Skip to main content

Broken Windows, Burning HomesAs It Turns Out, Business Writers and Economists Still Need A Lesson In Economics

“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all group.”--Henry Hazlitt, Economics in One Lesson.
You know what would be totally amazing? If the destruction by fire of more than 1,600 homes and buildings, massive evacuations and widespread business closures turned out to actually be an economic boon. Sure money is a small consolation to those who have suffered losses from the fires. No-one want to sound too happy about this thing. But an upside is an upside, right?
You can tell a lot of people wish the world worked like this because they keep pretending it does.
“Economists have noted the perverse reality that in the wake of disasters, re-construction spending helps the economy, even as people are still struggling to recover from their personal losses,” Tom Beemis wrote on Market Watch on Tuesday. And here’s more of the same from the Los Angeles Times. And more from the usually whip-smart Mark Lacter at LA Biz Observed. Some even took issue with our very own Joe Weisenthal's skepticism about wildfires as an economic boon.
One indication that this isn’t quite how things work is the fact that we jail arsonists. If burning down buildings and shutting down businesses was an economic boon, we’d treat arsonists like investment bankers. Or at least philanthropists.
Unfortunately, for arsonists and the rest of us, this isn’t how it works. While some California home builders and other’s who will help clean up the mess after the fires may gain, this gain is merely the loss of business and investment that would have gone elsewhere. Even money paid out by insurance companies is money that is now going to rebuild what we already had instead of getting invested in wealth increasing activities.
It’s easy to overlook this because we’re dealing with a counter-factual, with investments and purchases that won’t happen because the money is now being used to pay to repair the damage from the fire. But one thing that is certain is that the activities being described as helping the economy, and the money used to undertake those activities, are being done at the expense of what would have been done had the losses from the fire not occurred. There’s no stimulus here that isn’t being replicated as a loss in other parts of the economy.
The losses from the fire are terrible. One reader estimates they might add up to as much as $2.8 billion. It’s like California was run by Stan O’Neal for six months. There’s no upside, unless you happen to root for California home builders to gain at the expense of others. There’s no economic blessing rising from the ashes.
But it’s pretty to think so.
Could Calif. fires draw a line under housing crash? [Market Watch]
Fires won't hurt long term, economists say [LA Times]
Fires and broken windows [LA Biz Observed]


Bern Gets Burned (By Economists)

Not all of them are feeling his math.