain how this crisis would actually provide long-term benefit to that region of the world.

He quotes Bergsten as saying:

Like any disaster, you get negative effects through destroying existing property and people's health, but you do get a burst of new economic activity to replace them, and on balance, that generally turns out to be quite positive.

Over time, properties that have been destroyed will be fully replaced, and probably by better and newer substitutes, so at the end of the reconstruction process, the countries will probably be wealthier.

Even worse than the Broken Window fallacy, Babylon 5 will recognize this as the philosophical basis behind the Shadows and their warlike actions. But anyway, continuing:

To be fair, Bergsten admitted this disaster is, above all, a human tragedy, but his comments ignore other effects that will result when positive economic growth results from any disaster, whether it occurs due to a matter of policy (wars) or to unanticipated changes in the physical environment (tsunamis). These effects:

• involve forced capital consumption, shifting capital from other uses to those necessitated by the disaster
• ignore the opportunity cost of capital that is being transferred to the disaster sites (costs that should be considered before assuring public radio listeners that the resulting economic activity "generally turns out to be quite positive")
• encourage construction in areas that would likely be less inhabited if construction decisions were left to market forces, which is the same thing that happens when the U.S. Federal Emergency Management Agency continuously finances reconstruction after reconstruction along coastal areas in the U.S. that are regular targets of hurricanes
• legitimize the fallacies that disasters are good for economies, when in fact, while they allow governments to take credit for measured increases in gross domestic product, they reduce the quality of life to most everyone involved

I say most everyone because some groups in the economy clearly benefit, and often this includes firms that depend on government contracts resulting from emergency funding. Firms such as Halliburton or Bechtel may do great work in the private sector, but absent government contracts, these firms would play a much less notorious role in the society because their market power would be based, not on the forced conscription of capital that is taxation, but on voluntary exchanges between buyers and sellers. Politicians also benefit, if only because of the publicity they receive when disbursing other people's money to the disaster sites.

It is...clear that the best protection against natural disasters is not an expansion if the public sector on an international basis, but wealth creation. It is no mistake that natural disasters, which are quite equitable in distribution between rich and poor countries, are more devastating to the poor than the rich. The establishment of a thriving private sector in Sri Lanka, India, and Indonesia is crucial for a quality of life to develop there that can withstand earthquakes and their aftermath as well as does the California coast.

But such development will not occur from state-managed, broken-window-like economic growth extolled by many mainstream economists. War and natural disasters are not good for the economy. The evolution of property rights institutions and the autonomy they engender, as well as free trade and the social cooperation it engenders, are the human race's best long-term insurance against both.

 

[The Central Scrutinizer]

This thread will end with a Shanek hissy fit.

 

[LucyR]

But presumably there have been examples supporting the argument? Something like the Great Fire of London?

 

[The Central Scrutinizer]

But presumably there have been examples supporting the argument?

Sure. Look at just about any thread in which he has participated in the Politics forum.

 

[Cain]

Well, never underestimate the power of pundits to try and manipulate a disaster into supporting their own views. But I'll let this article make most of the arguments:

http://www.mises.org/fullstory.aspx?Id=1712

He quotes Bergsten as saying:

Even worse than the Broken Window fallacy, Babylon 5 will recognize this as the philosophical basis behind the Shadows and their warlike actions. But anyway, continuing:

That is why I was surprised to hear the Institute for International Economics' C. Fred Bergsten (known affectionately as See Fred) this morning (December 29th) on National Public Radio's Morning Edition explain how this crisis would actually provide long-term benefit to that region of the world.

I love how people like Shanek read the first chapter of _Economics in One Lesson_ and think they know more about how the global economy functions than Ph.D's from MIT.

Here's the slight problem in the above: It completely discounts how aid is transferred from the rest of the world to this particular region. Yes, on a global scale, in terms of the sum total of all known economic activity in the world, natural disasters are not "good". One should not confuse the total economy with particular aspects of the economy.

I think an example in Hazlitt's book took on a comment made by Galbraith on the Second World War, which was, bombing Japanese factories may increase production by forcing modernization. Well, if that works out then Japan could've bombed its own factories and rebuilt them, right?

This assumes actors behaved with (near or the best) information and knoweldge before the event. Suppose I go to my favorite restaurant and order the same meal everytime because *I think I like it best*. One day it turns out they can't make me that dish, so I order something else -- for the same price, taking just as long to prepare-- which becomes my new favorite meal. Granted, I could have decided at any time to choose something else, but only certain circumstances sufficiently motivated me to alter my behavior; gave me that initial "push".

