Sunday, November 11, 2012

Guest Blogger Sets Us Straight on the Broken Window

I made a point to a friend about hurricane Sandy *not* serving to boost the economy, in net. I pointed to the "Broken Window Fallacy" as how spending to 'repair' doesn't really boost overall growth.

In the example, Frederic Bastiat presented a parable in 1850 of the broken window to illustrate why destruction, and the money spent to recover from destruction, is actually not a net-benefit to society. The story demonstrates how opportunity costs, as well as the law of unintended consequences, affect economic activity in ways that are "unseen" or ignored.

Guest blogger Phil responded to my position thusly:

I did see mention of this in the link you sent, but it occurs to me that the repair of Sandy's destruction of power lines could result in not only money exchanging hands to benefit the linemen of the world. It could also eliminate the danger of loss of electrical power in the future, and the improvements could also benefit areas that were unaffected by Sandy.

Suppose that the "repairs" to the power grid included the elimination of telephone poles and placed the "repaired" lines beneath ground with the transformers placed in underground bunkers? Then not only would the repairmen receive funds for their work, but society would benefit from reduce risk of power outages in the future. Once the repairs in the damaged areas was complete, undamaged lines could be ultimately replaced without a disruption in service. The power would continue to run along the poles while the new underground system was constructed in those areas undamaged in the storm. Then once the new system was complete the power delivery could be switched to the underground system and the poles demolished. That would lower unemployment, provide a net benefit to society and with the multiplier effect increase the GDP. Not so sure that there is a fallacy, only a lack of forward thinkers.

Granted there is a weakness in my argument. That is expediency. The residents in the areas damaged by the storm would never stand for the time it would take for a new system to be built before power was restored.

1 comment:

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