Irene’s Broken Window


Reuters reports that bulk stores have been getting a boost over the past few days thanks to people preparing for Hurricane Irene:

Hastings expects Home Depot to do well, as it has 35 percent more stores than Lowe’s Cos Inc (LOW.N) in the affected region. He also expects Newell Rubbermaid Inc (NWL.N) to benefit from demand for storage containers.

Newell shares rose about 1 percent on Friday. Among battery makers, Energizer Holdings Inc (ENR.N) was up almost 2 percent, and Spectrum Brand Holdings (SPB.N) gained nearly 3 percent.

Drugstores and grocery stores should also see a sales lift.

“It helps the supermarkets most because people really stock up,” said BB&T Capital Markets analyst Andrew Wolf, noting Supervalu Inc’s (SVU.N) strength in Boston and Philadelphia, and Safeway Inc (SWY.N) and Ahold’s (AHLN.AS) big presence in Washington.

While sales may be boosted in these sectors, profits in other sectors — as the article does concede — may be hurt due to diverted spending.

The boost in sales of emergency supplies (and repair supplies that is sure to follow) is not some kind of wonderful economic boom to save the economy; it should not be applauded and cheered on. The boom from purchases due to Hurricane Irene all represent destroyed wealth.

This is a classic example of the Broken Window fallacy. Introduced by French political economist Frederic Bastiat, the broken window fallacy pretty much states that when wealth is destroyed (he uses the example of a baker’s window being broken), it may appear that the economy is stimulated by the expenditures to replace the wealth, but this is not so. Themoney that is used to replace the wealth could have been used to create more wealth elsewhere, while still keeping the original wealth (Bastiat uses the baker keeping the window and buying a suit). This expenditure — which would be something along the lines of school supplies or new clothes at this time of year, instead of batteries and water — may appear to help whoever supplies it, but the money could have been used to help whoever would have supplies the forgone purchases.

So, instead of having a perfectly full cabinet of food, a well-stocked fridge, a non-flooded yard, and house, and new clothes, school supplies, and other luxuries, people are stuck with emergency food supplies and a repaired house. The wealth that could have been invested in making people’s lives better was lost in preventing their lives from getting worse. Destruction is never an economic stimulus, it simply destroys wealth and prevents progress.

And to think that this is the stuff that Nobel Laureates advocate.

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