Here the case is even less demanding because there's an infusion of money into these countries and regions. Moreover, it is conceivable that in a couple of years, after these areas are rebuilt and revisited by journalists, that even more tourists will visit them (assuming the prospects of another catastrophic Tsunami does not deter them). The "Broken Window Fallacy" enters the picture when we observe that those tourist dollars will NOT go to other destinations (say the Carribean or Hawaii); nevertheless, this regions prospects can improve. What's funny here is that there's a misapplication of the cherished "Broken Window Fallacy."

Assuming someone throws a rock through my store window, the *window builders* will get money (and the tailor down the street will not).

Originally posted by The Central Scrutinizer
This thread will end with a Shanek hissy fit.

Quoted for truth.

 

[shanek]

But presumably there have been examples supporting the argument? Something like the Great Fire of London?

No, because no wealth was created in the rebuilding. If there were, then there would have been an economic motivation to rebuild even without the disaster.

 

[shanek]

Re: Re: Tsunamis good for the economy? (Broken Window fallacy)

I love how people like Shanek read the first chapter of _Economics in One Lesson_ and think they know more about how the global economy functions than Ph.D's from MIT.

Argument from authority. Besides, Westley is an economics professor at Jacksonville State University and has a Ph.D. So you only show your ignorance as well.

Here's the slight problem in the above: It completely discounts how aid is transferred from the rest of the world to this particular region.

No, it doesn't. None of that aid money goes to create wealth, when it otherwise would have without the disaster. It's a fallacy.

This assumes actors behaved with (near or the best) information and knoweldge before the event.

No, it doesn't. This was not true the last 500 times this point has been made in this forum, and it still is not true now.

Assuming someone throws a rock through my store window, the *window builders* will get money (and the tailor down the street will not).

But no wealth will have been created, whereas the tailor would have created wealth. That's the difference.

 

[LucyR]

No, because no wealth was created in the rebuilding. If there were, then there would have been an economic motivation to rebuild even without the disaster.

I don't think that follows, as Cain illustrated.

Also, I personally could create a lot more wealth if I was less lazy. I'm resitant to changing my lifestyle. If I was forced to, say through threat of divorce, I might discover a much better standard of living.

 

[shanek]

Also, I personally could create a lot more wealth if I was less lazy.

So? Would you suddenly create more wealth if your house burned down?

 

[Mercutio]

No, because no wealth was created in the rebuilding. If there were, then there would have been an economic motivation to rebuild even without the disaster.

What about the jacuzzi effect? Even if there is no increase in average wealth, this could be because disasters impact the rich and the poor differently:

The more affluent and those who are outright wealthy may actually end up more prosperous once rebuilding is finished. That's because repair work often involves upgrading their property, what some economists have labeled the ``Jacuzzi effect.''

Furthermore, they typically have private insurance and don't have to wait for government programs.

''There's plenty of money here,'' said Bob Alexander, proprietor of Alexander's Now and Then gift shop in Stuart. ``People who have money will put the cash out and reimburse themselves when insurance comes in.''

In essence, economists say, the affluent lose their deductibles, but the poor lose everything. Aid is often aimed at homeowners, not renters.

Yes, this is about the Florida hurricanes, not the tsunami. Yes, I claim absolutely no expertise in this area; I post this out of curiosity, and to be able to learn from the folks here who are more knowledgeable than I am.

 

[shanek]

What about the jacuzzi effect?

As I said above, if the upgrades really were to their benefit, they would have done so even without the disaster. The fact is, they don't value it as such, it's just something they might as well do. Yes, they're taking advantage of an opportunity, and it benefits them personally, but it's wrong to say that this has an economic benefit.

 

[LucyR]

What's your definition of an economic benefit?

 

[Cain]

For truly, strange things are afoot at the Circle K.

Argument from authority. Besides, Westley is an economics professor at Jacksonville State University and has a Ph.D. So you only show your ignorance as well.

I was only making a general comment on your posts. Yours. Nevertheless, there is such a thing as a valid appeal to authority... although maybe for once you do have a point. A four time failed candidate for the lowest elective office in Bumfcuk, Southern State X is just as qualified to solve the problems confronting our fast moving global economy as any Blue Ribbon panel full of eggheads. Or better yet, any and all of the economic dilemmas confronting our world today were rigorously solved by the following: Adam Smith, Frederic Bastiat, Ludwig Von Mises, Frederick Von Hayek, and Milton Friedman. Shanek graciously blesses all who will listen by applying this holy wisdom to contemporary problems.

No, it doesn't. None of that aid money goes to create wealth, when it otherwise would have without the disaster. It's a fallacy.

What are you babbling about? The first wave (sorry) of relief aid is for humanitarian purposes. This will not doubt be followed by development aid. All of it will "create wealth" in the sense that such a basic investment in people and infrastructure, is a precondition for a thriving economy.

