Time to turn our attention to a Frenchman who died 167 years ago to explain what's going to happen to Houston's economy as it recovers from Hurricane Harvey.
In short: The place is going to be poorer than it was, poorer than it would have been without the disaster, yet our statistics are going to record it as being richer. That's because our system of economic statistics violates the Broken Window Fallacy laid out by Frederic Bastiat, said dead Frenchman. The deeper meaning of this being that a dead Austrian, F.A. Hayek, was right: We've simply not got the information we might need in order to be able to plan an economy.
Patti Domm, over at CNBC, is actually correct when she says that United States GDP will rise as a result of the cleanup, so will that of the Houston area. We are collectively, and Houstonians more personally, going to clean up and rebuild the city. Doing so adds value, that's why we do clean up after a disaster, and GDP is a measure of value being added in an economy.
What GDP isn't though, even when we use it as such, is a measure of how much richer we all are. It's a reasonable guide, a proxy, but it still isn't quite perfect.
Which brings us to Bastiat and his window. If the tailor's window is broken then the glazier gets paid to come fix it, we see the money in circulation and think that the economy is larger. Which it is, if nothing would have happened.
But, as P.J. O'Rouke put it, maybe the tailor was planning to gain a new girlfriend, which would have meant his pox doctor getting paid to fix something instead? The cash would still have circulated, the economy would still have grown. That activity we can see in the economy isn't all there is to it -- there's what would have happened otherwise, that unseen, in the absence of what is. Today we call this opportunity cost, the real meaning of which is that the true price of anything is what you give up to get it.
The opportunity cost of cleaning up Houston is what we cannot have because we're doing all that work to clean up the city. We can think about this just as money if you like, whatever $30-50 billion we throw into this project cannot then also be spent on other important things. It's probably better, though, to think of it in resources -- those new power lines going in mean we can't be using the same steel to build The Wall. More importantly, all those hours of human time cannot be used to do other things, from vacations to curing cancer.
The cost of the clean up in Houston is all of those other things not done.
However, we've also got a problem with GDP, which is gross domestic product. It's a measure of the economy. But it is only one measure of many. We could measure things net instead of gross – take out the depreciation and maintenance bits. We could say national – which bits of the global economy go to Americans instead of domestic, which is which bits happen in the United States. Or perhaps by income, or consumption, instead of product, each of the three theoretically being the same (but they're not, because people lie, because of taxes).
The important one for us here is the difference between net and gross. The G part only tells us about value which is added. We're cleaning up the damage here, adding value. But why are we doing that? Well, obviously, because leaving the damage around makes us poorer, but our measure of the economy isn't including that. The net measure would do so, it would tell us our starting and finishing points, a much better gauge of how better off we've become. We don't do it because GDP is easier to measure than national net income, which is what we almost certainly should be doing (Sometimes it just works out that way).
Which is how we get to our having articles which say that GDP is going to rise as a result of a disaster – sure it will, but that's an error in GDP.
Bastiat was right: Opportunity costs matter and there are problems with net and gross. So, we will record ourselves as being richer as a result of the storm -- but we'll actually be poorer, by exactly the amount of what we've not got, which we should have had if the storm hadn't happened, plus the damages themselves, which we've not accounted for either.
All of which is a rather good example of Hayek's point that we just don't have the information we would need to be able to plan anything as complex as an economy. He went further and insisted we never could, but still this example works. We generally do think that higher GDP is a good idea and we're generally right about that.
But if we actually tried to manage the economy so as to have increasing GDP as a target, then we'd also be trying to engineer hurricanes through major cities each weekend. Probably not such a good idea. We've simply not got the data to be able to manage an economy.
Tim Worstall (@worstall) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.
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