Quality And Productivity Gains Are Exceptions To "Broken Window Fallacy"

From The Federal Reserve Bank of New York, "Could Superstorm Sandy Stimulate the Region's Economy?" by Jaison R. Abel, Jason Bram, Richard Deitz, James Orr, Kaivan K. Sattar, and Eric Stern:

However, it’s important not to fall prey to what economists call the “broken window fallacy.” It argues that the activity associated with fixing a broken window—or replacing a refrigerator—does little to raise economic well-being and, at best, simply brings the window, and the economy, back to where it was before the window was broken—even if this money comes from an outside source. Much of the economic activity generated by Sandy will be used to restore what was lost from the storm’s damage. As we discuss in a previous post, the region’s economic costs from the storm are substantial, difficult to measure, and need to be weighed against any benefits of an increase in activity. So while economic activity may have been boosted from such spending, the region’s net wealth hasn’t changed.

The Potential for Productivity Gains
Of course, some of the spending that will occur is for more than just replacing things like broken windows. In fact, even when a new window replaces an old one, it’s likely to be one that’s better—for example, one that’s more energy-efficient. Thus, in the case of replacing things damaged from the storm, there’s some potential for improvements to the region’s productivity. Along these lines, much of the spending will be used to rebuild and upgrade the region’s critical public infrastructure, making it more productive. For example, Sandy destroyed sizable electrical and signal infrastructure of New York’s Metropolitan Transportation Authority (MTA) that was old and in need of repair. Given the MTA’s budget constraints, it’s not clear whether the agency would have upgraded the electrical and signal equipment without the $3.8 billion in Sandy relief funds. Notably, studies indicate that such investments in public infrastructure can increase the attractiveness of an area and raise its productivity for many years. So any investments that upgrade and reduce the risk to the region’s critical public infrastructure could provide a form of longer-term economic stimulus. While these longer-term benefits of disaster aid are easy to conceive, they’re hard to measure.