Ghastly as it may seem to say this, the terror attack (911) — like the original day of infamy, which brought an end to the Great Depression — could even do some economic good.
If people rush out to buy bottled water and canned goods, that will actually boost the economy.
First, the driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I’ve already indicated, the destruction isn’t big compared with the economy, but rebuilding will generate at least some increase in business spending.
Paul Krugman, Princeton professor, New Times columnist and Keynesian extraordinaire on how the September 11th attacks could “stimulate” the U.S. economy.
The above quotation from Paul Krugman represents his economic philosophy embedded in the deepest part of his soul: that spending of any kind during economically distressed times is all that is needed to turn things around. Following Krugman’s logic, Hurricane Irene, with the destruction it wrought in the hundreds of millions (if not billions) of dollars along the eastern seaboard, could be just what the doctor ordered to give the sputtering U.S. economy a jump start. After all, roof tops will have to be repaired, structures and piers will need rebuilding and infrastructure like power lines, drainage systems, and roads will need revamping. According to Krugman’s philosophy, the carnage from the storm should be an economic bonanza for workers, tax authorities, and producers of goods.
But, hold on for one minute. Not only did Krugman’s prediction about the economic benefits of the World Trade Center being destroyed not come to fruition, his philosophy represents an economic fallacy explained by Frederic Bastiat, political economist and member of the French Assembly, in 1850.
In Bastiat’s Parable of the Broken Window, shopkeeper John B. has a careless son who breaks one of his shop’s window panes. The shopkeeper pays six francs to the glazier to fix his window. According to many of Bastiat’s contemporaries and Keynesians today this is a good thing, since the glazier is six francs richer and will presumably spend that six francs on other goods and services, thus providing employment to others. This sounds great and given the potential to the economy of one broken window you might think that John B. should be hopeful that his son never learns to be careful and breaks many more of his windows in his lifetime.
Naturally, the good shopkeeper doesn’t want to spend all of his profits on new windows and here is where the fallacy of Krugman’s thinking comes into play. Krugman and his Keynesian brethren only focus on what can be seen in the parable, namely the windfall to the glazier and his potential expenditure thereof. They totally ignore the fact that if the window had never been broken the shopkeeper would have had it and six francs worth of some other good or service to enjoy. Like the glazier’s expenditure, the shopkeeper’s outlay on other goods and services would also provide employment to others. Thus, spending on property destroyed through carelessness, vandalism, violence or natural disaster enjoys no advantage over ordinary consumer spending. If it did, Europe would have gotten rich immediately after World War II.
That’s why Hurricane Irene will not be a blessing in disguise for our economy.