Monday, October 29, 2012

"There is no profit in destruction"---This storm is beginning to affect economic reasoning as well...

An example of Frederic Bastiats "Broken Window Fallacy".  The BWF decries the "bad economist" and his view that there is a positive side to destruction. 

There are visible benefits to rebuilding, or fixing a broken window, but seldom is considered the unseen costs of what might have been purchased had the window not been broken.  What you add you must subtract as well.  This

This is one of the criticisms of calculating GDP----it only counts the stuff purchased to fix things. It does not subtract the value of things already in place and productive that were destroyed.

Yes, broken windows happen and need to be fixed, but it should not be considered a net positive for the economy by politicians and pundits.  It is neutral, at best.

From Forbes

Is Hurricane Sandy To Provide A Stimulus For The US Economy? 
The sharp divergence between macroeconomic and microeconomic data can certainly be attributed to hurricane Sandy that is about to hit Eastern US—a highly populated region—prompting consumers to stack-up to all kinds of things, from batteries and candles, to bottled water, to snacks, and all-sorts of dry food. Is this rush of consumers to spend a very-much needed stimulus of the US economy?
Definitely not, as Sandy is one time event, and as the boost in demand for certain items this week will turn into bust for the same items in the weeks to follow. A boost in the demand for water bottles this week, for instance, will turn into bust next week, as consumers over-stack the product. But, what about the impact of cleaning and reconstruction that is expected to follow the hurricane? Wouldn’t it give a boost to the economy? 
It depends on the extent of the damages and magnitude of the reconstruction to be done. Some experts talk of damages in the order of $10, $20, even $100 billion—seeing a “Sandy stimulus package.” But even if we go with the highest estimate, $100 billion, it is a too small number given the size of the US economy. Besides, whatever stimulus comes from cleaning and reconstruction will be mitigated by other factors like declines in the tourist sector, and losses in economic activity, due to disruptions in transportation and communication. And don’t expect any significant boost from policy makers.

The bottom line: We do hope and pray that the damages from Sandy will be minimal. A stimulus from a storm is something we don’t need.
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