Destruction Is Creation – Not

by Don Boudreaux on August 31, 2011

in Myths and Fallacies, Seen and Unseen, State of Macro

Here’s a letter to the Programming Director of Washington, DC’s, WTOP Radio:

Enough with reports (heard in today’s 1pm hour) that natural disasters can be good for the economy.  The vulgar Keynesian economics upon which such reports are based is hopelessly confused on the issue.

According to Keynesians, recessions result from people feeling pessimistic about the future – a pessimism conjured by what Keynesians regard as wary “animal spirits.”  This pessimism prompts people to save too much and spend too little.

But even if we accept these Keynesian notions, is it likely that the optimism necessary to improve the economy will be sparked by destroying people’s homes and businesses?  How plausible is it that people – who before being hammered by the likes of a hurricane felt that their savings were too low – will go on sustained spending binges because natural disasters oblige them to dip into the very savings that they were previously trying to increase?  By what logic are “animal spirits” buoyed with confidence by tragedies that make people poorer?  On what theory do consumers or investors become more hopeful about the future while standing in the rubble left by natural disasters?

Please, no more such absurd reports.

Sincerely,
Donald J. Boudreaux

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Invisible Backhand August 31, 2011 at 3:18 pm

“When something is destroyed you don’t necessarily rebuild the same thing that you had. You might use updated technology, you might do things more efficiently. It bumps you up,” says Mark Skidmore, an economics professor at Michigan State University. “Disasters help people think about things differently.”

Studies have found that earthquakes in California and Alaska helped stir economic activity there, and that countries with more hurricanes and storms tend to see higher rates of growth. Some of the most recent work has found a link between disasters and subsequent innovation.

http://www.boston.com/bostonglobe/ideas/articles/2008/07/06/how_disasters_help/

Seth August 31, 2011 at 3:28 pm

“…see higher rates of growth.”

Is that growth in terms of spending, which does not take into account the cost of the of destroyed capital?

Kevin August 31, 2011 at 3:32 pm

The issue I’d take with the assertion that it’s a net benefit is that, if there were an expected net return, individuals would be clamoring to tear down the existing infrastructure and rebuild it anew. As is, they’re stating that relying upon a natural disaster and then insurance or government assistance produces a net positive. In short, so long as somebody else pays for what no one else saw fit to do, it’s a gain. Something seems off about this.

I think this is also a case of misleading appearances, combined with the fallacy of composition: looking at the individual case and assuming it applies to the bigger picture.

For instance, if I have an old beater car that I’d love to replace, getting into a wreck wherein someone else must replace my car could be quite the boon! I get a new car out of it, and that new car may even be more efficient! I drive it, love it, and seem better off overall.

Of course, the old car I did have is no longer useful, the funds from the insurance company are no longer invested or saved, and once again I have leapt at the chance to receive something I would not have bought myself.

Chris O'Leary August 31, 2011 at 5:00 pm

AnnaLee Saxenian studied the difference between the technology economies of Silicon Valley and Boston and found the difference between had nothing to do with that.

I’m thinking your studies confuse causation and correlation.

Economiser August 31, 2011 at 6:45 pm

I like how that article quotes Don Boudreax in the middle and then goes on to disregard everything he said.

As GrizzlyAdam noted below, if disasters are good for the economy, why wait for mother nature’s flighty hand? Let’s start breaking windows on a predictable schedule.

These people need to read more Bastiat.

Methinks1776 August 31, 2011 at 8:23 pm

Invisible Backwash,

I will gladly help you get richer by taking a sledge hammer to all of your belongs. Why wait for an earthquake? I’ll do it for free. It’ll be a mitzvah, apparently.

Stocks and flows. Stocks and flows.

rbd August 31, 2011 at 8:33 pm

@ Invisible Hackband
You are exactly correct here. I had the distinct privileged of visiting Hiroshima, Japan back in 1990. I remember asking the locals what it was like after the bomb. I was shocked to learn that folks were so thankful for the US nuking them. They said they never felt so rich and so economically vibrant. They almost seemed disappointed that we only bombed two of their cities.

vidyohs August 31, 2011 at 10:44 pm

In the same vein, we have been looking at the Earth Liberation Front (ELF) in the wrong light. They are actually economic heros, not criminals, for stimulating the economy when they burn homes and destroy auto dealertship’s inventory.

