Television personality Lou Dobbs is starting a new television show on Fox Business Network, and judging by his recent remarks, viewers will want to be cautious when relying on Dobbs for information.
Appearing yesterday on The O’Reilly Factor, Dobbs made the same mistake that New York Times columnist and Nobel prize winner Paul Krugman made. He wrote in The New York Times that “the terror attack [of 9/11/2001 that destroyed the World Trade Center] could even do some economic good.”
On the earthquake in Japan, Dobbs said “There is a perverse effect here, which is beneficial to the world economy. That is the materiel, the expertise, the labor that will be required to rebuild will be something of a boon to the rest of the world.”
Where Krugman and Dobbs are mistaken is that they fail to see the unnseen effect of the economic activity that goes into recovering from disasters, whether they be natural or man-made. That is, quite simply: The effort that goes into rebuilding is not available for something else. Henry Hazlitt explains in an excerpt from his book Economics in One Lesson:
Part Two — The Lesson Applied — The Broken Window
Let us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass.
A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business?
Then, of course, the thing is endless. The glazier will have $50 more to spend with other merchants, and these in turn will have $50 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever- widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.
Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $50 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $50 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.
The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.
The Blessings of Destruction
So we have finished with the broken window. An elementary fallacy. Anybody, one would think, would be able to avoid it after a few moments thought. Yet the broken-window fallacy, under a hundred disguises, is the most persistent in the history of economics. It is more rampant now than at any time in the past. It is solemnly reaffirmed every day by great captains of industry, by chambers of commerce, by labor union leaders, by editorial writers and newspaper columnists and radio commentators, by learned statisticians using the most refined techniques, by professors of economics in our best universities. In their various ways they all dilate upon the advantages of destruction.
Ignore Bill O’Reilly, too
On the same show, host Bill O’Reilly was doubtful about the economic benefit — which we now know is not really a benefit — of the rebuilding in Japan doing much good for America. He said “They don’t buy a lot of American stuff over there.”
But figures from the U.S. Census Bureau for 2010 indicate that Japan is the fourth largest purchaser of American exports, ahead of the U.K. and Germany:
Canada 248.8 Mexico 163.3 China 91.9 Japan 60.5 United Kingdom 48.5 Germany 48.2 Korea, South 38.8 Brazil 35.4 France 27.0 Taiwan 26.0
Good stuff, Bob. I always shocks me that otherwise informed people cannot seem to grasp the broken window fallacy.