Ever since Hurricane Harvey slammed into Texas two weeks ago, we’ve seen countless images of heroic rescues, flooded interstates and damaged buildings.
As awful as the human toll was, it was not as bad as many of us feared. But it will take months to repair the homes, businesses and infrastructure of Houston and the surrounding area. The same will be true in Florida after Hurricane Irma.
The economic impact could be felt for years, but many economists and financial experts think there’s a silver lining.
The Los Angeles Times crowed that Harvey’s destruction is expected to boost auto sales. CNBC reported that Harvey "could be a slight negative for U.S. growth in the third quarter, but economists say it may ultimately provide a tiny boost to the national economy because of the rebuilding in the Houston area."
Even Goldman Sachs is looking at the bright side, noting that there could be an increase in economic activity, "reflecting a boost from rebuilding efforts and a catchup in economic activity displaced during the hurricane."
Economically speaking, it’s great news that all this damage in Texas and Florida needs to be fixed, right? Not only does this mean big bucks for cleanup crews, but think of all the money that street sweepers, construction workers and Home Depots will rake in.
And what about all those windows broken by the high winds? This will be the Golden Age of Texas Glaziery!
Not so fast.
A long time ago, a French guy named Frédéric Bastiat shattered this kind of nonsense, calling it “the broken window fallacy.” In his essay "That Which Is Seen, and That Which Is Not Seen," Bastiat showed that destruction never boosts the economy.
He imagined a boy broke a window. (Something I excelled at as a kid — sorry, north Phoenix.) Now his dad needs to pay to replace it. Amateur economists in the neighborhood tell the dad that’s a tough break, but note how great it is for the local glassmaker. Why, he would go out of business if annoying kids (such as yours truly) never put a baseball through a window.
In fact, the economic growth would be even better if they sent me around to smash the windows of every house on my street.
True, the glaziers would make a few extra bucks whenever I moved into a neighborhood. That’s the economic impact that is seen.
But the impact that isn’t seen is the fact my long-suffering dad can’t spend that money on a new guitar, a dinner out, or counseling for his petty vandal of a son.
Moreover, replacing something that has already been purchased is a maintenance cost, not a purchase of truly new goods, and maintenance doesn't stimulate production.
This idea can be broadened to all sorts of government activity. It doesn’t grow the economy to start a war, level a neighborhood for a giant arena, or tear up a rundown street to build a light rail.
After the fact, there might be an “improvement” for that immediate area, but it doesn’t account for all the economic activity lost in the process.
The only economic good to come from Hurricanes Harvey and Irma would be a remedial course in basic common sense. Instead of looking for disasters to fix our economy, economists and politicians should stop the unnatural disasters they inflict on American consumers and job creators every single day.
By eliminating red tape, silly regulations and unnecessary taxes, each of us will be free to actually grow our economy instead of passing around the dwindling dollars we already have.