by Frédéric Bastiat (with Gary North)by Gary North

News Report

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

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