11 Sep 2017

“That’s the Story of the Hurricane”

David R. Henderson, Economics, Scott Sumner 6 Comments

I am always happy to read a defense of the person receiving a Two Minute Hate, even if it’s a Fed official who seemed to subscribe to the Broken Window Fallacy. In that spirit, here is David R. Henderson defending William Dudley’s remarks about the hurricane. (Also notice Scott Sumner’s caveat in the comments.)

To try to minimize confusion in the comments here at Free Advice, this is what’s going on:

1) A kid breaks a shop window in 19th century France and normal people say, “That’s bad.”

2) A smug contrarian says, “On the contrary, the lad’s activity will provide employment for the glazier, who now has to replace the window. It stimulates economic activity and makes the community richer.”

3) Bastiat points out that this is shortsighted, and overlooks the employment that the storekeeper’s spending could have given to (say) the tailor who could’ve made him a new shirt. Total employment is the same either way, but now the community is poorer to the tune of one shirt.

4) (Hundreds of people commit the “Broken Window Fallacy” up through 2017, providing employment for smug libertarians to mock them and make our movement richer.)

5) William Dudley says the recent hurricanes will increase measured economic activity (i.e. official real GDP) because people will have to rebuild.

6) David R. Henderson clarifies that Dudley said “unfortunately,” and that there is no fallacy here. People are poorer, but they may indeed reduce the amount of leisure they otherwise would have enjoyed, in order to work more. Total measured real income will be higher than it otherwise would have been, but the community will be poorer, especially if we include “leisure enjoyment” in the measure of consumption. Note here that “poorer” means “lower wealth.” If someone takes away your house and your car, but then gives you a job offer giving you a $50,000 annual raise, the market value of your output is higher that year, but you still might end up “poorer” than you started.

7) Scott Sumner points out that even David’s defense of Dudley only works for small amounts of damage, because if the damage is too severe, then the reduced capital stock makes labor less efficient. So even if people work more hours, measured GDP might be lower until the capital stock is replenished.

8) Notice that points (1) – (7) do NOT rely on the Keynesian move of classifying “classical economics” as applying only to the special case of full employment. To see that discussion, read this old post where I gently push back against Matt Yglesias and Daniel Kuehn.

6 Responses to ““That’s the Story of the Hurricane””

  1. Tel says:

    Has Paul Krugman come out yet, and declared the hurricane “too small” ?

    • skylien says:

      You see, faked hurricanes would be much better!

    • Rick Hull says:

      Krugmanite lefties should be in favor of AGCC harms as a rallying point for the GDP Factory. Be a cog! Do your part! The numbers are looking fantastic this year! Enjoy your numbers in tomorrow’s newspaper!

  2. Harold says:

    It seems odd to say “in the long run” it increases economic activity. Once the stuff is re-built the activity surely returns to normal, but as David says perhaps 2-3 years is “long run” to some.

    “His second point is that, in his words, “The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms.”

    The use of the word “unfortunately” in that first part does indeed suggest that he is not making the broken window fallacy, but his second phrasing is:

    “”I would expect that by the time we get to the end of the year and early 2018, the transitory negative effects of this storm I think will be over and we actually will start to see some of the benefits of the rebuilding efforts in terms of boosting the economy,” Dudley said.”

    I don’t think a casual reader would think “oh yes, he is talking about reduced leisure there”. It does sound like the fallacy.

    “4) (Hundreds of people commit the “Broken Window Fallacy” up through 2017,” An underestimate, I think.

  3. DZ says:

    Thanks for this. So instead of the ‘not at full employment’ point, is this instead a debate regarding consumption, saving/investment, and income? The money spent to rebuild, as you quote Bastiat saying, could have been spent all the same on other items, presumably leaving aggregate income the same either way. Is the Keynesian argument that disaster spending will shift more savings to consumption/investment, and hence income, which otherwise would not have been converted into income because of the standard ‘savings /= investment’ mantra? If that’s the case, doesn’t this get back to the full employment point?

  4. Rick says:

    The man’s the authority we claim to blame

    If the tempest breaks a teapot and no one is around to fix it, is there gain or loss to be found?

    My apologies for really stretching on these…

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