Good Heavens! Frédéric Bastiat Wrote For Naught!

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This is sad.  I’ve come across this…….

Sandy’s Economic Impact: Positive or Negative? – Real Time Insight

Uhhgg!!!! 

Though the actual scale of the damage caused by the storm will be known much later—after many months or even years–the estimates are in the range of $20 to $50 billion. (Three ETFs to Watch in Hurricane Sandy’s Aftermath)

Zacks then asks the question…..

Do you think that Sandy will have an overall positive economic impact and boost GDP in the months ahead?

  1. Greater economic activity will boost U.S. GDP in 2013 and beyond
  2. There would not be much impact on the macro numbers
  3. Sandy will have an overall negative impact on the fragile economy

Good Heavens!  Lunatics.  The answer to the question is obviously this will increase GDP as it is figured today.  But, we should realize GDP is only an indicator.  It isn’t a true measure of prosperity.  How much will the GDP increase, as stated in the article, is unknown.  But, GDP will increase because of the cleanup costs, construction costs, restocking costs, and other resupply costs.  Note what was a reoccurring word in the the prior sentence…….  “costs”!

In the headline, I referenced Frédéric Bastiat.  For those not familiar, Frédéric Bastiat was a French born economist notable for developing the important economic concept of opportunity cost, and for penning the influential Parable of the Broken Window.  Rational people refer to the parable as the Broken Window fallacy.  I won’t bother retelling the entire parable.  I’ll give the abbreviated version, and modernize it.

An OWS lunatic takes a rock and throws it through a shop keepers window.  The shop keeper has to buy a new window, thus employing a glazier(window maker).   Bastiat walks it through how this is a negative economic action not a positive.  Oddly enough, there were people then, as there are now, who would argue this point. 

There are several ways to look at this, but the easiest way to consider this is that the shop keeper has to pay twice for the same thing.  This is wealth extraction.  Trained economists can go into much greater detail, but, this is a basic and simple concept.  It is not good for an economic to lose all of that value and then have to replace it. 

This is depressing to see this silly discussion about Sandy and GDP.  If this was an economic positive, then the government should hire people to tear things up.  No, the EPA doesn’t count because the things have to be replaced.  The EPA is more destructive than any hurricane.  But, in the interest of being willing to demonstrate this is a negative event towards prosperity, I volunteer to help tear down any structures and equipment associated with Zacks.  And as a bonus, I’ll kick in the National capital.  Then we can all cheer because the GDP will increase.  Dolts. 

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30 Responses to Good Heavens! Frédéric Bastiat Wrote For Naught!

  1. kim2ooo says:

    and the second time – he’s paying an inflated replacement price.

  2. tckev says:

    If destruction will raise GDP then let the anarchists run the asylum.

  3. kelly liddle says:

    I would argue actually that it could be a positive. This really depends on peoples behaviour after the event. In some cases it can actually improve GDP lets say some clothes were destroyed in a shop and some of those clothes had been sitting there for 8 months and should have been dumped (sold for below cost) anyway. The restocking could actually help the business. Same could apply with buildings and old machinery etc being built better or replaced to best standard as a result so long as it doesn’t send you broke in the mean time.

    If in the rebuilding phase people actually start to have a more positive outlook than they have had in recent years due to the increased activity it could be positive but say in the case of New Orleans this did not seem to be the case. The actual number even if you take the higher estimate of $50 billion is a drop in the ocean of US GDP anyway so it is largely academic.

    • suyts says:

      Kelly, please review the broken window fallacy. Yes, the number won’t significantly raise the GDP, but it will raise the GDP, but this has a negative effect on prosperity.

      The companies who own the clothes, buildings, and machinery already take into account the depreciative performance of their assets and will replace or mark down when necessary and cost effective.

    • kim2ooo says:

      lets say some clothes were destroyed in a shop and some of those clothes had been sitting there for 8 months and should have been dumped (sold for below cost) anyway.

      I don’t see a “for profit” operation doing this.
      You don’t keep a cow that has dried up – unless it’s for sentimental reasons.
      You surely, don’t keep a whole herd of dried up cows in a “for profit” operation.

      Capital used to replace existing structures etc – destroys accumulated capital. Accumulated capital is used for reinvestment or expansion of ones business.

    • DirkH says:

      Well I guess the woman whose house burned down due to a ruptured gas line in New jersey will definitely have a more positive outlook when she has a home again, which may or may not happen.
      http://video.foxnews.com/v/1937418717001/full-scope-of-sandys-destruction-becoming-clear

    • philjourdan says:

      Bad inventory is still an asset. Loss of assets is loss of wealth. If the window was made in China, then yes, it can be good – for China. But not for the economy where the window is located.

