The Broken City

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J.
P. Morgan senior economist Anthony Chan agrees that higher energy
prices will curb both regional and national economic growth in the
near-term.

“I think
a 0.2 percent decline in economic growth due Katrina’s impact
on oil and the regional economy is a realistic assumption,” Chan
said. Longer-term, Chan believes hurricanes tend to stimulate
overall growth.

Said Chan,
“Preliminary estimates indicate 60 percent damage to downtown
New Orleans. Plenty of cleanup work and rebuilding will follow
in all the areas. That means over the next 12 months, there will
be lots of job creation which is good for the economy.”

Prof. Doug
Woodward, with the Division of Research at the Moore School of
Business at the University of South Carolina, has researched the
economic impact of hurricanes.

“On a personal
level, the loss of life is tragic. But looking at the economic
impact, our research shows that hurricanes tend to become god-given
work projects,” Woodward said.

Within six
months, he expects to see a construction boom and job creation
offset the short-term negatives such as loss of business activity,
loss of wealth in the form of housing, infrastructure, agriculture
and tourism revenue in the Gulf Coast states.

Have you ever
witnessed the anger of the good shopkeeper, John Q., when his careless
daughter, Katrina, happened to break a city? If you have been present
at such a scene, you will most assuredly bear witness to the fact,
that every one of the spectators, were there even a million of them,
by common consent apparently, offered the unfortunate owner this
invariable consolation — “It is an ill wind that blows nobody
good. Everybody must live, and what would become of the construction
industry, not to mention the Army Corps of Engineers, if cities
were never broken?”

Now, this form
of condolence contains an entire theory, which it will be well to
show up in this simple case, seeing that it is precisely the same
as that which, unhappily, regulates the greater part of our economical
institutions.

Suppose it
cost $25 billion to repair the damage, and you say that the accident
brings $25 billion to the construction industry’s trade — that
it encourages that trade to the amount of $25 billion — I grant
it; I have not a word to say against it; you reason justly. The
construction workers come, performs their task, receive their $25
billion, rub their hands, and, in their hearts, bless the careless
child. All this is that which is seen.

But if, on
the other hand, you come to the conclusion, as is too often the
case, that it is a good thing to break cities, that it causes money
to circulate, and that the encouragement of industry in general
will be the result of it, you will oblige me to call out, “Stop
there! your theory is confined to that which is seen; it takes no
account of that which is not seen.”

It is not seen
that as our taxpayers have spent $25 billion upon one thing, they
cannot spend them upon another. It is not seen that if they had
not had a city to replace, they would, perhaps, have replaced their
retirement portfolios, or added another suburb to their inventory.
In short, they would have employed their $25 billion in some way,
which this accident has prevented.

Let us take
a view of industry in general, as affected by this circumstance.
The city being broken, the construction workers’ trade is encouraged
to the amount of $25 billion; this is that which is seen. If the
city had not been broken, the capital goods trade (or some other)
would have been encouraged to the amount of $25 billion; 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 labour, is affected, whether cities are broken
or not.

Now let us
consider John Q. himself. In the former supposition, that of the
city being broken, he spends $25 billion, and has neither more nor
less than he had before, the enjoyment of a city.

In the second,
where we suppose the city not to have been broken, he would have
spent $25 billion on an S&P 500 index fund, and would have had at
the same time the enjoyment of a better retirement and of a city.

Now, as John
Q. is society, we must come to the conclusion, that, taking it altogether,
and making an estimate of its enjoyments and its labours, it has
lost the value of the city.

When we arrive
at this unexpected conclusion: “Society loses the value of things
which are uselessly destroyed”; and we must assent to a maxim which
will make the hair of protectionists stand on end — To break, to
spoil, to waste, is not to encourage national labour; or, more briefly,
“destruction is not profit.”

What will you
say, Monsieur Chan — what will you say, disciples of good J. M.
Keynes, who has calculated with so much precision how much trade
would gain by the drowning of New Orleans, from the number of houses
it would be necessary to rebuild?

I am sorry
to disturb these ingenious calculations, as far as their spirit
has been introduced into our legislation; but I beg him to begin
them again, by taking into the account that which is not seen, and
placing it alongside of that which is seen.

The reader
must take care to remember that there are not two persons only,
but three concerned in the little scene which I have submitted to
his attention. One of them, John Q., represents the consumer, reduced,
by an act of destruction, to one enjoyment instead of two.

Another under
the title of the construction worker, shows us the producer, whose
trade is encouraged by the accident.

The third is
the capital goods maker (or some other tradesman), whose labour
suffers proportionably by the same cause.

It is this
third person who is always kept in the shade, and who, personating
that which is not seen, is a necessary element of the problem. It
is he who shows us how absurd it is to think we see a profit in
an act of destruction. It is he who will soon teach us that it is
not less absurd to see a profit in a restriction, which is, after
all, nothing else than a partial destruction. Therefore, if you
will only go to the root of all the arguments which are adduced
in its favour, all you will find will be the paraphrase of this
vulgar saying — What would become of the construction workers,
if nobody ever broke cities?

The
Broken Window

September
3, 2005

Gary
North [send him mail] is the
author of Mises
on Money
. Visit http://www.garynorth.com.
He is also the author of a free 17-volume series, An
Economic Commentary on the Bible
.

Gary
North Archives

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