Tuesday, June 15, 2010

The Gulf Oil Spill and Broken Windows

This is the latest example of the classic broken windows fallacy
Oil Spill May End Up Lifting GDP Slightly - Real Time Economics - WSJ
The continuing oil spill in the Gulf of Mexico could end up adding a bit of growth to the U.S. economy as the huge cleanup efforts in some ways outweigh negative factors, analysts at J.P. Morgan Chase said.
Let's say the cleanup of the oil spill eventually costs BP $40 billion.  This means that prior to the cleanup we had a clean Gulf of Mexico and BP had $40 billion.  Now with the cleanup, we have the Gulf restored, but no $40 billion to pay as dividends or to invest in future projects, so how, exactly, have we come out ahead?  The answer, of course, is we haven't.

The folks at the WSJ realize this, and note that what this really highlights is how GDP can be a poor measure of well being.  In case you are not familiar with the broken windows fallacy:

The Broken Window Fallacy Reapplied - Llewellyn H. Rockwell Jr. - Mises Daily
A kid throws a rock at a window and breaks it, and everyone standing around regrets the unfortunate state of affairs. But then up walks a man who purports to be wise and all knowing. He points out that this is not a bad thing after all. The man fixing the window will get money for doing so. This will then be spent on a new suit, and the tailor too will get money. The tailor will spend money on other items, and the circle of rising prosperity will expand without end.

What's wrong with this scenario? As Bastiat put it, "It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented."

You can see the absurdity of the position of the wise commentator when you take it to absurd extremes. If the broken window really produces wealth, why not break all windows up and down the whole city block? Indeed, why not break doors and walls? Why not tear down all houses so that they can be rebuilt? Why not bomb whole cities so construction firms can get busy rebuilding?

It is not a good thing to destroy wealth. Bastiat puts it this way: "Society loses the value of things which are uselessly destroyed."


Jo Egelhoff, said...

Uselessly destroyed - like supposed "clunkers?"

D said...

The broken windows fallacy is single-handedly responsible for those who claim that 'WWII got us out of the depression!'
Ironically (as always) alleged free marketeers and conservatives who decry stimulus and the New Deal are the first ones to claim that the rabid militarism and unimaginable destruction of WWII somehow got us out of the depression.
In the War on Reality, having less is really having more, drafting 13 million men into the army alleviates unemployment, and destroying nearly everything of value in Europe is a net gain.
I hereby propose to end the Great Recession by forcing labor and materiel into the ship building business, ordering the final product into the middle of the ocean, and finally to destroy them with bombs.
Prosperity in 3 simple steps.

J. Strupp said...

You can call it rabid militarism.

I call it enemy induced government stimulus.

We can repackage reality anyway you like.

Either way, FDR's dollar devaluation via the removal of the gold standard in 1933 coupled with "enemy induced government stimulus" got us out of the Great Depression.

I wouldn't assume that conservatives necessarily believe what you think though, D. Most are being re-educated to believe what they believed was true back in the 30's: That austerity measures taken during a depressed economy decreases our debtload and magically returns us to the land of milk and honey.

Jeremy R. Shown said...

Is anyone actually promising milk & honey Struppster?

Nice rhetoric, I'm just not sure it matches reality.

J. Strupp said...

Sorry I had an economics professor that used that phrase almost everyday. Ironically, he was Austrian.