One bright side of Hurricane Irene is the new opportunity to highlight the “broken window fallacy.” As those who understand the fallacy realize, that’s about the only bright side. There is no net economic benefit from the destruction linked to the storm. Lawrence Kudlow makes this point in his latest column.
When the final tally is in, Irene may or may not qualify as a top 10 hurricane. But the history of such disasters is that the national economy rebuilds and snaps back shortly thereafter. Nonetheless, the economic rebuilding essentially gets you back to where you were before the storm. Unfortunately, there is virtually no net new investment from all of this.
That said, if President Barack Obama tries to use Hurricane Irene as an excuse to pour tens of billions of new infrastructure dollars into the economy, he’s barking up the wrong tree.
For just as Bastiat’s seen-and-unseen analysis holds for the shopkeeper repairing his window, it also holds for the impact of massive government spending on the whole economy. It’s a huge mistake — and a consequence of our fiscal profligacy — when private money is not spent on new investment because funds are absorbed by big-government borrowing.
If we are to restore strong economic growth and job creation, we require measures such as pro-growth tax reform or regulatory rollback and repeal. In this sense, the new House Republican plan just released by Majority Leader Eric Cantor to repeal job-destroying regulations — especially on labor and the environment — makes a lot more sense than throwing money at the Federal Emergency Management Agency? for new infrastructure banks.
Breaking fiscal windows is just as ineffective as breaking the shopkeeper’s pane of glass.