      • kelly liddle says:

        See I can turn that into a positive with the information you have provided. The insurer was Australian so the wholesaler, retailer and fitter of the new glass will be sent some money along with a very small amount for the manufacture of the glass. Also bad inventory can be a liability if the shelf space costs more than the value of the product.

        • philjourdan says:

          Given the Oz economy, I have no doubt they have the glass franchise locked up. 😉

          But you are talking intangibles with shelf space. Shelf space is not an accounting asset, it can be a business asset (put it under the nebulous “good will”).

    • kelly liddle says:

      A better and much more simple way to put my comment is there will be many winners along with the losers.

  4. DirkH says:

    Amusing. None of those Zack commenters brings up Bastiat.

  5. David says:

    All true, it is never fun to repurchase what you already have, just to replace anything now broken. And yes, having to replace paid for wealth/infrastructure/buildings, with new wealth is difficult, costly, and basically and purely net negative.

    The best postive to consider is that the funds from insurance companies are a stimulus, and do, in affect, come from a now active reserve, that was not really apart of the money supply when it was a non-active reserve. Indeed, without insurance the true cost of recovery would be seen, and rebuiling would take immensely longer. Insrance is a good thing, basically a forced savings for a what?, a “rainy day” so to speak.

    However when all is said and done there is usually higher insurance costs, and some do not rebuild, some do not have insurance, or are under insured, and some businesses can not survive the revenue crash until all is rebuilt. Some Gulf business never recovered after Obama froze drilling. Also, there is, due to the influx of this new demand, an inflationary affect on many materials, which affects expansion costs that were pre-planned, unrelated to the disaster.

  6. Gary Meyers in Ridgecrest, CA says:

    Should those people who lost homes and businesses be allowed to rebuild in the same locations?
    Here in the desert where I live, we don’t build homes in dry washes. They may be dry now but they are washes for a reason. The storms that produce the washes don’t happen every year, but they do happen. The same goes for beach front property. If sea barriers are not in place to protect from the 100 year storm, the same tragedy will happen again. If they are going to rebuild, then do it right! If protection can’t be afforded, then build where it can. I look at this as an opportunity to do it right! Again, who would pitch their tent on a highway just because there were no cars in sight?

    • DirkH says:

      From what I saw people lost homes mainly for two reasons: Fires – can happen anywhere when a gas line breaks. And trees falling on houses. It’s a good idea to cut them down before they become a danger, but again, this can happen anywhere.

      • Gary Meyers in Ridgecrest, CA says:

        In New Jersey, there were many many homes that were washed away, flooded and moved off there foundations, or otherwise damaged due to being too close to the beach during the storm surge. As you say, fires and tree damage can happen anywhere.

        • DirkH says:

          I just accidentally found this video from today or yesterday. John Stossel explains that he had a beachfront property and got federal flood insurance which was ridiculously cheap. I didn’t know that that exists. It’s stupid – nobody in Germany or even France gets such a thing – you’re in an area prone to flooding, you gotta live with that.

          Stop that, and nobody in that area will be able to get affordable insurance, and the problem is solved.
          http://video.foxnews.com/v/1938066980001/should-the-federal-government-subsidize-flood-insurance

        • philjourdan says:

          It is cheap. But unless a stray rogue waves takes out only your house, most people do not do it. Why? Once an area is declared a Disaster Area, the money starts flowing. It is kind of stupid to have insurance, and then tell everyone else “That is ok. We will pay you anyway.”.

        • suyts says:

          Yeh, it’s one of the stupidest things we do. We say we hate the flooding and loss of homes and lives etc…… but, we encourage people to have oceanfront property and assume the risks as a nation as opposed to the individuals. I’m surprised Stossel had that. Another Fox commentator, on “The Five” said he didn’t believe in it so he didn’t buy it. His was a total loss, but at least he puts his money where his mouth is.

        • DirkH says:

          Hey, if you live in a ridiculous system that takes advantage of you most of the time it’s only fair to take advantage of the system in return when possible.

          I’m with Stossel. I’m against the EU commission and against subsidies for renewables but I had no problem earning money in the renewables industry for some time.

        • DirkH says:

          I guess that makes me a climate change denier in the pocket of Big Solar.

        • philjourdan says:

          Sun Worshipper, eh?

        • suyts says:

          Well, I can understand that. Still…….

        • DirkH says:

          philjourdan says:
          November 1, 2012 at 12:04 pm
          “Sun Worshipper, eh?”

          I’m agnostic but always against subsidies.

    • philjourdan says:

      They let them rebuild in the swamps of New Orleans. They will let them rebuild.

  7. Lars P. says:

    Thanks James for the post, this will not stop the lunatics from repeating the falacy, but at least there is also the answer. It needs to be said again and again…

    • suyts says:

      Thanks Lars. It sometimes catches me off guard. I don’t always realize that people hang onto stupid ideas which have been demonstrated wrong many lifetimes ago.

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