The Broken Window Fallacy and the Gulf Coast
Natural disasters always bring out plenty of instances of Bastiat’s broken window fallacy. However, to point out the implications of disasters like Hurricane Katrina for measured growth is not necessarily to fall victim to the broken window fallacy. It is simply to highlight the well known limitations of the ways in which we measure economic activity, particularly for flow based measures like GDP. This is not the same thing as claiming that we are better off in a welfare sense as a result of a natural disaster. No doubt some commentators are not clear about this distinction, but it is also clear that many of those who are pointing out the fallacy in the context of Katrina are not clear about the distinction either.
Understanding the distortions to measured activity arising from events like Katrina is an important task for economists. Action Economics Director of Investment Research and Analysis Rick MacDonald is an expert at sifting through the implications of hurricanes for US economic data. For those wanting a good handle on the implications of Katrina for these data, I would highly recommend his research.
posted on 04 September 2005 by skirchner
in Economics
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Comments
The general theory of Macro economics is not all that useful in predicting the consequences of disaster because of the “horses for courses” effect. For instance, alot depends on what phase of the business cycle (expansionary-contractionary) that part of the economy is currently enduring. Currently Bush/Greenspan have got the fiscal and financial spiggots turned on pretty full. So there will be little overall expansionary effect from reconstruction, it will be more a case of resource deflection rather than resource creation.
And much depends on where the local economy fits into the national economy (what segment of the supply chain). New Orleans is a critical juncture where Old Economy material resources are directed by New Economy virtual networks. So infrastructural destruction and social dislocation it is likely to cause much disruption to economic activity, in the short term.
Finally, much depends on the kind of people that are managing recovery, both at local, state and federal level. New Orleans looks like a fairly badly run city in the middle of Louisiana, a fairly badly run state. The Bush administration is obviously about the last organization on earth one would task with nation building efforts.
International comparisons are instructive. Integrating the East certainly hamstrung German economy, Kobe put the Japanese economic recovery on its arse. And these nations are much better organized people than the Americans from the Confederate states. So the general conclusion is pretty bleak.
Posted by Jack Strocchi on 09/04 at 08:17 PM