Thursday, December 3, 2009

Serious floods lead to broken windows

In an article in yesterday's Irish Times, the ESRI's Prof Richard Tol suggests that the clean-up operation may boost the economy. A short extract gives the main details.
Prof Richard Tol of the Economic and Social Research Institute (ESRI) has said that while the flooding has caused widespread damage, there may be an unexpected fillip to the economy once the clean-up operation begins. “Floods are bad but flood restoration can actually provide a stimulus to the economy,” said Dr Tol.

Dr Tol pointed out that he was not downplaying the impact the floods had on people who lost their homes and businesses, some of whom were not insured. However, he said that one of the unusual consequences of the restoration work, once it begins, is that it will provide an economic stimulus, generating local work and business in construction, engineering and in retail sales.

“What the water has done is it has destroyed many things. But once insurance is paid, there will be a lot of money coming into the country. Most of the funds will come not from Irish insurance companies but will be called in from international reinsurers. So it will be mostly coming from abroad, which is a stimulus.”

He said that consumption would increase in affected areas as restoration work began, providing a measurable boost. “As such there is a silver lining to the flood,” he added.

A silver lining! An estimated €250 million euro worth of property has been destroyed and Tol finds a "silver lining". Quick, get the ESB to open up more dams! The path out of the recession has been found. Surely they'd be able to cause at least double the damage again in no time at all and we'd have twice as much of this "silver lining". And don't send the army in to help people. Have them get out the heavy artillery (they do have guns, don't they?) and blow up buildings and stuff on high grounds that escape the floods. Pretty soon we'll have enough "silver lining" for everybody.

Richard Tol, what are you at? Yes the floods will lead to expenditure on repairs but that money will come from reduced expenditure elsewhere. Open your other eye! Have you every heard of The Lesson which Hazlitt brought to us from the work of Federic Bastiat. You must have!

Here is Hazlitt's piece on the simplest application of The Lesson as proposed by Bastiat. The Broken Window is short enough to reproduce here in it's entireity. Read it. Think of the €250 million that will be spent on flood repairs. Read it again.
Let us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass.

A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

Aren't all these international insurance companies nice to be giving us this "stimulus" money to pay for the flood repairs and they'd never want it back. Would they?

UPDATE: Prof. Tol took his ideas from the paper of record and put them over the airwaves with George Hook on Newstalk's The Last Word. You can listen to the short interview by going here.

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