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In fact, some observers see a boon to areas such as construction, which is down 28,600 jobs through September, a 3% decline from the previous year, according to the state Employment Development Department.
“In the odd nature of economic accounting, this will probably be a stimulus,” said Alan Gin, a University of San Diego economist. “There will be a huge amount of rebuilding in the next couple of years, financed by insurance payments.”
Such economists have obviously not studied the parable of the broken window by Frederic Bastiat, which clarifies that such events always have hidden (“unseen”) costs involved.
Yes, people will have to spend money on rebuilding, remodeling, and the rest. Yes, those involved in these trades will stand to gain. But what would happen with this money had it not been used in this instance? Proponents of the broken window theory suggest that destruction is good, because it stimulates the economy through reconstruction afterwards. Would the United States’ economy be better off if the fires swept the entire land clean, and we started over completely? How does destruction truly benefit anybody?
One might argue that the money already exists in the form of insurance checks, and therefore can easily be spent in this case to stimulate the economy. But as William Anderson notes, this too is a fallacy:
It is true that some people will be made better off temporarily as insurance money compensates the owners in part for their losses and new construction begins. Even then, however, anyone who has ever had to make an insurance claim on lost or destroyed property knows that the ordeal is hardly costless.
This analysis takes into account only a tiny number of [people] who will be employed either cleaning up the rubble or rebuilding after this gruesome task has been completed. Kudlow fails to recognize that the billions of dollars that insurance companies will pay for losses will come from funds that would have been invested elsewhere. Other projects that were being planned will now die, as they will be starved for lack of available capital.
The author of this article also explains why there’s no big pot of money sitting around waiting to be used in instances such as the San Diego fires:
Boil this down into simpler terms. You wreck your car, and in the process, you hurt your back. Your car insurer writes you a check. You get the car fixed. Your health insurer cuts you a check. You go to the hospital, and get your back fixed. Is the economy better off for your accident? If you subscribe to broken-window thinking, you say yes. You’re back in good health. Your car is fixed. You’re no worse off than you were before, and your mechanic and your chiropractor are doing better.
That’s baloney, of course. The money from your insurer came from somewhere else. It was pulled from the task of creating new wealth, and spent on merely getting you back to where you were before you had an accident. In fact, often that money comes from you, when you consider that every time an insurance company writes a check, premiums go up just a hair for all of its policyholders.
Nobody is better off after a disaster. The economy, while stimulated in limited, related areas, is not better off as a whole. Projects that would have been pursued are left ignored for lack of liquidity, and portions of the economy that would have otherwise been benefited are left bereft.