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In Defense of Liberty - Daily News - 6/02/2011

Written By: The Liberty Brothers, Mr. John C. Deming and Mr. Lee G. Deming  |  Posted: Thursday, June 2nd, 2011

New York Times - "Reconstruction lifts economy after disasters". We said after the recent destruction that someone would argue that it would be good for the economy. It makes sense that it would be the New York Times. It is such a nonsensical notion that few people seem to question it. After all, it was in the New York Times, but let's review. The article states, "reconstruction can help rebuild local economies as well as neighborhoods.'' The article goes on to say, "No one would suggest that disasters are a desirable form of economic stimulus. But economists who have studied the impact of floods, tornadoes, and hurricanes have found that after the initial anguish and huge economic disruptions, periods of increased economic activity frequently follow as insurance money and disaster relief flow in to jump-start building." Which of these statements are true (if either)? It seems as though the article is suggesting that reconstruction isn't a desirable economic stimulus, but it does act as a stimulus. The article describes many aspects of this philosophy, including an argument against raising prices at this time (aka price gouging). It describes people working and money being paid for goods at Home Depot. The problem here is that the author suffers from the broken window fallacy (starts on page 11), which was eloquently described by Henry Hazlitt in his book "Economics in One Lesson".  In this example, a child throws a rock through the window of a bakery in town. At some point, someone suggests that it will provide work for the glass company. The glass company wouldn't have had this business opportunity (stimulus) if the kid hadn't broken the window. However, what is forgotten is that the baker will now have to pay for the window instead of something he or she might desire (like a new mixer). Even if the window is covered by insurance, there still may be a deductible and the baker's insurance premiums might rise. The fallacy is that the stimulus creates wealth in the economy. If the kid hadn't broken the window, the baker would have a window and a mixer with the money now spent on the window. Capital is lost. The baker is less well off than before, and although the glass company might be better off, the company that makes mixers is less well off. As the broken window fallacy clearly illustrates, these types of stimuli actually hurt the economy. There are no new jobs created here. The hiring of people at Home Depot to handle the latest rebuilding needs comes at the expense of jobs lost elsewhere. If capital is being destroyed, then wealth is being lost, not gained. There's no getting around that fact. Bastiat described this in the essay "What is seen and what is not seen: The bad economist confines himself to the visible effect". In a strange twist, Hazlitt was the principal economic editorial writer for the New York Times from 1933 - 1946. F. A. Hayek and Milton Friedman, both Nobel Prize winning economists, praised his work. We strongly encourage everyone who is interested in learning more about economics to read Economics in One Lesson. The irony of this story should not be lost on its readers. Hazlitt's weekly columns described the economics of the Depression, as well as the interventions that came later. He argued against government interventions, and was able to predict outcomes by applying Austrian economic principles. His columns helped discredit Keynesian economic thinking. We now find a broken window fallacy espoused in the New York Times, as well as Paul Krugman rallying everyone in support of the discredited Keynesian economic theories. These columnists would do well to read historical columns from their own newspaper. Better answers were printed generations ago.

 

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