Frankenstorm: Don’t fall foul of the Broken Windows Fallacy

Allister Heath
THERE are times, fortunately not too often in these days of technological revolution and extraordinary scientific progress, that human beings can but bow to the forces of nature. We may be capable of flying to the moon but there are some natural events that leave us powerless and unable to control events. Everybody with family, friends and colleagues in New York and the United States will be hoping that the next few hours go smoothly and that Hurricane Sandy spares lives and property.

In addition to its potential human impact, Sandy will also have an economic effect. Flights have been cancelled by the thousand, business is not being conducted, people are not being hired, consumers are not spending. The New York Stock Exchange will be closed again today; it is the first time since 1888 that the market has been shut for two consecutive days due to weather. There may also be a political impact: campaigning in the ultra-close US presidential elections has been disrupted, turnout will fall in some regions (which could boost Mitt Romney) but Americans may rally around the president (which would boost Barack Obama).

It is vital for anybody trying to analyse the effects of Sandy not to succumb to what the French economist Frederic Bastiat called the broken windows fallacy: the wrong-headed view that damage caused by the storm is a good thing as it will boost spending on repairs. That is nonsense. A country doesn’t become richer when its assets are smashed up, or its buildings flooded, or its bridges damaged, even if mending them temporarily creates new jobs. Hurricanes don’t boost a nation’s wealth, they impoverish it; resources that could have been allocated to other things need to be diverted to the reconstruction effort. Savings that would previously have been used to finance a new factory are suddenly diverted to rebuilding an asset that was working perfectly fine. So much for the economics – today, however, our thoughts are with ordinary Americans struggling with the elements. We wish them well.

EXTREME chutzpah doesn’t even begin to describe the Labour Party’s latest position on the European Union. That most slavishly Europhile of parties – and opponent of all domestic public spending cuts – wants the EU’s budget to be slashed.

This may be extraordinarily hypocritical – but it is the right position to take, given the waste in Brussels and the fact that voters are having to tighten their belts. It is also a clever trick which will expose the divisions between David Cameron’s position and that of most of his party.

Astonishingly, MEPs backed the European Commission’s bid to increase its budget by 6.8 per cent in 2013. Member states want to increase it by 2.79 per cent. Cameron is calling for a real terms freeze, equivalent to a cash increase of around 2 per cent (and the default outcome if no agreement is reached). Yet now even the Labour party has become willing to take on the pro-EU establishment; there are votes to be won by outflanking the Tories.

This is a major political milestone. As the Eurozone moves towards ever-closer integration, the UK is moving towards a major renegotiation and an in-out referendum on EU membership, with an entirely unpredictable result, dividing the country, political parties, the City and the business community. Forget about economic reform: a historic and final decision on Europe by the UK electorate, after decades of prevarication, will turn out to be the real politico-economic story of the decade.