Perhaps the folks at Bloomberg Businessweek ought to spend more time reading Barron’s. Then they might know the fallacy behind the argument that Sandy will end up leading to more good than harm.
Whether it’s recovering from a war or cleaning up after a natural disaster, periods of severe destruction are usually followed by sharp bursts of economic activity. Money pours in from government and insurers to repair infrastructure. Homes get rebuilt, debris cleared. As a result, the overall economic growth that follows a natural disaster can often outweigh the wealth it destroyed. Economists call this the broken window effect. “To an economist, breaking a window always boosts GDP,” says Michael Englund, chief economist at Action Economics. Englund thinks that Sandy could end up boosting fourth-quarter gross domestic product by as much as two-tenths of a percentage point. “The backfill activity will probably be bigger,” he says. “By the time the rebuild is over, I think we’ll see this as a net positive [for GDP].”
If that’s true, we ought to root for more destruction-causing storms to help lift our economy out of its doldrums. Better yet, we ought to go out and stimulate the economy by breaking some windows on our own, since the repair work will generate positive economic growth.
If that idea sounds foolish, then you understand what the Businessweek writer missed: The broken window “effect” is better known as the broken window fallacy.
