Some journalists still don't understand economics

John Carney at Bloomberg notes several writers who think to find a silver lining to the California fires - that they will bring a boom to the economy of Southern California. Tom Beemis at Marketwatch had this comment:

Economists have noted the perverse reality that in the wake of disasters, re-construction spending helps the economy, even as people are still struggling to recover from their personal losses.
The impact can be relatively small: rebuilding in the wake of the California fires of 2003 came against a backdrop of tens of thousands of new homes under construction.

Then again, in early 2006, reconstruction related to Hurricane Katrina, may have helped bolster the national economy.

So in Southern California, one of the hardest hit housing markets in the country, the temporary reduction of available supply may not be enough to turn things around completely, but it could at least act as a brake on the housing crash.

And the L.A. Times published this analysis:

Despite the destruction of more than 1,600 homes and buildings, massive evacuations and widespread business closures, Southern California's vast, diverse economy probably will withstand this latest disaster with little long-term damage, economists say.

In fact, some observers see a boon to areas such as construction, which is down 28,600 jobs through September, a 3% decline from the previous year, according to the state Employment Development Department.

"In the odd nature of economic accounting, this will probably be a stimulus," said Alan Gin, a University of San Diego economist. "There will be a huge amount of rebuilding in the next couple of years, financed by insurance payments."

Gee, why didn't we think of goosing California's economy by setting fires earlier? As Carney writes,

Unfortunately, for arsonists and the rest of us, this isn’t how it works. While some California home builders and other’s who will help clean up the mess after the fires may gain, this gain is merely the loss of business and investment that would have gone elsewhere. Even money paid out by insurance companies is money that is now going to rebuild what we already had instead of getting invested in wealth increasing activities.

It’s easy to overlook this because we’re dealing with a counter-factual, with investments and purchases that won’t happen because the money is now being used to pay to repair the damage from the fire. But one thing that is certain is that the activities being described as helping the economy, and the money used to undertake those activities, are being done at the expense of what would have been done had the losses from the fire not occurred. There’s no stimulus here that isn’t being replicated as a loss in other parts of the economy.

The losses from the fire are terrible. One reader estimates they might add up to as much as $2.8 billion. It’s like California was run by Stan O’Neal for six months. There’s no upside, unless you happen to root for California home builders to gain at the expense of others. There’s no economic blessing rising from the ashes.

But it’s pretty to think so.

Frederic Bastiat exploded this myth over a century ago when he explained the broken windows fallacy. It's surprising to see modern economic correspondents falling for it again.