The Broken-Window Fallacy Is Still Alive And Well

Tyler Durden's picture

Authored by Robert McKeown via The Mises Institute,

As Hurricane Harvey, now tropical storm Harvey, makes its way across the southern US, estimates have already come in as to the cost of the storm. According to AccuWeather, Harvey is expected to cost upwards of $190 billion in damages, one percent of the national GDP. This makes Harvey the costliest storm ever to hit the United States, more than Katrina ($100 billion) and Sandy ($60 billion) combined.

Here Come The Clowns

As in the wake of every disaster, pundits and politically biased economists - including Larry Summers who declared Japan's 2011 Tsunami would boost economic growth -  will wax elequently on how Harvey will end up being a boon for "the economy." CNBC, for example, reports that Hurrican Harvey may ultimately "raise wages."  It will spawn government spending and insurance payouts to flood victims, we're told. These victims will spend that money in the economy which will put people back to work, employ the factors of production and so on and so on. 

As usual, these types of talking heads forget Frederic Bastiat at their own peril. In his pamphlet, “That Which Is Seen and That Which Is Not Seen“, he warns of the unseen consequences of wasting scarce recourses by replacing capital and capital equipment. Replacing goods that have already been produced is always an expense, a net negative, and never a positive. It’s no cause for celebration to replace a flat tire or a broken windshield.

As a simple reductio ad absurdum thought experiment, imagine tanks driving through our city streets, blasting away at buildings and infrastructure, so that insurance companies and governments can spend money on rebuilding them. Yes, it employs labor and capital to rebuild, but what about the unseen? What new products or services could these people have produced had they not been involved in replacing things? The economy as a whole loses when capital must be spent twice on the same things. Nothing new, hence no real wealth, has been created.

Reckoning the Costs

Moreover, the costs to insurance companies are felt throughout the economy as premium costs rise for all consumers. Since the Great Recession began, along with the Fed’s zero interest rate policy (ZIRP) and low returns on investments, insurance companies are finding it ever harder to grow their respective insurance pools. These companies are still paying for Hurricane Sandy.

The rising costs of petroleum based products have already begun to rise as refining capacity has been interrupted for a time. Not just gasoline and diesel, but the myriad of plastics and other products the refiners produce in the East Texas area will become more expensive. This is the supply side of the equation. By reducing supply, price increases. This is basic economics. Higher prices are never a net gain for consumers.

Let us consider the next round of relief spending the government will now immerse itself in. Where do politicians get the money to spend on disaster relief? Certainly, not their bank accounts. They will get another loan from the Federal Reserve System, at interest, and the American public will foot the bill. Now you know why legislation is called a “bill” before it is passed into law. The Fed, on the other hand, will create this new “money” from thin air with a few computer keystrokes and dilute the current supply of money even further. Monetary inflation provides another unseen tax.

No Silver Lining

If you’re finding little to be happy about when a natural disaster hits don’t worry, you’re normal. After all, they’re called natural disasters and not natural bonuses. Also, by wasting capital to rebuild a destroyed city doesn’t yield more wealth. If it did, then Japan would invite the US Air Force back to relieve their economy from a nearly 20-year slump. Destruction is always a net negative.

Whether it’s a hurricane, tornado or earthquake or even a war, there is no silver lining in destroying capital. Destroying scarce resources is always a stupid move. But realize, the greatest destruction left in the wake of one of these events is the irreplaceable resource of human lives and the disruption of livelihoods. Those left standing after disaster strikes aren’t comforted when a pundit tells them how lucky they are. All of their life’s treasures have been destroyed. Not just houses and cars, but records, photos, and heirlooms that are not replaceable. The loss of incomes causes people into foreclosure, prematurely. Once the news cameras are packed away and Houston, Port Arthur or wherever USA is no longer in the news cycle, these victims must still cope with the damages.

Hard as I may try, It is very difficult to find that silver lining in the wake of a disaster. Natural or man-made.

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DinduNuffin's picture

irma = goddess of war

takeaction's picture

So....as a Hurricane aproaches, Guns are being Confiscated?  Isn't the Virgin Islands a US Territory???

..I find this HORRENDOUS!!

http://dailycaller.com/2017/09/05/virgin-islands-allows-national-guard-t...

Ramesees's picture

This is fine and all, but let's acknowledge that if you look at it in a localized way, Broken Window Theory does work.  That is to say, of course overall the global economy would be better off if people in Houston didn't have to spend the time fixing things that weren't broken, since their efforts could be directed toward more productive wealth-generation.  However, in the short-term and for a localized section of the economy, a broken window can be a good thing.  

ejmoosa's picture

No, it does not work.  It takes money that people have saved and forces them to spend it on something that adds no additional value to their life.

Sort of like Obamacare.

 

There would be more productive wealth-generation if the return on investment was there.

