Gold News

Please Ignore these "Broken Window" Fools

Natural disasters and other destructive events do not "boost" the economy...

IT DIDN'T take long after Hurricane Irene had passed before economic commentators were making fools of themselves, writes Chris Mayer for the Daily Reckoning.

David Kotok is the chairman and chief investment officer of Cumberland Advisors. He was on the radio with Larry Kudlow, who asked him about the economic impact of Irene. Kudlow noted how Irene tracked over 1/10th of the nation's economic output. Here is Kotok writing about Cumberland's response to his investors afterward:

"We are now upping our estimate of fourth-quarter GDP in the US economy. Billions will be spent on rebuilding and recovery. That will put some people back to work, at least temporarily. We speculate that Washington may set aside the usual destructive and divisive partisan political wrangling and act in the interest of the nation. That means there will be a flow of federal financial assistance to the disaster areas."

This is horrible, horrible reasoning. It is the old broken window fallacy, which we see trotted out by otherwise intelligent people anytime there is a natural disaster. These people say that destruction is an economic boost, as we busily rebuild what was lost.

It's a shame people continue to repeat this. The great economist Frederic Bastiat killed this idea decisively in an 1850 essay, "That Which Is Seen and That Which Is Unseen." It remains a classic essay on economic reasoning.

In his usual witty manner, Bastiat wrote a parable about a boy who breaks a window. The "seen" is the glassmakers who have new business they didn't have before. That's what people like Kotok focus on. But as Bastiat wrote:

"It is not seen that as our shopkeeper has spent 6 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 6 francs in some way, which this accident has prevented."

Kotok's point about federal assistance is particularly depressing, because he seems unable to recognize that this is simply money taken from someone else.

Please don't fall for the broken window fallacy. And please correct anyone you hear using it. It seems the first step in basic economic literacy. Hurricane Irene was a dead loss for the economy. Period.

Looking to protect your wealth by Buying Gold?

After a decade in corporate banking, Chris Mayer used his deep analytic approach towards stockpicking to beat the market 3-to-1 between 2004 and 2014 at newsletter publishers Agora Financial. Now moved to Bill Bonner's Bonner & Partners, his Chris Mayer's Focus service seeks shares with the possibility of returning 100-to-1.
 
See the full archive of Chris Mayer articles here.

 

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn

 

 

Market Fundamentals