Kirby September 1, 2011 at 6:14 pm

IBH, there is a reason that people don’t replace everything after it is a year old (like computers, houses, etc etc). And that is because it is inefficient.

ettubloge August 31, 2011 at 3:18 pm

I heard a Rutgers econ prof named Hughes on the radio yesterday state that it is “counter-intuitive” but the hurrican damage can be beneficial to the economy. He did admit there were some losers but overall it would spawn commericial activity. Very few of us in Jersey know about Bastiat though we are very knowledgeable of broken windows (mostly windshields).

kyle8 September 1, 2011 at 7:06 am

An Econ Professor? That is just sickening.

Invisible Backhand September 1, 2011 at 10:54 am

Have you abandoned your blog? You haven’t posted since Aug 9th.

Chris O'Leary August 31, 2011 at 3:25 pm

I do think that there’s some merit to this…

“(R)ecessions result from people feeling pessimistic about the future – a pessimism conjured by what Keynesians regard as wary “animal spirits.” This pessimism prompts people to save too much and spend too little.”

…because it’s a basic consumer confidence argument.

However, I agree that destroying things doesn’t do much that’s positive for consumer confidence. That same is true of gigantic stimulus packages that don’t have an immediate or tangible impact on people’s lives.

Seth August 31, 2011 at 11:01 pm

Yes.

And it doesn’t help restore confidence when the government spends and borrows so much and seems committed to keep doing it for the foreseeable future. Everyone knows that the debt repayment must come from us in some form or fashion at some point. Not very reassuring at all.

Tim September 1, 2011 at 8:10 am

Seth,

That’s the Ricardian equivalence argument but I’m not so sure that really holds. Most Americans support government spending programs and cry bloody murder when Congress tries to take them away. I don’t think people really worry about the debt that much. Sure it’s the hot topic right now but how long will the media attention really last? It would seem that all these many years of politicians claiming that we have unlimited credit has indeed shifted the mindset of the man on the street. Anybody be damned who talks about the debt while trying to take his unemployment away or tries to say that the government should not help rebuild after a disaster.

John Dewey September 2, 2011 at 5:42 am

Tim: “Most Americans support government spending programs and cry bloody murder when Congress tries to take them away.”

Let’s be sure we understand what some Americans really believe. Like me, many – but not most – of my fellow Boomers argued for privatization of Social Security. We certainly believed we could have received better returns on the 12% FICA taxes than the government promised us. But we were consistently outvoted by older Americans and other Boomers.

Once we enlightened Boomers reach retirement age – and no longer have the time or ability to invest and earn – we are going to support Social Security. We are going to vote consistent with our economic self-interest.

Over most of our lifetimes, we did not favor Social Security. Once it became obvious that our preferred alternative would not be permitted by fellow voters, we accepted the inevitable,

vikingvista September 3, 2011 at 2:57 pm

Tim,

And that is the essential moral flaw that collectivism has bread into many Americans today. The very essence of immorality is the deliberate victimization of innocent strangers for one’s own personal benefit. But the morally weak actively perpetuate this cycle of violence. They recognize themselves as victims of the state, and seeing the success of the vivtimizers, openly choose to join them. It is a kind of massive Stockholm Syndrome that takes decent rights-respecting and just Americans, and turns them into degenerate thugs.

fdsa August 31, 2011 at 3:33 pm

It may be that a well-earned experience of triumph over adversity translates into confidence and optimism. Having undertaken a few long canoe trips and DIY home remodeling projects, this seems plausible to me. Does the same effect apply on a much larger scale, when whole populations triumph over infinitely greater adversity than a rough portage? There’s a good case that it does.