Pairadimes's picture

The broken windows theory overlooks the fact that invested capital is consumed as expended capital with no net gain in material wealth. You have to be a progressive to be that stupid. Right, Krugman?

Escrava Isaura's picture

“Wealth is a flow. Spent it must be to produce future wealth.”Frederick Soddy, 1921.

https://www.amazon.com/Cartesian-Economics-Physical-Stewardship-Classics/dp/1616407395/ref=pd_ybh_a_47?_encoding=UTF8&psc=1&refRID=MQ602PFFHPJKAA14P8BM 

 

Déjà view's picture

As insurance premiums rise many will go bare at 'taxplayer' i.e. future generations expense...

PGR88's picture

You can't calculate which locals benefit and which do not.

brown_hornet's picture

Certainly the glazer benefits. Chem manufacturers not so much.

migra's picture

Broken windows theory most certainly works. I lived in Brooklyn, New York from 1989 to 2005. I saw how it was with Democrats with crime running wild and I saw how to was with Rudy allowing the NYPD to lock up the scum of the earth. Broken Windows totally works.

Let it Go's picture

It is difficult to think people still believe that any kind of spending is good. It is very important people understand that economic growth does not equal economic strength. Quantity simply does not make up for poor quality spending, we are talking about two totally different animals.

Misdirected spending for something like breaking a window is not a wealth builder. It is much like spending based on low-interest rates and Ponzi style financing which creates an economy that is built on sand and prone to failure. The article below delves deeper into this subject.

 http://brucewilds.blogspot.com/2017/08/economic-growth-does-not-equal-economic.html

Moving and Grooving's picture

It's the broken lives that will need repairs.Home Depot can't help.

Big Creek Rising's picture

"As a simple reductio ad absurdum thought experiment that's about to happen real fucking soon by your local over-armed police departmentimagine tanks driving through our city streets, blasting away"

Creepy_Azz_Crackaah's picture

In theory I'm completely with you. But I honestly wouldn't mind the tanks blasting away in Detroit, Chicago, Southeast D.C., Baltimore, et al.

c2nnib2l's picture

I don't think they know who Frederic Bastiat was. They are socialists after all.. 

GoldHermit's picture

Or Mises, Hayek, Bohm-Bawerk, or George Reisman of current notoriety.

anarchitect's picture

Socialists is too narrow.  Statists would be more appropriate.  Their kind are utterly incapable of seeing unintended or hidden consequences.

GoldHermit's picture

Read Hazlett's Economics in One Lesson. This is in chapter 1. There are too many stupid people running around under the guise of economists.

Dickweed Wang's picture

There are too many stupid people running around under the guise of economists.

 

Did you just notice that??

GoldHermit's picture

Oh no... I've been quite aware of that for some time!  Probably more than not!!!

Creepy_Azz_Crackaah's picture

You can get it (Henry Hazlett's Economics in One Lesson) free (legal), in pdf form, here, BTW:

https://mises.org/system/tdf/Henry%20Hazlitt%20Economics%20in%20One%20Le...

Main page:
https://mises.org/library/economics-one-lesson

I had a fairly liberal friend read it. He said it was too political so felt free to ignore the solid economic theory.

bobert727's picture

so we need more disasters like Harvey and Irma to get the economy going....yeah...that makes sense

Son of Captain Nemo's picture

Yes indeed... Still "ALIVE" in a delusional psychopath's mind that no longer is capable of understanding the difference between "solvent" and "insolvent" and how it impacts the outcome of the "broken-window" FALLACY!

replaceme's picture

I just skimmed that, so -bullish? I liked the thought of tanks and such, buy Purple Shovel??

Herodotus's picture

The Jews get their cut on every disaster.

css1971's picture

When they talk about growing the economy, what they actually mean is "debt growth". Nothing more than that.

surf@jm's picture

Not to mention the global warming hysteria ginned up, to put communists in charge......

NEOSERF's picture

So when we apply the Katrina numbers below, you are probably looking at at least $250B in economic impact over the next 10 years and probably slightly higher insured losses at $50B....most of the government money goes to the people helping people who now are unproductive with no jobs, no homes and no cash for retail.  There really isn't a recovery from that kind of event which hopefully Miami will be spared from.

 

University of North Texas Professor Bernard Weinstein estimated that Katrina cost $250 billion.

That includes both the damage and its economic impact. He estimated uninsured losses at $215 billion, and insured losses at $35 billion. That's because the worst flooding occurred in New Orleans' 9th Ward. It was a low-income are that was mostly uninsured. 