No, it doesn't. This was not true the last 500 times this point has been made in this forum, and it still is not true now.

I see.

OK, let's say I work at an office building and one person, call him Shane, is underperforming relative to the group. All he does is rant and rave about the inefficiencies of government, and peddle his economic nostrums to any unsuspecting co-worker he can trap in front of the water-cooler. Further suppose we suspect that Shane can be replaced with somebody more productive. Poof -- it happened. Here's the logic: It could've happened, and therefore it did happen

This reminds me of the most excellent scene in _Bill and Ted's Excellent Adventure_ when our protagonists need to break their historical figures out of jail.

"But how are we going to unlock them without the keys?"
"Dude, listen: go back in time and steal your dad's keys..."
"Ok..."
"... and then place them... next to this stop sign!"
"Whoa! Here they are [holds up keys]."
"Dude, since you already went back in time it already happend!"
"So it was me who stole my dad's keys! "

What does make sense, in the real world at least, is how a co-worker might leave work, for whatever reason, and then gets replaced with by a much more productive person.

But no wealth will have been created, whereas the tailor would have created wealth. That's the difference.

You're missing the point in two important ways.

Let's say the owner of the broken window represents the region devastated by tsunami. The window breaks in an earthquake, and somehow, all the other shop owners decide to chip in to pay for a new one, a better one. Does this help the OVERALL economy? Probably not. Has the position of the owner of this once broken and now fixed window -- meaning, this particular region (see bold print in my first post) -- improved? Quite possibly, yes.

Second, reiterating the previous point, you're misapplying the fallacy. Apart from this misapplication, the logic may well be suspect because of previously mentioned assumptions of rationality.

 

[shanek]

What's your definition of an economic benefit?

One that creates wealth. This happens when both parties engage in a transaction, both feeling that they come out ahead.

To examine the above example, lets say a new Jacuzzi costs $5,000 to purchase and install. It costs this because the Jacuzzi people value the $5,000 more than they value the actual material product. Let's say that Mr. and Mrs. Moneypants go and buy the Jacuzzi; they do so because they value the material product more than the $5,000.

But Mr. and Mrs. Dollarbags don't want to pay that price. They clearly value the $5,000 more than the Jacuzzi. But now they lose their house to a fire; the insurance company is going to pay for it anyway, so they're going to take advantage of their insurance check to upgrade by buying the $5,000 Jacuzzi. It is not the case that they're suddenly valuing the Jacuzzi more than the $5,000; it's just that they don't care anymore because it's not their money. Notice that they're not putting up $5,000 of their own money to get the Jacuzzi. It's being paid forby the insurance company.

Ergo, no wealth is created.

 

[Bubbles]

I have never owned a home, so perhaps home insurance works differently than auto insurance.

A few years ago my car was hit by someone. The insurance company, after some inconvenience, cut me a check for something like $1500. The insurance company did not fix my car. That was my problem. The insurance company did not give me a blank check towards fixing my car. I got a reasonable estimate of the cost of fixing my car.

If you have a valid home insurance claim, do they give you whatever you want? Do they pay for a jacuzzi even if you didn't have one before? Maybe, but it seems odd.

The argument that is being made is something like this:

I'm using a chemistry analogy. There is a thermodynamic driving force for my books to become carbon dioxide and water. Why don't they? There is a kinetic barier. Let us suppose that someone owns a bathtub. They could buy and install a jacuzzi for $5,000. They want to do so. Why don't they? There is a certain amount of trouble and inconvenience that they don't want to put up with. The huricane comes along, and that barier is removed. In effect, the disaster acts as a catalyst for economic transactions that were thermodynamically favored.

Now, does that make the disaster a good thing? Not really. It does mean that there can be hidden benifits. You have to realize that there is a 'kinetic' element to transactions as well as the 'thermodynamic'.

 

[LucyR]

I'm using a chemistry analogy. There is a thermodynamic driving force for my books to become carbon dioxide and water. Why don't they? There is a kinetic barier. Let us suppose that someone owns a bathtub. They could buy and install a jacuzzi for $5,000. They want to do so. Why don't they? There is a certain amount of trouble and inconvenience that they don't want to put up with. The huricane comes along, and that barier is removed. In effect, the disaster acts as a catalyst for economic transactions that were thermodynamically favored.

Good. I was going to use the "kinetic barrier" analogy too. Maybe Shane is assuming that just because some course of action will generate wealth guarantees it'll actually happen. Sometimes we have to be forced.

 

[Walter Wayne]

Shane, this does create wealth under certain circumstances. If the houses replacing the old are better (have more value), and the money comes from outside the region, and goes to builders in the region, we have a case where wealth is not necessarily created but moved into the region.

