• 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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