Private Insurance Payments: 
Insurance companies have paid an estimated $41.1 billion on 1.7 million different claims for damage to vehicles, homes, and businesses in six states. 63% of the losses occurred in Louisiana and 34% occurred in Mississippi. Hurricane Katrina is the costliest disaster in the history of the global insurance industry. By 2007, 99% of the 1.2 million personal property claims had been settled by insurers. Source: Insurance Information Institute, 2010 National Flood Insurance Payments: 
The National Flood Insurance Program paid out $16.3 billion in claims
. $13 billion went to claims in Louisiana. June 2006 - The Government Accountability Office releases a report that concludes at least $1 billion in disaster relief payments made by FEMA were improper and potentially fraudulent. Impact on the Gulf Coast:  
More than one million people in the Gulf region were displaced by the storm. At their peak hurricane relief shelters housed 273,000 people. Later, approximately 114,000 households were housed in FEMA trailers. FEMA has provided more than $15 billion to the four Gulf states for public works projects such as the repair and rebuilding of roads, schools, and buildings, in the 10 years since the storm, and $6.7 billion in recovery aid to more than one million people and households. The majority of all federal aid, approximately $75 billion of $120.5 billion, went to emergency relief operations.
Rich Monk's picture

Just end the Federal Income tax altogether, end the marxist Jew owned Federal Reserve, disband the Federal government. It's a start.

FreedomWriter's picture

Yeah baby, hard to imagine how it could get any worse. And Manip is right, they do work for us. A lot of them need to be fired.

 

Manipuflation's picture

I did what I said I was going to do.  I went and picked up the daughter from her first day and a new Screwl today on the Harley.  I told her yesterday that I would be there at exactly 11:30 AM.  I arrived at... 11:30 AM sharp.  Not 11:29 AM and 11:31 AM.  That is what the letter said.  I am a ZHer and I am very particular about that sort of detail.  But of course that it not how it went down because we don't have a private school for my daughter's grade where we live.  

That is why I rode the route yesterday so that I would know exactly how to get there and what to expect.  This is the public fool system that I will be dealing with.  I distrust anything with the .gov involved.  I wanted to make a statement that would resonate.  So there I am on my all black bikew/crhome trim and dressed in all black with my black Ray-bans on, no helmet, and my leather.  

I parked on the street and watch the debacle unfold.  There were a lot of very confused parents because the busses were not running for return home but I knew that yesterday.  In fact, the Mrs.M had to take daughter to the Fool this morning because the bus never showed up to pick her up.  Many of you are parents so what would you think of this sort of .gov incompetence?  It is not acceptable to me.

I made sure that fuckers saw me because that was my intention.  I finally up to the school doors where the young, not hot, lady cop was and she gave the once over look.  I didn't say a word but I didn't like the look of that.  My daughter was there and I brought her home.

Her friends from the private school saw it all and the teachers did as well.  I was pretty tame but I have a new nickname now.  I am the Terminator according to the kids.  I think it is really important to establish how shit is going to work right away and make sure that it is loud and clear.  Don't make me remind you .gov fucks that you work for me.        

Manipuflation's picture

No I did it.  I just retrieved my son as well and he actually made the bus and that bus showed up.  He is six years old. 

I don't trust any of these .gov fuckers with my kids.  At least with his school they kind of know who I am because I rode my bike ride down their sidewalk and jumped it off the stairs. 

I am sure that you think I making it up.  If you think that about me then you'll make an easy target.  If you think that about me then you don;t understand.  I send messages to not fuck with me and if you fuck I make sure that you pay the price for it.  I am what Minnesotans call "different". 

You can't tell me that I took the family on public transportation all over the Twin Cities to art galleries, down Nicollet Mall, stopped at the original Target and bought some lunch of a third of the price and then rode the Green Line to the University at TCF field and walked down the west bank station but on the way dtopped into a college bookstore and bought Orwell's 1984 for my daughter, told the young clerk on her smartphone that it is now the truth.  She had not read 1984.  Do you think I would make that story up? 

That is just part of one day for me.  Who do want on your side?  Life is too short anyway.  It is all passive-agressive OCD rebellion or so they might say.  I have crates of ammo and more guns then a man would ever need.

The fact of the matter is that I am watching them as much as they think they are watching us and they are scared shitless.  They should be.    

rejected's picture

I distrust anything with the .gov involved

Apparently you trust them with your most important asset. As a ZHer you are aware she will be dutifully brainwashed and will graduate with a less then stellar education. Like everyone else, you can blame the education system but when the Harley rubber hits the road,,, it's really your responsibility.

Dre4dwolf's picture

Ill break it down and make it simple.

Catastrophic events of mass destruction create wealth because

1) If nothing happens people pay their insurance premiums and that money is essentially wasted on overhead/non-productive activities (mostly people sitting in an office doing nothing waiting for something to happen).

2) When a hurricane hits and destroys 100,000 homes, now all that WASTED INSURANCE MONEY THAT PEOPLE HAVE BEEN PAYING FOR YEARS has an outlet and a "cause" / "use case" .

