Irene, jobs and the parable of the broken window

Although less powerful than anticipated, hurricane Irene still managed to inflict a significant amount of damage on the United States East Coast.  Over 4 million people remain without power and 25 individuals lost their lives.  The destruction to property and assets was equally as severe and the latest estimates are that the repair and rebuilding efforts could cost upwards of 7 billion $USD. 

As the media struggles to find the positive in Irene’s devastation, several major news outlets and a few economists (who should know better) are painting Irene as a potential “jobs creator” and suggesting that the hurricane could generate a meaningful boost to the struggling economy.  When I listen to these arguments, I am reminded of my Austrian Economics class and Frederic Bastiat’s parable of the Broken Window.

For those that may have forgotten (or had the good sense to never learn), the parable of the Broken Window considers a scenario where a young boy throws a rock through a shopkeeper’s window.  It argues that the shopkeeper will now have to hire someone to replace the window and “inject” capital into the market.  The window repairman would then have more money to spend on other items and the entire economy would grow and benefit as a result.  The reality, however, could not be more different. 

What the parable fails to consider is that the shopkeeper now has less money to spend on other items, but the same “window utility” as before.  He is meaningfully worse off after the window has been broken and repaired.  Let’s assume it cost the shopkeeper $200 to have his window repaired.  Before the window was broken, the shopkeeper had 100% “window utility” (the window was in place and intact) and he had $200.  When the window was broken, but before it was repaired, he had 0% “window utility” and he still had his $200.  After the window was repaired, the shopkeeper again had 100% “window utility” but now no longer had his $200.  The end result is the same utility, but less wealth.

It is true that after the repair the repairman now has an additional $200.  However, the shopkeeper could have spent that $200 on having his house painted and would now have to defer that expense.  The house painter will now not be hired and is worse off after the window was broken.  Wealth has not been created within the system, it has merely been shifted from one tradesmen to another with no corresponding increase in utility.

Irene, and the repair work she caused, will probably have an upward impact on the US annual GDP figures and maybe jobs as well.  However, this does not mean that the US economy is in better shape than before the storm.  GDP is an effective measure of the velocity of capital in the system, not a measure of the store of wealth in the economy. 

If the $7 billion estimate of repairs holds true, the US will see an additional $7 billion “spent” and reflected in GDP.  However we will not have $7 billion of additional wealth to show for it.  We will have spent $7 billion to be exactly where we were before the storm.  Along the way, we may also see a slightly improved jobs picture as workers are hired to repair the damage.  These are temporary jobs and come at the expense of other investments that could have been made with the $7 billion.

As Bastiat argued, “Society loses the value of things which are uselessly destroyed… To break, to spoil, to waste is not to encourage national labor.”  Destruction is not profit.