BP’s Right, An Oil Spill Would Stimulate The Economy Around The Great Australian Bight

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BP has made an entirely correct and even unremarkable statement when it says that an oil spill in the Great Australian Bight would stimulate the local economy as a result of the clean up efforts. This is entirely true statement- clean up efforts for an oil spill do in fact stimulate that local economy. And no, this isn’t quite a violation – or proof – of Bastiat’s Broken Window Fallacy. They two keys being that yes, as with Bastiat, we’ve a certain problem in the manner in which we measure economic activity but also there’s a lot resting on that word “local”. As long as we insist upon that then BP is right and Bastiat doesn’t apply.

So, error though is usually is, it is necessary to disagree with Mike Munger here.

8.  BP makes a claim that is classic “broken window fallacy.”

Nope.

So, the fallacy itself, window gets broken, everyone observes how money circulates as it gets repaired. The glazier has some from the shopkeeper, the glazier spends it on whatever, the money circulates, we’ve created economic activity through the window being broken. What is important though is what we don’t see happening. The shopkeeper without the broken window spends his money on his favourite lady of negotiable affection and we also gain economic activity. This being France of course the end result of either flow of that money and activity is that the pox doctor gets richer, it mattering not whether it’s the butcher who got the glazier’s money to spend on the negotiated affection or the shopkeeper directly.

The oil spill example is a little different in one sense. In that we don’t account for natural wealth like a clean Great Australian Bight in our economic statistics. So, the damage done to it appears nowhere – we only see the economic activity of cleaning it up. It is true that cleaning it up is economic activity tho’ for it adds value. We think a clean Bight is valuable, that’s why we clean it up, cleaning it up adds value. Our loss here appears on the balance sheet, not the record of activity. And yes, if we weren’t straining the Bight of the spilt oil we’d be off doing something else which also added value so Bastiat and the Broken Window is in play.

However, here’s the original statement:

BP claims an oil spill off Australia’s coast would be a ‘welcome boost’ to local economies Coastal towns would benefit from an oil spill in the pristine Great Australian Bight because the clean up would boost their economies, energy giant BP has claimed as part of its controversial bid to drill in the sensitive marine zone.

That word local. The money to pay for that clean up would not be coming out of that local economy. It would, instead, be coming from Bermuda – the likely location of BP’s captive insurance company – and then a little further back from BP’s shareholders around the world. Sure, there’ll be some of those in Bightland but it’ll still be a considerable transfer of resources from outside the local economy into it. The same will be true of labour coming in, ships and so on. And that’s why BP is correct here.

An oil spill is stimulative to the extent that we measure economies wrongly – Bastiat is right. But when we add the word “local” BP becomes correct again. Local clean up efforts are a transfer of resources into that local economy, that is stimulative. If that were not true then sending clean up resources after any form of disaster, economic, weather or political, would never benefit that local and affected economy, would they?