Hypothesis: After the allies won WWII, we in the US felt like we could do anything. The malaise of the Depression years was gone, and we went on an economic tear for the next 25 years. This strikes me as much more plausible than the belief that WWII ended the Great Depression because we somehow mysteriously increased our wealth by building war materiel and consuming it in battle.

It’s reasonable to suggest that a successful rebuilding effort ultimately pulls people together and and provides that kind of experience. If I were in a half-ruined town in Vermont, I would be seriously demoralized right now, this afternoon, “standing in the rubble” — but all you can do is get to work. Eventually, when rebuilding is complete, it may be that everybody involved will feel energized by what they’ve accomplished.

Of course, improved confidence in a few towns in New Jersey and Vermont won’t do anything for the national economy! THAT is an absurd proposition, absolutely, and it is the only way Irene will have any meaningful stimulative effect. I agree with you that WTOP is wrong.

EDG reppin' LBC August 31, 2011 at 5:09 pm

Most of that 25 year long “economic tear” we went on had to do with the fact that the war completely obliterated the industrial capacity of most of Europe and Asia. So, lets stop slapping our backs about the good old days of the 1950′s. Instead, try to find examples of good economic growth that was not preceded by a worldwide war. Also, the stimulative effect of rebuilding after a hurricane is simply an illusion. It’s really just more of a wealth transfer, i.e. Atlantic Coast states will receive disproportionately more Federal dollars than they pay into the system. It is really more like California, Texas, Ohio, and the other non-affected states are subsidizing the rebuilding efforts in the Atlantic States. I doubt it will stimulate much outside of the region.

Andrew_M_Garland August 31, 2011 at 7:15 pm

World War II destroyed the productive capacity of Europe. Suposedly, this led to an economic boom in the US, as we tooled up to sell them huge amounts of stuff.

Question: With their society in ruins and their industrial capacity destroyed, what did they pay us with? That is, what were the huge exports to the US that paid for our booming production?

An economy can boom without exporting, merely by efficiently putting everyone to work on useful things. Conversely, Greece and Spain are going broke despite having an intact industrial infrastructure.

Leftists claim that the government spending of World War II, rationing, and the conscription of soldiers (giving everyone a “job”) somehow produced prosperity. But, what possible mechanism produces prosperity out of war? People can’t eat or enjoy tanks, and shooting people produces nothing of value beyond winning.

In reality, WWII interrupted FDR’s plans and changed the mood of the American people, leading them to reject big government. It was the post-war reaction of the people against FDR’s policies that resulted in good policies and renewed prosperity.

Spending did not end the Great Depression
Reduced spending and lowered tax rates did it.

Darren August 31, 2011 at 7:25 pm

I can see a society with older structures and inefficient production being forced to modernize, which could lead to a ‘boom’ in the economy. It’s more long term. Without that destruction there would be much resistance to destroying what they *did* have in exchange for what they *might* have. A bird in the hand….

Methinks1776 August 31, 2011 at 8:33 pm

Darren,

I don’t think so. Imagine you own a business. You are competing with all other producers. If your equipment is old and tired and making you uncompetitive, you’re not maximizing and you have plenty motivation to replace your tired, outdated equipment. If you don’t you will be outcompeted by other business owners who are not so foolish.

I wish I didn’t have to invest so much in technology every year, but if I didn’t, I’d be less profitable. The promise of more profit with better, faster technology means that the capital expenditure is more than worth it.

You know, if the bird in the hand is dead, it’s time to bury it and move on.

vikingvista September 3, 2011 at 3:10 pm

Darren,

Is a farmer with an old outdated tractor better off making some profitable use of the tractor for some optimal period of time and then selling it to finance a new tractor next year? Or is he better off if someone steals his tractor today forcing him to tap into savings for whatever kind of new tractor he can currently afford?

You see, people always have the option of trashing or giving away their current assets and buying new replacements. But they also have the options of utilizing current assets for a period of time first. They can determine which course is better for them. A destructive storm takes that option away.

Since such destruction ONLY eliminates options, it can only make people poorer.

kyle8 September 1, 2011 at 7:10 am

It is not so much that the Europeans were buying from us, although they did start to do that after their economies got a little better. It is that we had very few competitors left in the world.

