It’s All A Wash: Hurricane Sandy And The Broken Window Fallacy

Shelley Bernstein/Flickr

Hurricane Sandy has brought commerce to a halt across a geographic area worth $10 billion annually in economic activity. Will it help the economy, or hurt it?

Some economists will say hurricanes like Sandy produce enough economic activity to create a net gain. But they may not be taking into consideration what is known as The Broken Window Fallacy.

Dennis Delay, an economist at the Center for Public Policy Studies, says that after the storm, it’s easy for economists to measure the positive economic effects of a hurricane. Whatever sales were lost because of store closures will probably be made up in extra shopping later in the week. And fallen trees, flood damage, and broken glass all create opportunities for people like arborists, construction workers, and landscapers. But, he says, property damage is harder to quantify.

“If you were to break someone’s window, then they have to go out spend more money to buy a new window, and that shows more economic activity. What they’re not considering is the damage they did when they break the window in the first place.”

Because of this so-called “broken window fallacy,” Delay says, economists frequently say hurricanes like Sandy are a net gain. More likely, it’s all a wash. No pun intended.

Comments

  • Bob_Robert

    Actually it’s negative, not a “wash”.

    Just do the math. Today I have $10 in stuff. A storm comes through, does $5 damage, I now have $10-$5=$5 stuff.

    I have to work and produce in order to generate another $5 wealth in order to get back to what I had before, $10-$5+$5=$10. I’m right back where I started.

    Without the storm, I would have the same +$5, but now I would end up with $15, not $10.

    Fredrick Bastiat, “The Broken Window Fallacy”, 1850. What is awful is that there are STILL very highly paid people, like Paul Krugman, who will tell you that the rebuilding after a disaster is wonderful for the economy and we should have more destruction.

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