Nope, not a new wave song by Blondie, David Bowie or Nick Lowe.
But rather a classic tale used by some economists to refute the notion that "catastrophes" can be a net win for the economy.
I spent the better part of Monday doing yard work as we and virtually everyone in our county had lost power due to Hurricane Irene. As I worked I was able to listen to Bloomberg Radio and heard the "Broken Window Parable" mentioned twice. In researching it today, I see that several well-known columnists, including Larry Kudlow, have also written about it in the past 48 hours.
So it might just be interesting to share here.
It is now estimated that the costs of Hurricane Irene will be somewhere between $3-7 billion, well below initial estimates but still very significant in terms of lost business, insurance claims, dislocated workers and transportation disruptions — costs that will take months to fully calculate.
By some estimates, these losses could knock over 1/2% off the 3rd Qtr. U.S. GDP.
But one school of economic thought argues that the economic "benefits" of the storm could in the long run outweigh the costs, as construction, utility, maintenance and other workers are put to work and sectors affiliated with rebuilding the infrastructure could profit.
And here is where the "Parable of the Broken Window” comes in. To quote from Mr. Kudlow:
"The parable was introduced by French free-market philosopher Frederic Bastiat in an 1850 essay called “That Which Is Seen, and That Which Is Unseen.” Bastait tells the tale of the shopkeeper who is angry at his careless son for breaking a window, while the on looking crowd argues that it is good for the glazier. While Bastiat agrees that repairing broken windows is a good thing, encouraging the glazier’s trade and income, he argues that it is quite different from the idea that breaking windows is a good thing, in that it would cause money to circulate and encourage industry in general.
Why? Because a shopkeeper who spends money to fix broken windows cannot spend or invest that money on new ventures.
“It’s not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library,” wrote Bastiat. “In short, he would have employed his six francs in some way, which this accident has prevented.”
The story takes on particular resonance as President Obama is scheduled to announce his major “jobs and growth initiatives” after Labor Day. It has been long assumed that some form of infrastructure spending will be part of the plan, in some ways similar to FDR’s WPA plan.
As MarketWatch’s Chief Economist Irwin Kellner reminds us, “FDR’s plan essentially paid people to dig holes and paid others to fill them back up.”
I am certainly not going to knock FDR and Mr. Kellner was a little tongue in cheek, but we should hope that the Administration can come up with a more creative and substantial plan than “breaking windows, only to fix them.” And, quite seriously, I know the infrastructure up and down the East Coast could certainly use a lot of really meaningful work, even before Hurricane Irene hit.
As always, we would appreciate reading your comments on this topic.
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Comments
let's start with ending the subsidies of private industry first. and let free enterprise stand on their own two feet. no more free ride for oil companies, factory farms, defense industries. then we can invest in a sustainable future.
One thing for sure..Obama and his tax, spend, and grow government, absurd back door cap and trade regulations, Obama care, talk of changing and raising taxes on businesses while also talking about giving them tax breaks for hiring!...increased welfare and food stamp programs..the moratorium on drilling in the Gulf etc etc...is killing jobs and is creating so much uncertainty in the business world, that until all of these issues are resolved, giving the peope who hire workers are confident of the playing field aand it's rules, our economy will remain stagnant and most likley head even lower as this progresive jackass tries to get re-elected by any means possible. He cannot run on his record. With all of that been said, if he does get re-elected (horrific) we will most likely get downgraded again and we will go into severe recession and, or depression (of course it will be Bush's fault!) If this scenario plays out, i will be in silver and gold and be waiting for a clear signal to short the market on every bounce up to trading ranges..I will wait for the signals posted to me via "Daily Decision" and make a boatload of $$. If someone else takes charge and promotes growth in an economically sane and competent way, then we can make another boatload of cash as the markets roar higher...That is my take on the situation....and by the way...It is my opinion that whoever is still under the impression that Obama is doing well for this country is woefully blind...and refuses to allow themselves to see clearly via thier blind faith in a man that either is totally incompetent, or even worse, wants the US to collapse, so he and his progressive friends can take over witha whole new system that will be an ugly one! Thanks for listening and I am very open to refutes...but let us keep to the facts.
Too bad we didn't spend the billions wasted in Iraq and Afghanistan on U.S. infrastructure. We could have upgraded our nation's electrical grid, air traffic control system and still have plenty left for roads and bridges!
Mark, You uge that we "keep to the facts", yet your diatribe contains zero; none; not a single; factoid. Shame! Shame! Shame!
Granted that rusty bridge COULD use some paint; that broken park bench fixed. However, NO real goods, no wealth is created by such short sighted economic "stimulus"! It is foolishness to consider repairing roads and bridges on the east coast EVEN in the ABSENCE of a hurricane, when that same money can be spent by business(paying less in real estate taxes, fees) employing more tax-paying citizens while increasing further the taxable income of the business-- allowing them to pay more income taxes while reaping more sales of REAL GOODS. The worn infrastructure on the east coast can STILL wait months or even years more without catastrophic effects while the Private economy is reborn. There is no way to cut it any other way. It all boils down to having the guts to take responsibility for FAILURES NOT to do so in the past. Government spending must be stifled, a clear plan must be published, and confidence must return to the markets while allowing business to restart the engines.