Tuesday , June 19 2018
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“That’s the Story of the Hurricane”

Summary:
I am always happy to read a defense of the person receiving a Two Minute Hate, even if it’s a Fed official who seemed to subscribe to the Broken Window Fallacy. In that spirit, here is David R. Henderson defending William Dudley’s remarks about the hurricane. (Also notice Scott Sumner’s caveat in the comments.) To try to minimize confusion in the comments here at Free Advice, this is what’s going on: 1) A kid breaks a shop window in 19th century France and normal people say, “That’s bad.” 2) A smug contrarian says, “On the contrary, the lad’s activity will provide employment for the glazier, who now has to replace the window. It stimulates economic activity and makes the community richer.” 3) Bastiat points out that this is shortsighted, and overlooks the

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I am always happy to read a defense of the person receiving a Two Minute Hate, even if it’s a Fed official who seemed to subscribe to the Broken Window Fallacy. In that spirit, here is David R. Henderson defending William Dudley’s remarks about the hurricane. (Also notice Scott Sumner’s caveat in the comments.)

To try to minimize confusion in the comments here at Free Advice, this is what’s going on:

1) A kid breaks a shop window in 19th century France and normal people say, “That’s bad.”

2) A smug contrarian says, “On the contrary, the lad’s activity will provide employment for the glazier, who now has to replace the window. It stimulates economic activity and makes the community richer.”

3) Bastiat points out that this is shortsighted, and overlooks the employment that the storekeeper’s spending could have given to (say) the tailor who could’ve made him a new shirt. Total employment is the same either way, but now the community is poorer to the tune of one shirt.

4) (Hundreds of people commit the “Broken Window Fallacy” up through 2017, providing employment for smug libertarians to mock them and make our movement richer.)

5) William Dudley says the recent hurricanes will increase measured economic activity (i.e. official real GDP) because people will have to rebuild.

6) David R. Henderson clarifies that Dudley said “unfortunately,” and that there is no fallacy here. People are poorer, but they may indeed reduce the amount of leisure they otherwise would have enjoyed, in order to work more. Total measured real income will be higher than it otherwise would have been, but the community will be poorer, especially if we include “leisure enjoyment” in the measure of consumption. Note here that “poorer” means “lower wealth.” If someone takes away your house and your car, but then gives you a job offer giving you a $50,000 annual raise, the market value of your output is higher that year, but you still might end up “poorer” than you started.

7) Scott Sumner points out that even David’s defense of Dudley only works for small amounts of damage, because if the damage is too severe, then the reduced capital stock makes labor less efficient. So even if people work more hours, measured GDP might be lower until the capital stock is replenished.

8) Notice that points (1) – (7) do NOT rely on the Keynesian move of classifying “classical economics” as applying only to the special case of full employment. To see that discussion, read this old post where I gently push back against Matt Yglesias and Daniel Kuehn.

Robert Murphy
Christian, Austrian economist, and libertarian theorist. Research Prof at Texas Tech and author of *Choice*. Paul Krugman's worst nightmare.

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