If someone in South America wanted a radio or auto they pretty much had to buy one from the USA.

John Dewey September 2, 2011 at 6:06 am

What period are you referring to, kyle8? I’m pretty sure that Phillips, a Dutch company, and Panasonic, a Japanese company, were exporting radios in the 1950s.

fdsa September 1, 2011 at 9:45 am

I agree with everything you said except “leading people to reject big government”. It’s more like WWII conditioned the American people to accept big government once and for all. It’s been getting bigger ever since.

Andrew_M_Garland September 1, 2011 at 10:21 pm

American sentiment (see the link above) turned against the schemes of FDR. Government economists at that time predicted that 12 million returning soliers would be unemployed and cause social unrest. In fact, the soldiers integrated smoothly into an economy that was then relatively unhindered by giant government programs.

It took a while for politicians to again lure the populace with big promises and government programs.

Don Boudreaux September 1, 2011 at 10:38 pm

Sadly, I believe that there’s much validity in your hypothesis.

vikingvista September 2, 2011 at 6:17 pm

fdsa,

In spite of the post war backlash against the FDR regime, many wartime powers were not reversed. This is a pattern of war documented by Higgs. One specific example is the infamous legacy of the Milton Friedman wartime income tax withholding scheme.

John Dewey September 2, 2011 at 6:29 am

EDG reppin’ LBC: Most of that 25 year long “economic tear” we went on had to do with the fact that the war completely obliterated the industrial capacity of most of Europe and Asia.”

I don’t think it took anywhere near 25 years for European companies to rebuild and start competing with North American companies. I’m pretty sure that Fiat, Renault, and Volkswagon were competing globally with GM and Ford by the mid-1950s. BP and Royal Dutch Shell were among the major integrated petroleum companies in the 1950s. Ericcson was one of the world’s telecommunications manufacturers throughtout the 1950s and 1960s. These six companies were not exceptions. Within a decade after WWII, Europe had a strong industrial base.

Darren August 31, 2011 at 7:21 pm

After the allies won WWII, we in the US felt like we could do anything.

I’ve wondered what things would be like after WW2 if we had lost (besides having to bone up on Japanese and German). I doubt there would have been any kind of ‘Marshall Plan’ for us, either.

Ari August 31, 2011 at 3:33 pm

Pedantic point for future letters: The title of the person in charge of what goes on the air at a radio station is “Program Director,” not “Programming Director.”

JS August 31, 2011 at 3:47 pm

It could be said that natural disasters and things of that nature are good for the the economies of some people.

The free market thinkers here should never get too upset with what’s said by the Keynesians and socialists, because correct theory always triumphs over bullshi… Obama can give all the teleprompter speeches he desires but no matter how much the ignorant masses believe them, they won’t improve their standards of living. He may sucker the masses into getting another 4 more years, but that won’t help them.

Time is on our side.

Andrew_M_Garland August 31, 2011 at 7:18 pm

That calm perception is fine as long as you are not in the boat that Obama is sailing.

JS August 31, 2011 at 7:56 pm

You’re right. I should have been more sensitive.

Things won’t change much with Republicans in office. They’ll slow things down a bit, at best. Statism is here to stay and people need to find ways to succeed despite the uncertainty surrounding us. People need to learn how to prosper in an environment where only 3/4ths of the population is productive.

We are still a capitalist society even with the State functioning as a competing participant as well as possessing the power to socialize their losses. We remain a market economy and even distorted markets have the power and potential, through competition, to create vast wealth for society. This power to create wealth is breathtaking in its scope and its likely that the economy will soon spurt forward simultaneously with the imposition of policies that we all understand as detrimental to growth, but it will happen in spite of it, and the politicians will mistakenly think that it was their interventionist policies that provided for the growth. They will be re-elected on the platform that their central planning brought forth prosperity and the history books will celebrate them as great leaders in these tough, turbulent times.

txslr August 31, 2011 at 4:19 pm

Also, if you measure the wrong thing perpetual motion is possible!

