Broken Window Fallacy: Alberta Flooding

Alberta has recently experienced massive flooding.  If you would like to donate $5 to the Red Cross’ efforts there you can text “ABHELP” to 4664.  It really is an easy way to help out your fellow Canadians in their time of need.

Alberta is one of Canada’s “have” provinces.  What that means, is that they (net) pay money to the federal government rather than receive payments. When the flooding started it was inevitable that people would start talking about how this was going to affect their economy. I thought this would be a good time to talk the Broken Window Fallacy. If you are looking for information on the “broken window syndrome” then you are in the wrong place and you should check out a criminology website instead.

The original idea goes something like this.  A window is broken in a shop and the shop owner needs to call a glazier to replace it. He is, of course, upset that he needs to replace this broken window.  To try and make the shop owner feel better someone points out that if windows were never broken then the glazier would never have any work to do; implying that it is a good thing that the window was broken because it helps money change hands. This ignores the fact that the money would have been better off used on something else rather than on replacing the window.

This is one of the issues with many methods of calculating GDP. If someone remodels their bathroom because they feel like it, then it adds to total GDP as they purchase supplies.  If they need to rebuild their bathroom because it was destroyed by a flood then they are also buying supplies and that too increases the GDP.   In the first case however, the house value is higher overall. Unfortunately, in most cases existing home sales are kept as a separate statistic and it is new home sales that push up GDP. So for this type of GDP calculation it makes no difference that the original bathroom was destroyed.  Flood repair fallacy would seem a more appropriate name in this case.

So the money spent on these repairs is money that would have been spent elsewhere.  That is one downside.  The other thing to keep in mind if you see anyone claiming this will actually boost the GDP of Alberta is that overland flood insurance does not exist in Canada as far as I am aware.  If your drains back up and your basement floods then maybe you would get an insurance payout but if the water comes in through a doorway or window then you will not be covered, this is overland flooding. What this means is that many of the repairs are going to be done with borrowed money.  The money borrowed today is obviously money that cannot be spent tomorrow. So if there is a bump in construction material sales during the rebuilding period you can assume that there will be a slump afterwards as the money that was used to repair everything is being paid back, with interest.

So over the next few weeks or even months keep these things in mind as people talk about the cost of repairs.  Finally, for the $5 donation you made after reading the first paragraph of this post you could also get 5 Wild Rose pink sprinkle doughnuts at Tim Horton’s, the proceeds of which are being donated to the flood recovery. It is unclear where charity doughnuts fall in GDP calculations.

 

Please type what you think and why.