The money that would of otherwise been wasted paying people to stand around a water cooler chomping down donuts , is then used instead to build NEW HOMES and FILL THOSE NEW HOMES WITH NEW STUFF, (which causes a rise in demand).

Opposed to nothing happening , insurance premiums being sucked into a black hole, and people getting stuck with depreciating assets/homes.

 

Break some stuff, its actually good for you (if you are being held at gun point and forced to pay for insurance).

 

 

VZ58's picture

Wow. Are you serious? Sure, let's all pay AGAIN for stuff we already had and built. Yeah that's positive growth for ya! Keep smoking what you're smoking...

FreedomWriter's picture

"The money that would of otherwise been wasted paying people to stand around a water cooler chomping down donuts , is then used instead to build NEW HOMES and FILL THOSE NEW HOMES WITH NEW STUFF, (which causes a rise in demand)."

 

The donut eaters would at least have been earning salaries and spending money on their homes (and perhaps insurance premiums) or on something else. What happened to the insurance premiums used to play the ZIRP market?  Were there any real returns (as in tangible economic growth) from that investment? What happens when no one has any money left to pay for insurance premiums or buy homes again?  CTRL P redux, baby, followed by food riots? 

Very nice when FIRE and Wall Street can show record profits, not so nice when regular folks can no longer play in the casino.  Yes, in the long run, we are all dead, but some are deader than others.

NYC_Rocks's picture

Wrong.  The premiums are not "wasted."  They are saved and invested to cover the future disaster costs.  It's just future savings.  The pool of diversified payments covers the cost of overhead, profit and he dollars that get paid out for claims.  Your logic fails beyond belief.  The premiums are based on statistics and competition between isurance companies keeps the rates such that they cover all claims plus a market based profit.  This does not debunk the broken window fallacy.  You could not be more wrong.  You post is complete, utter nonsense.

rejected's picture

Saving today is considered hording.  You are supposed to spend it all.

Of course, when you want to retire, they want to know why you didn't save....

VZ58's picture

Hey, when your country doesn't produce any real shit anymore, then that's all you've got if you want to make the numbers look good. Either that or just infalte away your stock markets based on imagined value. Is anyone surprised anymore? Imagine all the economic activity generated if we all start digging holes and filling them up again! It's all AWESOME!

passerby's picture

When you can milk the host no longer, kill it and consume it.

Musum's picture

The fact that this even has to be explained, over and over and over ad nauseum, to the nincompoops in academia, DC, Wall St. and Main St., is proof of our collective insanity, stupidity and absurdity.

Stan Smith's picture

This only "true" if your covered or have the money to rebuild and remodel.    If your not covered,  or dont have the money -- and it sounds like a shitload of people in the S.E. Texas area arent -- the broken windows fallacy is simply rubbish.

Do you think someone who's house has been destroyed -- and wont be coming back -- give a damn about what the economy is doing?   Sorry.   That's folly.

From a 30,000 ft view it might be fine.    But on the ground Houston wont ever be the same.   New Orleans isnt.    Miami after Irma isnt going to be either.

Musum's picture

No, no, no, no, nooooooooooooooooooooooo... there is no difference whether you have money/savings to replace the broken window... NOOOOOOOOOOOOOOOOOOOOOO.

bagpiper's picture

Remember Hurricane Floyd in '99, and the "1000 year flood" afterwords?

People, we're still suffering because of that nasty smelly polluted mess that came 4 ft in my back yard, I lost everything in my barn, there are still piles of crap piled up and hidden in the woods around here where people couldn't get any 'assisstance' from FEMA or anyone else... all the 'help' was concentrated in the cities. All FEMA would give us is a 'loan'.... yeah right, another loan to pay off.... so the end of the story is, if you ain't black, brown, or another of the victim classes, you get fucked.

Wait till Houston figures that one out.

(The MOST they do is give the lower class an RV to live in for 18 months, and then, poof, you're on the street. Not that I have a problem with that part, because there is a class of victims who LIKE being victims.)

messystateofaffairs's picture

A Jew comes and breaks your window and tells you the Muslim down the street did it. You thank him and pay him to put in a new window. You and the Muslim go to war, the Jew sells both of you guns. The broken window is not a fallacy, its good for business.

Berspankme's picture

Imagine if NK blasts one off- Krugman will get a 4 hr erection

Expat's picture

It is stunning how many otherwise intelligent people believe this fallacy.  It works very well until you suggest they burn down their own home to get rich.  Then all of a sudden they don't think it's such a good idea.  Or suggest they open an insurance business.

People are morons.  You can see that just by looking at 1600 Penn. Ave.

indio007's picture

"Now you know why legislation is called a “bill” before it is passed into law."

Never a truer statement has been said.

Next mental excercise.

Ponder the Bill of Rights.

geeves's picture

Any article that references Bastiat is good.