Friday, February 13, 2009

Broken Windows Fallacy, Mate

In reaction to the recent Australian brushfires, which destroyed over 1,000 homes and taken over 200 lives, an Australian newspaper printed this economic analysis:
As an aside, the bushfires may help the nation fend off recession: Goldman Sachs JBWere economist Tim Toohey says rebuilding will generate an economic stimulus equal to 0.25-0.4 per cent of GDP over the next 18 months.

"As tragic as the events of the past two days have been, the rebuilding phase will provide a catalyst for economic growth in coming months, even if the personal and environmental cost takes years to recover," he says.

If this isn't a clear-cut example of Bastiat's broken windows fallacy, I don't know what is! His logic is, that since houses need to be rebuilt, the new demand for wood/concrete/construction labor will benefit the economy.

What he, rather surprislingly, ignores is the destruction of wealth that the fire caused in the first place--that the economy lost 1,000 homes and 200+ people who had trained skills, which the economy needs to replace to make up for what was lost. The "growth" that this economist predicts is only goes to making up for what was destroyed in the fire. Without the fire, the wood/labor/capital that was used to make up what was lost could have been used for other, more productive things.

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