A disaster can be an economic boon for a region that is not a closed system. I think it is unlikely, especially for a tourist destination which is now bringing in no tourist dollars.

I can see how the broken window fallacy applies to a closed system, but things are different when outside sources interfere.

The very last line of the article Bergsten quote is "...so at the end of the reconstruction process, the countries will probably be wealthier." Note he doesn't mention world economy, but local economy.

Bergsten never uses the term wealth creation, but mentions an area become wealthier. This could happen by creation or moving of wealth. When you argue that there is no wealth creation it is a strawman. It doesn't appear to be what Bergsten or anybody on this thread has argued.

Walt

 

[The Central Scrutinizer]

If you have a valid home insurance claim, do they give you whatever you want? Do they pay for a jacuzzi even if you didn't have one before? Maybe, but it seems odd.

No, they don't.

There are several different kinds of coverage you can have, but I would assume what we are talking about on this thread is what is known as "Full replacement value". Meaning, when you buy your policy, the insurance guy looks at your home and says "OK, if that home disappeared tomorrow, it would cost $200,000 to replace it". Now, let's assume that home has a cedar shake roof, and no jacuzzi. Now the house burns to the ground. The insurance company will pay you 200K to replace the home. Now, let's say you really want a jacuzzi more than you want a cedar shake roof. You can get a cheaper conventional shingle roof, and then also get the jacuzzi, as long as the amount doesn't exceed the 200K limit.

 

[Mercutio]

No, they don't.

There are several different kinds of coverage you can have, but I would assume what we are talking about on this thread is what is known as "Full replacement value". Meaning, when you buy your policy, the insurance guy looks at your home and says "OK, if that home disappeared tomorrow, it would cost $200,000 to replace it". Now, let's assume that home has a cedar shake roof, and no jacuzzi. Now the house burns to the ground. The insurance company will pay you 200K to replace the home. Now, let's say you really want a jacuzzi more than you want a cedar shake roof. You can get a cheaper conventional shingle roof, and then also get the jacuzzi, as long as the amount doesn't exceed the 200K limit.

Or, as suggested in the "catalyst" examples above, you can use the 200K and some of your own money to have both the cedar shakes and the jacuzzi, figuring that even though it would have been inconvenient to put in the tub before, doing it this way is no more inconvenient than not adding the jacuzzi, since you are already homeless for the time being.

 

[Art Vandelay]

There have been many different arguments examined in this thread, with widely varying validity. If people are arguing for or against the idea the disasters can be good, they should be clear about which argument they are talking about.

Over time, properties that have been destroyed will be fully replaced, and probably by better and newer substitutes, so at the end of the reconstruction process, the countries will probably be wealthier.

This one is absurd. Merely having better properties does not increase wealth. Suppose after the disaster, my property is worth $10,000. If I spend a year rebuilding my house, and at the end it's worth $20,000, have I increased my wealth? No, because obviously a year's worth of my labor must be worth $10,000. Yes, people might end up with better properties (but even this is doubtful). But only if wealth is diverted fro somewhere else. There is no net increase in wealth. Moreover, even if this is a possibility, saying that it will "probably" happen is ridiculous.

Here's the slight problem in the above: It completely discounts how aid is transferred from the rest of the world to this particular region

First of all, it was responding to a specific argument, so the existence of another argument does not take away from its validity. Now, it may be that they might manage to get more foreign aid than their actual losses. That's especially true when a relatively minor disaster receives massive coverage. But it's doubtful in general, especially in this case, sinc, given the scale of the disaster, it's difficult for the coverage to be "disproportinate".

This assumes actors behaved with (near or the best) information and knoweldge before the event.

If this assumption is false, that means that an opportunity exists to increase wealth. This leaves two questions:
1. Is it possible for wealth to be created?
2. Will wealth consistently be created?
The answer to the first question is "yes", but this is rather trivial. After all, if I go driving drunk, it's possible that I might hit and kill a psychotic killer, and society will be better off, but that's hardly a defense of drunk driving.
For the second, a "yes" answer would require not just that humans lack knowledge, but that disasters would effectively "know" more than hummans. The idea that the blind forces of nature can plan better than intelligent humans is difficult to swallow.

I'm using a chemistry analogy. There is a thermodynamic driving force for my books to become carbon dioxide and water. Why don't they? There is a kinetic barier. Let us suppose that someone owns a bathtub. They could buy and install a jacuzzi for $5,000. They want to do so. Why don't they? There is a certain amount of trouble and inconvenience that they don't want to put up with. The huricane comes along, and that barier is removed. In effect, the disaster acts as a catalyst for economic transactions that were thermodynamically favored.

The problem with that analogy is that molecules can't look ahead and see that an initial investment of energy will end up releasing a net positive amount of energy.