Kirby August 31, 2011 at 8:38 pm

for example, if you measure the likelihood that something will reach the end of the universe before being snagged by the gravity of a celestial body.

Seth August 31, 2011 at 11:27 pm

or GDP

vikingvista September 2, 2011 at 7:55 pm

The universe has an end? I thought it was both finite and endless.

Methinks1776 August 31, 2011 at 4:21 pm

I wish someone would send such a letter to CNBC and Fox Business. I mean, it’s one thing to have this kind of thing on a chat show, but quite another when it’s being spewed on financial news networks. Myth spinners.

Dan H August 31, 2011 at 4:31 pm

Notice Muirgeo has been noticably absent from these “Destruction brings economic growth” arguments? Perhaps even he realizes that it is an insane assertion.

ArrowSmith August 31, 2011 at 8:05 pm

Brain freeze.

Methinks1776 August 31, 2011 at 8:27 pm

he realizes

That is the funniest thing you’ve ever written. Muirdiot doesn’t even understand most of what he spews. He’ll cut and paste the Keynesian line even if he doesn’t understand it. Don’t be fooled by his absence. Every once in a while, he takes a break from pooping on this blog to do blow in nature – somewhere on a trail near his Vacaville hovel. He hasn’t realized anything in the 6 years he’s been misspelling stuff not worth writing on this blog.

Dan H September 1, 2011 at 8:14 am

It amazes me how in my first micro class at Ohio State back in 2006, I was taught about opportunity cost. The very next quarter when I took macro, the professor is trying to sell me keynesianism and how broken windows can be good for an economy. To which I asked the professor “But what about opportunity cost?”.

Methinks1776 September 1, 2011 at 8:47 am

Was his reply a blank stare, rolling his eyes at your tedious question or an explanation that explained nothing?

Dan H September 1, 2011 at 11:19 am

It was something to the effect of, “Well, there’s just a lot you don’t understand yet about macro.”

Methinks1776 September 1, 2011 at 11:38 am

Oh, yeah. The “we cannot understand the mind of God” explanation.

I’m assuming since he doled out the grades you didn’t remind him that it was his job to explain to you things you do not understand about macro. Like, for instance, why there appears to be no opportunity cost.

Dan H September 1, 2011 at 11:46 am

Methinks, I kid you not when I say half the questions on the final were phrased as “What should the Federal Reserve do in situation x” or “What would be the best policy of a central bank if y were to happen”.

It was painful.

Methinks1776 September 1, 2011 at 1:06 pm

Dan J,

I know you’re not kidding. My intro macro class was too long ago to remember such details. But, I vaguely remember similar central planning questions – easy fixes for misunderstood problems. It was a bit like med school for quacks. I also remember that the goal of virtually every student in the UVA econ department was to get a job at the Fed.

Dan J September 1, 2011 at 11:27 pm

My micro marveled in how govt can help bring about improved regulations that make our lives better and his thesis on the benefits of 6yr terms for presidents. 15 of 20 students, including myself, gasped. This after he proclaimed his disgust with Bush and his terms.

LowcountryJoe August 31, 2011 at 10:36 pm

I think it’s just coincidental and he’s been too preoccupied by something else. But I’m waiting. I want to pounce on him if he does chime in. I want to see him split himself in two when I ask him whether or no so-called man-made climate change [and the supposed destruction that it *would* bring] wouldn’t be stimulative and create jobs.

brotio September 2, 2011 at 4:55 pm

:D

He’ll do what he always does when presented such questions.

Quack… Quack… Quack…

Bill August 31, 2011 at 4:57 pm

Steve Horwitz’s drawing attention to the distinction between flow (GDP) and stock (wealth) is instructive in this matter.

http://www.coordinationproblem.org/2011/08/the-krugman-who-cried-stimulus.html

SaulOhio September 1, 2011 at 5:35 am

I think Keynesians want the stock to become part of the flow.

vikingvista September 2, 2011 at 7:01 pm

Great Thor yes. Keynesiacs despise the stocks. And yet, the stocks are where keynesiacs belong.

