September 11, 2017

Harvey, Irma, and Frédéric – the “Broken Window Fallacy” returns

Jon Gabriel tries to set the record straight on what a natural disaster means for the economy (hint, ignore anyone who says the GDP will rise due to the recovery efforts):

Ever since Hurricane Harvey slammed into Texas two weeks ago, we’ve seen countless images of heroic rescues, flooded interstates and damaged buildings.

As awful as the human toll was, it was not as bad as many of us feared. But it will take months to repair the homes, businesses and infrastructure of Houston and the surrounding area. The same will be true in Florida after Hurricane Irma.

The economic impact could be felt for years, but many economists and financial experts think there’s a silver lining.

The Los Angeles Times crowed that Harvey’s destruction is expected to boost auto sales. CNBC reported that Harvey “could be a slight negative for U.S. growth in the third quarter, but economists say it may ultimately provide a tiny boost to the national economy because of the rebuilding in the Houston area.”

Even Goldman Sachs is looking at the bright side, noting that there could be an increase in economic activity, “reflecting a boost from rebuilding efforts and a catchup in economic activity displaced during the hurricane.”

Economically speaking, it’s great news that all this damage in Texas and Florida needs to be fixed, right? Not only does this mean big bucks for cleanup crews, but think of all the money that street sweepers, construction workers and Home Depots will rake in.

And what about all those windows broken by the high winds? This will be the Golden Age of Texas Glaziery!

Not so fast.

All of this is based on a misunderstanding of what the GDP actually measures. It’s a statistic that often gets mentioned in the newspapers and on TV, but it is almost always used in a way that misleads people about what is happening in the economy. GDP — Gross Domestic Product — is intended to show the approximate total of goods and services produced in a national economy. Thus, when the GDP goes up, it means that the current period being measured recorded more goods and services produced than in the previous period.

When a natural disaster like a hurricane, earthquake, flood, or tornado strikes a city, state or region, all the work required to fix the damage will artificially boost the recorded GDP for that year. But the affected area isn’t that much richer than it was before, despite the GDP going up, because the GDP does not measure the losses suffered during the natural disaster.

This is where Frédéric comes in. I’m referring to the French economist and author Frédéric Bastiat, who brilliantly illustrated the GDP misunderstanding in his essay “What Is Seen and What Is Not Seen“:

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

The GDP problem I identified at the start of this post is a general case of what Bastiat called the “Broken Window Fallacy”:

Have you ever been witness to the fury of that solid citizen, James Goodfellow, when his incorrigible son has happened to break a pane of glass? If you have been present at this spectacle, certainly you must also have observed that the onlookers, even if there are as many as thirty of them, seem with one accord to offer the unfortunate owner the selfsame consolation: “It’s an ill wind that blows nobody some good. Such accidents keep industry going. Everybody has to make a living. What would become of the glaziers if no one ever broke a window?”

Now, this formula of condolence contains a whole theory that it is a good idea for us to expose, flagrante delicto, in this very simple case, since it is exactly the same as that which, unfortunately, underlies most of our economic institutions.

Suppose that it will cost six francs to repair the damage. If you mean that the accident gives six francs’ worth of encouragement to the aforesaid industry, I agree. I do not contest it in any way; your reasoning is correct. The glazier will come, do his job, receive six francs, congratulate himself, and bless in his heart the careless child. That is what is seen.

But if, by way of deduction, you conclude, as happens only too often, that it is good to break windows, that it helps to circulate money, that it results in encouraging industry in general, I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.

It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.

Let us next consider industry in general. The window having been broken, the glass industry gets six francs’ worth of encouragement; that is what is seen.

If the window had not been broken, the shoe industry (or some other) would have received six francs’ worth of encouragement; that is what is not seen.

And if we were to take into consideration what is not seen, because it is a negative factor, as well as what is seen, because it is a positive factor, we should understand that there is no benefit to industry in general or to national employment as a whole, whether windows are broken or not broken.

Now let us consider James Goodfellow.

On the first hypothesis, that of the broken window, he spends six francs and has, neither more nor less than before, the enjoyment of one window.

On the second, that in which the accident did not happen, he would have spent six francs for new shoes and would have had the enjoyment of a pair of shoes as well as of a window.

Now, if James Goodfellow is part of society, we must conclude that society, considering its labors and its enjoyments, has lost the value of the broken window.

From which, by generalizing, we arrive at this unexpected conclusion: “Society loses the value of objects unnecessarily destroyed,” and at this aphorism, which will make the hair of the protectionists stand on end: “To break, to destroy, to dissipate is not to encourage national employment,” or more briefly: “Destruction is not profitable.”

Related: Shared by Thomas Forsyth on Facebook:

Smug Canadian vanity over helping (some) refugees may harm a larger number of more desperate refugees

Filed under: Cancon, Middle East — Tags: , , , , , — Nicholas @ 03:00

Jonathan Kay in the National Post:

By my anecdotal observation, these accounts are not overblown. At Toronto dinner parties, it’s become common for upscale couples to brag about how well their sponsored refugees are doing. (Houmam has a job! The kids already speak English! Zeinah bakes the most amazing Syrian pastries — I’m going to serve some for desert!) Syrian refugees aren’t just another group of Canadian newcomers. They’ve become central characters in the creation of our modern national identity as the humane yang to Trump’s beastly yin.

