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April 6, 1994
"No, We Don't Want to Level Los Angeles"
San Jose Mercury News
By Timothy Taylor
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AS THE California economy begins to stumble toward recovery, news reports are noting an irony: the Northridge earthquake that rocked southern California in mid-January led to new construction jobs. Last week, the UCLA Business Forecasting Project released an optimistic forecast for the California economy, pointing out that the earthquake will add 20,000 jobs in the first half of this year, helping trigger the state's economic recovery.

Something must be wrong with the belief that earthquakes promote economic recovery. After all, if the Southern California economy just needed a bit of destruction, why wasn't it already perked up by the riots, floods, fires, mudslides and earthquakes of the last several years? If disaster is actually beneficial, then why not encourage vandalism, arson, and other destruction of property, to generate new jobs and assist economic recovery?

The essential fallacy was perhaps best explained back in 1946, in a book by Henry Hazlitt called "Economics in One Lesson," which remains today one of the quickest ways to understanding at an intuitive level how economists think. Hazlitt relates a parable he called "The Broken Window."

"A young hoodlum, say, heaves a brick through the window of a baker's shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies.

"After a while," Hazlitt writes," the crowd feels the need for philosophic reflection. And several of its member are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier.... After all, if windows were never broken, what would happen to the glass business?"

Hazlitt points out that the glazier will in turn spend the money received for fixing the window on other goods and services, and those who receive that money will spend it as well. "The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor."

The logical flaw here lies in the hidden assumption that the increased business for the glazier represents a gain to society as a whole. Hazlitt put it this way:

"The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $100 that he was planning to spend on a new suit. Because he has to replace the window, he will have to go without the suit (or some equivalent need or luxury).... The glazier's gain of business, in short is merely the tailor's loss of business." The same lesson holds for earthquakes, oil spills, wars and other destruction. The "gain" from rebuilding after an earthquake is not a net benefit, but only a transfer from other ways those resources would otherwise have been spent.

As Hazlitt put it: "The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye."

In the case of the Northridge quake, any private money spent to rebuild southern California comes either out of people's pockets or out of insurance premiums. Public money spent to rebuild California either means less for other public programs, or higher taxes. Such costs represent either private or public consumption that now will never happen. The lost opportunities are difficult to visualize, but they are nonetheless real.

Although roads and buildings can be rebuilt, there is no compensation for suffering the stress of misfortune and the disruption of day-to-day life. In addition, when an economy suffers repeated disasters, as Southern California has in the last few years, it tends to discourage the planning and investment that is so necessary to long-term growth.

Of course, there are complicating factors here. For example, the gains from rebuilding after the earthquake occur solely in southern California, while some of the offsetting costs are distributed more widely through the economy, by insurance companies and the government.

Hazlitt died last summer, at the age of 98. But let his 1946 essay have the last word: "Such complications should not divert us from recognizing the basic truth that the wanton destruction of anything of real value is always a net loss, a misfortune, or a disaster, and whatever the offsetting considerations in a particular instance, can never be, on net balance, a boon or a blessing."

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