GrizzlyAdam August 31, 2011 at 5:42 pm

If destruction creates wealth and growth, then in times of economic depression, why isn’t the US military forcibly evacuating select towns and cities (mostly evacuating, funeral homes need clients after all) and bombing them into rubble? Why wait for an unpredictable, and often disappointedly un-destructive, hurricane or earthquake?

fdsa September 1, 2011 at 9:46 am

Yes! Hell, why don’t we just bomb Kansas?

Pete August 31, 2011 at 6:00 pm

“…will go on sustained spending binges because natural disasters oblige them to dip into the very savings that they were previously trying to increase?”

I assume the logic is that regardless of whether I want to increase my savings or not, I now have no choice and _must_ rebuild my house, thus spending my hoarded savings. Or spend the hoarded resources of insurance companies.

Has anyone done any research on whether this happens and what happens to the banks/insurance companies that now must liquidate investments?

Kirby August 31, 2011 at 7:38 pm

Just curious, if the money can supposedly be spent anywhere, then why not simply give it back in direct proportion to the taxpayers, but buying their labor, proving that it is simply a waste of labor?

vikingvista September 2, 2011 at 8:10 pm

Because the models show unequivocally that the multiplier for stealing less of people’s income is lower than for degenerate politicians squandering masses of borrowed funds on political cronies, using looted victims as collateral.

Macro 101.

ArrowSmith August 31, 2011 at 8:04 pm

If disasters are so great, let’s nuke a few our our cities! That will spur innovation on a bigger scale! Just taking Keynesian “logic” to it’s ultimate conclusions…

Stone Glasgow August 31, 2011 at 9:25 pm

Yeah that’s why Japan is so rich today, because of the bombs. Duh.

vikingvista August 31, 2011 at 11:41 pm

Hitler didn’t understand how he was enriching the Brits during the Blitz. If he had been an economist, he would’ve realized that the key to winning the war was to turn his bombers on his own country.

Dan J September 1, 2011 at 11:42 pm

Amazingly, Krugman and big govt economists are touting the extraordinary stimulus that destruction of property en masse brings. Yet, the Obama admin is spouting off about how all of these disasters around the world are to blame for their policies to have been utter disasters. Heads I win, tails you lose.

vikingvista September 2, 2011 at 7:02 pm

A politician trying to have it both ways? Tell me it ain’t so.

ArrowSmith September 1, 2011 at 2:05 am

Japan didn’t get rich because America bombed the heck out of it. Japan got rich because it was able to focus on business instead of wasteful imperialism.

persiflage August 31, 2011 at 9:41 pm

If capital goods serve as a sort of storehouse of previously produced value, there is no possible way that the destruction of capital goods could increase prosperity, generally. Such destruction impoverishes the creators of that stored value – lays to waste their fruitful efforts – and all who benefited, even indirectly, from its creation.

vidyohs September 1, 2011 at 1:00 am

Imagine you own a business in the USA, imagine an Obama presidency and and Eric Holder DOJ; and then imagine your business in hell. But, I repeat myself.

http://www.redstate.com/shoutbits/2011/08/29/if-gibson-is-not-safe-nobody-is/

http://www.redstate.com/aglanon/2011/08/31/doj-advises-gibson-guitar-to-export-labor/

Obama and his minions anti-business? Naw, whoda thunk it?

Ceeby September 1, 2011 at 7:05 am

NPR (yes, NPR) actually had a segment where an guest mentioned the “broken windows fallacy” and Bastiat. He insisted, even after being pressed, that disasters DO NOT benefit us. It was on the August 31st morning show (and their web site) on the segment “Will Hurricane Cleanup Aid the Economy?”. h/t to Steven Hayward on Powerline.

Brian September 1, 2011 at 2:18 pm

It’s true because the movies say it is. :P

http://www.youtube.com/watch?v=Tt1W0F0yObg

vikingvista September 2, 2011 at 7:08 pm

I like when Hollywood correctly portray keynesiacs as the greedy autocratic villains that they are. You can’t say Hollywood never gets it right.

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