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Strategies & Market Trends : Stock Attack II - A Complete Analysis -- Ignore unavailable to you. Want to Upgrade?

To: DD™ who wrote (22445)	10/24/2001 2:11:31 PM
From: Chris	Read Replies (1) \| Respond to of 52237

THE LUSKIN REPORT 43,600 Broken Windows Donald L. Luskin Wednesday, October 24 , 2001 Frédéric Bastiat, the 19th century French economist, would have taken a certain grim satisfaction from the September 11 terrorist attack that destroyed the World Trade Center. His most celebrated writing concerned the economics of broken windows -- and between the two WTC towers there were 43,600 of them. Bastiat's ruminations about broken windows stand at the center of a debate about the economic consequences of the war on terrorism. Will the one-time costs of repairing lower Manhattan and the Pentagon and replacing four airplanes, and the far greater ongoing costs of fighting a global war on terrorism and of securing greater safety in the homeland, be a deadweight drag on the economy? Or, perversely, are they in fact a stimulus to the economy -- consisting, as they do, of economic activities that wouldn't have taken place otherwise? In this short introduction I'll set the stage for the debate. And then, over the coming week, I'll explore some its subtler dimensions. I can tell you right now, though, that the resolution is not obvious. And the difficulty of it is reflected in the indecision pattern that we see in all the equity market indices, and the clear sense that the market just doesn't want to go down -- but that it doesn't really want to go up, either. Now, back to Bastiat. In his essay "What is Seen and Not Seen," collected in Selected Essays in Political Economy, he writes of a bakery window that is broken when a vandal throws a brick through it. At first everyone is saddened by the destruction, but then some philosophers point out that now the glass repairman will get some business he wouldn't have otherwise had. The repairman, then, will have the money to buy something from some other merchant which he couldn't have otherwise afforded. That merchant will be able to buy something... and so on and so on, until the broken window has triggered an economic boom. So what's wrong with the philosophers' interpretation? Something must be, because if they're right, the best way to set off an even bigger boom would be to break windows all over town. Indeed, why not just destroy the whole town? I can think of some people who'd be glad to help... Robert McTeer, the president of the Dallas Federal Reserve Bank, explains it this way: Sound familiar? We have local hurricane and earthquake booms as well... The answer lies in...the story that’s not told. In this case, the untold story is what would have happened had the baker not spent his money on window repair. He might have bought that new suit for which he had been saving. Then, the tailor would have spent the money with another merchant, and he with another and so on. Or he might have saved the money in a bank, which might then lend it to someone to start a new business. The glass repairer’s gain is merely the tailor’s or new entrepreneur’s loss. No net new business or employment was added; they were only diverted. The philosophers in the crowd thought only of the parties to the transaction and what they expected to happen. They forgot about what would have happened had the brick not been thrown. Actually, it's even worse than this. If we see the payment to the glass repairman as simply the diversion of economic activity away from someone else, at least it's a breakeven -- at least someone gets the money. But what gets left out of this analysis is the fact that the baker has to write off the window on his balance sheet -- his stock of wealth has been diminished. Any future economic activity now starts "in the hole" by that amount. In the case of the September 11 terrorist attacks, the issue is much more complicated than simply replacing the capital that was destroyed. Because much more was lost than a couple of buildings and a few airplanes at a known replacement cost. About six thousand lives were lost, too, and they can never be replaced -- but their loss entails complex costs, some of which can be estimated and some of which can't. And innocence was lost, as well: the greatest costs now may be for increased security and other forms of insurance for the indefinite future in a world now understood to be far riskier than we ever suspected. The issues here are also more complex because they involve collective action. Many of the most fateful economic decisions that will arise from our 43,600 broken windows will be made by central bankers, legislators, presidents and generals -- and their decisions have very special impacts. And when decisions operate on that level, they have the potential to affect not only the pocketbooks but also the hearts and minds of millions of economic actors around the world, unleashing passions and powers that can have their own special economic consequences. That's the backdrop to the debate. More to come.