April 2, 2013

Destruction Is Not Profit

In the Washington Post, Neil Irwin explains how after hurricane Sandy economic activity will be sluggish for the weeks following because most of the businesses will be shut down after the devastating storm.  He goes on to ramble about how it will take months for businesses to re-open and return to their previous status.  I find it interesting though that he believes the result from this devastation will lead to economic growth or a positive net from opportunity to rebuild and clear damages.  “During the next couple quarters, there will be an almost perverse boost in overall economic activity, as efforts to clear damage and rebuild houses and businesses add to the gross domestic product.”  This whole tragedy reminds me of the fallacy of the broken window as Bastiat explains, and that the silver lining you (can't) find with hurricane Sandy is purely one seen side of the cost; it's important we find and question the unseen.  We see the cost and benefit of providing more jobs, but the problem is we don’t see that we are spending money to rebuild things we already had, and we are now taking money away from the country to rebuild the city when we could have spent it on something else more productive or at least something that we didn’t already have.  Bastiat explains, “But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows (in our case-destroy cities), that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”  Furthermore, Irwan from the Washington Post explains that “there are no reliable estimates of the financial damage wrought by the storm, but one pre-storm estimate of $88 billion would imply that rebuilding efforts would add about two-tenths of a percentage point to GDP growth.”  Again this is just fictitious, even though many economist and people in general use the GDP as a measure of our welfare they are simply wrong; the GDP fails miserably to accurately measure my overall happiness and has no way of quantifying my quality of life. 
Back to the opportunity Irwin tries to convince us of that hurricane Sandy will generate jobs, exchange and happiness; he supports this by unfolding, “The storm depleted some of the nation’s capital stock- houses, stores, and bridges and other infrastructure were destroyed… The country is, in effect, poorer by whatever amount the damage comes to but the urgent need to rebuild will create jobs and spur economic activity, with the bill paid by insurers and governments.”  The whole idea that depleted housing, stores and business will generate jobs is just crazy, on one hand yes it does but it also takes away from us spending money in a more productive way or towards something we didn’t already have.  As we said in class, instead of replacing that broken window we could have spent it on a new pair of shoes for the shop; same goes for New Jersey/New York, instead of paying people to replace their houses, stores and business they could have had the government spend money on things that would bring more enjoyment and prosperity to the states.  It’s amazing though that Irwin pursist that there is a silver lining within this mess, and that there are long term benefits to rebuilding infrastructures that we already had compared to investing in new projects and innovations. 
Furthermore, “In a 2002 paper published in the journal Economic Inquiry, Mark Skidmore and Hideki Toya analyzed areas that were affected by natural disasters around the world. They found that such events can provide the impetus needed to invest in new and more productive capital.”  Yet it again, I don’t completely disagree with what they are claiming but I do believe that they are not seeing the whole picture; they see the obvious but are failing to see the not so obvious that I pointed out earlier.  Bastiat helps to explain this through the broken window, “Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs: this is that which is seen.  If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.  And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labor, is affected, whether windows are broken or not.”  Ultimately, when people like Irwin claim that there is a benefit to rebuilding things we previous had they are only looking at what can be seen and not at what can’t be seen.  Irwin sees that this devastation allows someone to use their labor and make a wage, what he doesn’t see is that the person who is paying to repair the damages is being urged to use money in this way instead of something that may be more enjoyable or beneficial to them or their business.  Furthermore, when Irwin claims that the government pays for these rebuilds I think he is wrong;  they may be writing the check or finding the credit but the government isn’t taking it out of their pockets, they are taking it from our pockets through taxes, or they are borrowing money from other countries, printing money (causing inflation) or they are spending future income for present problems which all have rippled unintended consequences.  Bastiat sums it up well, “Whence we arrive at this unexpected conclusion: Society loses the value of things which are uselessly destroyed; and we must assent to a maxim which will make the hair of protectionists stand on end—To break, to spoil, to waste, is not to encourage national labor; or, more briefly, DESTRUCTION IS NOT PROFIT.”  Concluding, Irwin must see the unseen and reevaluate his beliefs on finding the silver lining within great devastation; and he must question where New Jersey/ New York would have been without the hurricane and what the government could have spent the money on if it didn’t have to rebuild previously owned damaged goods.

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