Silver Hurricane Clouds?

As the level of material destruction in New Orleans mounted, I began to have a horrible sinking feeling that politicians would soon proclaim the hidden blessings of all the rebuilding work that will inevitably be done. This kind of thing (which happened after the last few major earthquakes in California, the terrorist attacks on 2001, and the more recent hurricanes to strike Florida) usually goes as follows: "Yes, this destruction is terrible, but think of all the construction jobs created by the rebuilding effort." Or, think back to the more ominous tones in 1945: "This second World War is an unprecedented exercise of human suffering. But we're lucky it saved us from the Great Depression."

Both of these are examples of Frederic Bastiat's Broken Window Fallacy. It's a parable illustrating how people easily get confused about the deadweight loss imposed by natural or human-made disasters. Suppose a bakery's shop window is broken by a vandal hurling a brick. The baker then has to hire a window glazer to replace the shattered pane. The glazer in turn has to order sheet glass from a supplier, glaze from another supplier, and pay some laborers to cut and install the glass. The sheet-glass supplier in turn can hire somebody to supply sand and fuel for his furnace. And so on throughout the entire network of suppliers. A casual onlooker is tempted to say that the broken window is a net gain; after all, a whole cascade of "new" business has been generated at the price of the baker's window replacement costs.

But this totally ignores the fact that the baker was not going to bury in his backyard the money which now has to be spent on a new window. Perhaps he was about to invest in a new oven (and set of a similar ripple effect along the network of producers who supply the oven). Or maybe he was set to buy a new suit from the tailor across the street. Even if this money was to be saved, the act of saving (through banks, stocks, etc) releases resources for somebody else to use. The possibilities are too numerous to predict, but by definition the baker already had something more urgent planned for that money than window replacement. Absent the vandal's action, the baker would have both a window and the fruits of this other planned use of the money. Instead he now has only a window.

I personally attribute a lot of the confusion here to the fact that people get tripped up by the concept of money. They think that cash changing hands constitutes an automatic gain. In macroeconomic matters, it's often helpful to pretend that money doesn't exist at all. If a disaster comes along and destroys a big chunk of resources (war materials, windows, non-earthquake-proof buildings, whatever...) society is obviously less wealthy than it otherwise would have been.

Getting back to Katrina: my suspicions were validated as I listened to syndicated AM radio news this last week. FEMA talking heads were espousing the benefits of the forthcoming vigorous construction boom. It seemed that we are slipping again into this weird fetish that venerates destruction. Then I saw this story running around on MSNBC pointing out the Broken Window Fallacy. In the mass media! Perhaps we'll be spared the politician's claims of a silver lining this time. I remain skeptical, but less sure than before.