Bastiat's Bastions

Predictably, in the wake of hurricane Katrina, several so-called economists quickly reminded us that all was not bad. Indeed, there really is a silver lining in the storm, and that shiny metallic coating is: the coming boom in reconstruction, they say. This is our choice for howler of the year (via Pacific Views):

Prof. Doug Woodward, with the Division of Research at the Moore School of Business at the University of South Carolina, has researched the economic impact of hurricanes.

“On a personal level, the loss of life is tragic. But looking at the economic impact, our research shows that hurricanes tend to become god-given work projects,” Woodward said.

Disasters are good for the economy, he said. Within six months, he expects to see a construction boom and job creation offset the short-term negatives such as loss of business activity, loss of wealth in the form of housing, infrastructure, agriculture and tourism revenue in the Gulf Coast states.

This argument about disasters has been made for years and years, but that has yet to make it correct. Frederic Bastiat countered this basic error in logic in the 1850s in “What is seen and what is unseen.”

As Bastiat told it, a man’s son breaks a window at play. People try to console him saying that such destruction actually does some good, in that it provides employment for the fellow who is hired to fix the window. Bastiat noted that the employment and income for the repairman is what is seen, but that an economist looks for what is unseen. For instance, the man with the broken window had, before the damage, a window in good repair and money to buy something else – say, a pair of shoes. Once the broken window is fixed, the man has a window in good repair, as he did before, but no money left for shoes. The damage cost him and society, a pair of shoes. Nothing at all is gained.

If there truly were some good from the broken window, then people should rush to smash more windows, break them all, as Katrina seems to have done. Break the windows in Baton Rouge, in Houston, in Thibodaux and Houma, too. If one broken window is good, thousands broken would surely be better. Just as the New London, Connecticut City Counsel OKed the use of eminent domain to force people from their homes in the name of economic development, surely they would welcome some broken windows to accomplish the same end.

Economically, Katrina is simply devoid of any silver lining. The “god-given work projects” to which Woodward refers have to be paid for by someone (even if it comes from Uncle Sam), and that money could have been spent on other items. Someone may have been about to purchase a new computer, now they won’t. The workers at Dell lose out. Someone could have been on the verge of buying a new car. People working for GM lose. And so on. This is a basic principle of economics, that the science fiction author Robert Heinlein named TANSTAAFL in his book, The Moon is a Harsh Mistress. TANSTAAFL is simply an acronym for “There ain’t no such thing as a free lunch,” because somebody has to give up something for the lunch.

In much of economics, it is the unseen part of a situation that holds the key to understanding. Unfortunately, the unseen activity usually slips by too many – even trained economists.

We mentioned only a few examples of goods not purchased, but there is surely more unseen activity that deserves a look. For instance, all those workers rushing into New Orleans will put a strain on labor markets in other areas, probably causing prices to rise. And, all those building materials (and cars?) rushing into the city will put pressure on markets in other areas, likely causing prices to rise in those markets. And, we will never be able to recapture the wasted resources left in the wake of Katrina.

Economically, there is no silver lining in destroying a city. Would anyone seriously contemplate tearing down a major U.S. city when unemployment rises?

To end on an upbeat note, there is some sort of silver lining to Katrina. We have witnessed a great deal of charitable giving and many people across the Gulf Coast communities have done everything possible to help their neighbors. This sort of human reaction is encouraging, and all of us along the coast are sure to need our neighbors more than ever in the coming years. We see that most people are basically pretty good (though we witnessed some pretty awful behavior, as well) and will do what they can for someone in need. Now that we have learned that lesson, we don’t think anyone wants to repeat it.

Norbert Michel and Morris Coats