Storms: A new path to prosperity?

Published 11:00 pm Wednesday, October 31, 2012

There’s nothing like a natural disaster, such as Hurricane Sandy, or tragedy like September 11th to encourage empty economic thinking. Peter Morici, an economist at the University of Maryland, is the latest case in point. In a Monday news story about Hurricane Sandy, Morici acknowledges the upfront costs of Hurricane Sandy but then goes claims the hurricane will deliver significant economic benefits and make “communities better off than before.”

Morici’s dead wrong, and he’s fallen prey to the “broken window fallacy,” which is something any good economist’s students learn to avoid in their first few weeks of an introductory course. People who commit the broken window fallacy make the mistake of thinking the economic activity after something is destroyed is new, net positive activity. When a rock is thrown through my window, money is spent to replace the window. The money ripples through the economy and employs other people. The activity has the appearance of stimulating growth when, of course, it’s just helping me get back to where I was before. I am worse off and out a few hundred dollars because of the broken window; the world is no better off. The same logic at the individual level extends to large disasters like Hurricane Sandy.

To Morici’s credit, he is not the first and won’t be the last person to commit the fallacy. The Nobel Prize winning economist, Paul Krugman, had the following to say after the September 11th terrorist attacks: “…the terror attack—like the original day of infamy, which brought an end to the Great Depression—could even do some economic good.” Ten years later, President Obama’a former director of the National Economic Council, Larry Summers, had this to say after the Japanese earthquake and tsunami of 2011: “[The earthquake and tsunami] may lead to some temporary increments ironically to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength.” Never mind the 6,000 people killed by the Kobe earthquake or the 30 killed so far by Sandy: If the data can somehow be squeezed to look like incomes have grown, then natural disasters—put all common sense and economic intuition to the side—must be a benefit.

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The mistake people like Morici, Summers, and Krugman making is the following: they’re focusing on what Frederic Bastiat, a 19th century French economist who first introduced us to the broken window fallacy, calls the seen effects. Fixing a broken window or rebuilding after an earthquake creates a lot of employment and busy people. But, of course, all of their activity is to help us get back to normal again.

What is not seen are the numerous exchanges and opportunities lost when a disaster occurs; had people not had part of their capital destroyed, more could have been produced, and we could all be a little better off. Whether it’s my $200 dollar window that gets replaced or $3.3 trillion of expenditures to recover from 09/11, spending to return to normal is not and never should be thought of as wealth-enhancing. Instead, such expenditures are helping us return to normal.

People without PhDs in Economics know disasters are bad. In fact, they are heart-breaking, tragic, and events we would never wish upon anyone. They make us worse overall, and economists saying otherwise are behaving like hacks, rather than conducting good economic analysis.

Scott Beaulier is Executive Director of the Manuel H. Johnson Center for Political Economy at Troy University.