The Broken Window Fallacy

Of all the idiocy that passes for economic commentary in today's media, few things bug me more than the perennial assertions that natural disasters can act as a fillip for economic activity through forcing resources to be allocated to reconstruction efforts. Here's an example from the Financial Times.

In the longer term, the earthquake is certain to force heavy spending on construction and public works in the affected region....

By forcing households and businesses to dip into their savings to finance reconstruction, the disaster is likely to support economic growth in the later months of this year. 

Japan’s construction sector has been badly squeezed by efforts by the ruling Democratic party to shift spending “from concrete to people”, cutting public works budgets in favour of child allowances and more generous welfare. Much concrete will now be needed in the northeastern prefectures, providing a boost to hard-pressed contractors.

We've heard similar comments recently about the floods in Queensland and the destruction caused by cyclone Yasi. Commentators always fall for what is referred to as "The Broken Window Fallacy". 

The Broken Window Fallacy goes a little like this; if you break a window, you have to allocate some resources to get it fixed. Someone has to buy the necessary supplies and then exert time and effort to make a new window, someone else has to install it (creating jobs!!), and the income they receive from this is then spent on something else, which in turn triggers a Keynesian pattern of spending and re-spending which increases activity throughout the whole economy. 

What's the flaw with this logic? Well, it just doesn't make any sense. It looks at the activity that they can see (the new window), but ignores the activity that would have been generated had those resources been allocated elsewhere. If I didn't have to waste my resources to purchase the new window, I could have bought more capital equipment, or gone out for dinner, or participated in any other activity, all of which would have generated more utility to me than wasting it on fixing something had it never been broken. 

You see the same fallacy come up when discussing the jobs that government "creates". Governments cannot create jobs; they only destroy them. Every job that government "creates", it does so by forcibly taking resources from the private sector, destroying efficient jobs driven by real market demand, and reallocating them to whatever government program that politicians or the special interest groups that support them want. John Stossel recently had a segment on this concept relating to Obama's green job's initiatives. 

At the end of the day, natural disasters destroy resources; they destroy capital equipment, and they force huge re-allocations in future spending patterns to recreate the stores of capital that used to exist anyway. This is a disaster for any economy.