15 Trillion Gallons Of Keynesian Goodness?


by David Stockman, via Lew Rockwell:

If you ever wondered why our monetary central planners and their Wall Street megaphones are so clueless about the on-going deterioration of capitalist prosperity in America, look no farther than this bit of tommyrot from JPMorgan’s chief economist. Therein one Michael Feroli avers that Harvey’s estimated 15 trillion gallon deluge on Houston may appear to be crushing tens of billions of residential, commercial and industrial properties, but not really.

Alas, what finally appears to be real news from CNN is not all that. By the lights of Feroli’s economics, Harvey is a fake disaster that will lead to an increase in GDP!

As a general rule, hurricanes tend to be a short-run depressant and a medium-run boost to economic activity. Sources within the insurance industry as well as J.P. Morgan’s insurance industry research team estimate that the physical damage will be in the $10-$20 billion range…….Total damage, and total rebuilding, should be greater than this amount, as invariably there will be uninsured losses that will be repaired. Even taking this into account, we believe the overall impact on GDP in Q3 and Q4 should be positive but very small, consistent with the historical experience. For this reason, we are not changing our top-line GDP forecast.

We could send him Bastiat’s essay on the “broken window fallacy” and be done with it. After all, $30-50 billion (or even more depending on the final storm phases) of perfectly good capital stock—-drilling rigs, oil and gas platforms, refineries and chemical plants, office buildings, hotels and shopping malls, public roads and utility lines and hundreds of thousands of residences and apartment units—are being destroyed or badly impaired.

That subtracts from societal wealth pure and simple: There is no economic growth or Keynesian goodness to it!

Indeed, if that simple proposition were not true, why leave it to the chance of Mother Nature having one of her episodic hurricane tantrums? The geniuses on Capitol Hill might as well be encouraged to deploy demolition crews around the country to foster the need for vast rebuilding efforts in their wake, thereby sending the GDP growth stats soaring and Home Depot’s stock to new all-time highs.

Since we are deeply antiwar, we cannot endorse the ultimate growth tonic along these lines, as suggested this morning by Zero Hedge. But you can’t assail their logic:

……(Feroli) has proceeded straight to the “broken window fallacy” nirvana: the growth that destruction somehow always guarantees in a Keynesian world. If that was the case, why not just nuke the US and rebuild it from scratch, assuring triple digit GDP growth for decades to come.

So the reason to focus on Hurricane Harvey’s 15 trillion gallon deluge and the nattering bits of Keynesian idiocy it has elicited among Wall Street economists is that it is a metaphor for the “broken window fallacy” that lies at the heart of government and central banking policy all around the world. T0 wit, true prosperity and growth arises from gains in free market efficiency and entrepreneurial innovation, but the impact of state policy— especially its central banking branch—is everywhere and always to promote inefficiency and block innovation.

Stated differently, in the economic sphere the state is reactionary; it gets captured by lobbies and economic players with a vested interest in preserving the status quo or in artificially directing economic resources and activity toward their investments, not the best and highest uses determined by the free market.

A powerful lesson with respect to this truth is happening before our very eyes today as the Army Corps of Engineers has been forced to open the Addicks and Barker dams 17 miles west of downtown Houston and thereby knowingly and deliberately destroy potentially thousands of homes downstream. This seemingly unaccountable action is taking place because the alternative would be even worse—–namely, uncontrolled flooding in the communities around the reservoirs, which are now overflowing their banks. At one point, the water level was rising by a half of foot per hour.

Needless to say, both of these dams were constructed by Washington in the 1940s to reduce flooding along Buffalo Bayou, a narrow body of water that runs through downtown Houston, at the behest of local developers. It was part of the much larger project of channeling and dredging the bayou and turning Houston into a major deep water port via the massive Houston Ship Channel. Over the years literally tens of billions of Federal dollars have been spent to deepen the channel to 45 feet and widen it to 530 feet so that ocean-going ships and tankers can navigate 50 miles inland!

During the years since then, of course, a whole lot of “GDP” has been generated in downtown Houston owing to the perception that flooding risks had been sharply reduced, bringing billions of windfall gains to land owners and property developers who got in on the ground floor. Likewise, the massive refining and petrochemical industries berthed along the Ship Channel are there owing to the Army Corps projects, as are the fashionable communities and commercial districts that developed around the reservoir lakes.

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