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Posts Tagged ‘Frederick Bastiat’

Rejoice For The Stimulus Project Called Hurricane Sandy!

In Economy, Job Creation, Obama Administration on November 2, 2012 at 8:06 pm

Do you believe in stimulus programs?  Do you believe jobs are created by the government?  Are you Keynesian?  Are you voting for Barack Obama?

If so, rejoice!  Hurricane Sandy is a massive stimulus program.  Set aside the civilian deaths for a moment and focus on the government and private sector spending.

Think of Sandy as a $60 billion dollar injection of stimulus. [1]

In one watery swoop, Sally sept into millions of tight-fisted consumers’ wallets.  A frugal Congress can’t stop government spending via FEMA.  “Fannie Mae and Freddie Mac said they will offer help to borrowers whose homes were damaged or destroyed.” [1] 

Deductibles and out-of-pocket expenses to fix broken windows will rev up the metropolitan New York economy.  Think of all the drywall and generators sold by Home Depot.  Surely, pump makers like Britain’s Andrew Sykes Group are busy.  Ruined cars must be replaced, employing autoworkers in Japan and the USA. 

NYC looters [2] act as stimuli, forcing small businesses to restock.  Retailers who love a few dozen TVs and smartphones in a robbery have to replace their electronic inventory.   This creates jobs, doesn’t it?  Even if the products are made abroad, Americans are employed in the ports, on the railroads and at the trucking firms that bring in the replacement wide-screen plasmas.  The looters might even be 99%’s, taking from 1% retailers.

The rebuilding money comes from the federal government, consumers and insurance companies.  Isn’t it good to raid greedy insurance companies?

But does Mother Nature’s destruction of a 2011 Impala actually help us?  The 2012 Impala replacement comes from a combination of an insurance company’s settlement plus a consumer’s deductible.  Is that money free? 

The illustrious French economist Frederic Bastiat addressed the Lindsay Lohan-like thinking behind the above “Sandy stimulus” in his classic  “That Which Is Seen, and That Which Is Not Seen.” [3]   Bastiat looked at the example of the shopkeeper, whose window is broken by someone.  The Obama-Krugman view is that broken windows are very good.  The shopkeeper spends six francs to purchase a window; someone is paid to install it.  The window seller and the window installer receive those francs which they then spend elsewhere in the economy, say for beer and fishing rods, employing even more.  The broken window bonanza flows through the economy, creating what the Keynesians call a “multiplier effect”.  A single dollar spent fixing a window broken by a vandal might become $5 as it filters through the world economy.

The strange conclusion becomes that the economy really needs more broken windows.  Vandals are heroes.  Bastiat saw through that twisted logic, writing about the unseen effects, namely the things the shopkeeper would have spent the six francs on something else, which would have the same multiplicative effect on the economy.  The difference would be a net increase in the economy.  Instead of ending with a replacement window no different from the previous pane, at a cost of six francs, the shopkeeper would have bought something else.

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. [3]

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs: this is that which is seen.

If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs: this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labor, is affected, whether windows are broken or not.

The Keynesian fallacy rests on an idea of huge amounts of savings, selfishly unspent, that could be employing someone.  In the USA of 2012, most everyone is leveraged.  The US government is $16 Trillion in debt, with no hope of repayment.  Consumers are struggling to make ends meet, many deep in debt.  Tens of millions of homeowners’ mortgages are as underwater as the Queens-Midtown Tunnel.  Insurance money is not free, it comes from somewhere.  Property insurers will liquidate their stock and bond holdings to pay Sandy claims, slicing money from the economic system.  They will replenish those reserves by reducing dividends, which takes money out of the economy, and by raising insurance premiums, which also grabs cash from the economy.

Sandy is not really a Stimulus project for the US economy.  It’s an economic calamity just as it’s a humanitarian crisis.

[1] http://business.time.com/2012/10/31/hurricane-sandy-estimated-to-cost-60-billion/

[2] http://news.yahoo.com/blogs/abc-blogs/looters-arrested-post-superstorm-spree-182401079–abc-news-savings-and-investment.html

[3] http://mises.org/daily/3804/The-Broken-Window

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