Given all this, it seems strange to entertain the thought that — contrary to this core nationalist narrative — our refugee policy may actually be doing more harm than good. Yet after reading Refuge: Rethinking Refugee Policy in a Changing World, a newly published book jointly authored by Paul Collier and Alexander Betts, I found that conclusion hard to avoid. When it comes to helping victims of Syria’s civil war, the road to hell is paved with good intentions.


What’s worse, the lottery-style nature of the system means that refugees have incentive to take enormous risks. German Chancellor Angela Merkel received lavish praise for admitting more than 1 million Muslim refugees in 2015. But the data cited in Refuge suggest the tantalizing prospect of first-world residency is precisely what motivated so many refugees to endanger their lives by setting out from Turkey in tiny watercraft. We like to believe that generous refugee-admission policies are an antidote to the perils that claimed Alan Kurdi’s life. The exact opposite seems more likely to be true.

Moreover, the refugees who make it to the West do not comprise a representative cross-section of displaced Syrians — because those who can afford to pay off human smugglers tend to be the richest and most well-educated members of their society. (Betts and Collier cite the stunning statistic that fully half of all Syrian university graduates now live outside the country’s borders.) This has important policy ramifications, because refugees who remain in the geographical vicinity of their country of origin typically return home once a conflict ends — whereas those who migrate across oceans usually never come back. Insofar as the sum of humanity’s needs are concerned, where is the need for Syrian doctors, dentists and nurses more acute — Alberta or Aleppo?


But logically sound as it may be, the authors’ argument also flies in the face of our national moral vanity. Scenes of refugees being greeted at the airport by our PM offer a powerful symbol of our humanitarian spirit. Having our PM cut cheques to foreign aid agencies? Less so. While focusing more on supporting Syrian refugees who’ve been displaced to other Middle Eastern countries would allow us to do more good with the same amount of money, we’d also be acting in a less intimate and personal way — and we’d get fewer of those heartwarming newspaper features about Arab children watching their first Canadian snowstorm.

And so we have to ask ourselves: In the end, what’s more important — doing good, or the appearance of doing good? If we’re as pure of heart as we like to imagine, we’ll seek out the policy that saves the most people, full stop. And Refuge supplies an outstanding road map for getting us there.

5 Woodworking Cuts You Need to Know How to Make | WOODWORKING BASICS

Filed under: Technology, Woodworking — Tags: — Nicholas @ 02:00

Published on 9 Jun 2017

Sometimes the terminology gets confusing, so in this BASICS episode, I’ll break down the 5 basic types of woodworking cuts and how to make them.

QotD: Does inequality matter?

Filed under: Books, Economics, Quotations — Tags: , , , , — Nicholas @ 01:00

The central problem with the book, however, is an ethical one. Piketty does not reflect on why inequality by itself would be bad. To be sure, it’s irritating that a super rich woman buys a $40,000 watch. The purchase is ethically objectionable. She should be giving her income in excess of an ample level of 2 cars, say, not 20; 2 houses, not 7; 1 yacht, not 5 — to effective charities. Andrew Carnegie enunciated in 1889 the principle that “a man who dies thus rich dies disgraced.” Carnegie gave away his entire fortune. (Well, he gave it at death, after enjoying a castle in his native Scotland and a few other baubles.) But the fact that many rich people act in a disgraceful fashion does not automatically imply that the government should intervene to stop it. People act disgracefully in all sorts of ways. If our rulers were assigned the task in a fallen world of keeping us all wholly ethical, the government would bring all our lives under its fatherly tutelage, a nightmare achieved approximately before 1989 in East Germany and now in North Korea.

Notice that in Piketty’s tale the rest of us fall only relatively behind the ravenous capitalists. The focus on relative wealth or income or consumption is one serious problem in the book. Piketty’s vision of apocalypse leaves room for the rest of us to do very well indeed — rather non-apocalyptically — as in fact since 1800 we have. What is worrying Piketty is that the rich might possibly get richer, even though the poor get richer, too. His worry is purely about difference, about a vague feeling of envy raised to a theoretical and ethical proposition.

But our real concern should be with raising up the poor to a condition of dignity, a level at which they can function in a democratic society and lead full lives. It doesn’t matter ethically whether the poor have the same number of diamond bracelets and Porsche automobiles as do owners of hedge funds. But it does indeed matter whether they have the same opportunities to vote or to learn to read or to have a roof over their heads.

Adam Smith once described the Scottish idea as “allowing every man to pursue his own interest his own way, upon the liberal plan of equality, liberty and justice.” It would be a good thing, of course, if a free and rich society following Smithian liberalism produced a Pikettyan equality. In fact, it largely has, by the only ethically relevant standard of basic human rights and basic comforts. Introducing liberalism in Hong Kong and Norway and France, for instance, has regularly led to an astounding betterment and to a real equality of outcome — with the poor acquiring automobiles and hot-and-cold water at the tap that were denied in earlier times even to the rich, and acquiring political rights and social dignity that were denied in earlier times to everyone except the rich.

Deirdre N. McCloskey, “How Piketty Misses the Point”, Cato Policy Report, 2015-07.

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