"Good News! A Hurricane Has Destroyed Our Homes and Businesses!"

[Bono]

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Good News! A Hurricane Has Destroyed Our Homes and Businesses!

Hurricane Katrina.jpg
Thanks, Katrina, for Inducing Us to Buy New Cars and Houses!

I’ve not heard anyone thick enough to actually invoke the broken window fallacy yet, but don’t worry. They will.

Here’s what Slate magazine’s Timothy Noah (writing as “Chatterbox”) wrote on September 12, 2001:

    Why does Chatterbox think it [the World Trade Center disaster] will benefit the economy? Simple: because we live in a very wealthy nation that responds to horrible disasters by spending large sums of money. In this case, the spending will come both from private insurers and from the federal government’s Federal Emergency Management Agency, which over the past decade has established itself as a politically unstoppable source of federal largesse. FEMA helped Southern California’s recession-plagued economy to boom after it suffered various natural disasters in the early 1990s. In that instance, of course, California benefited from a Democratic administration’s reliance on its votes in the upcoming 1996 election. Since New York is unlikely to go for Bush in 2004, this president will likely be less enthusiastic about rebuilding it. But rebuild it he must if he wants to demonstrate that terrorists can’t damage U.S. morale.

    Why will the entire U.S. economy benefit, as opposed to just New York’s? Because the money will be spent in the nerve center of American finance, which is having a rough time of it these days. Chatterbox believes that the mere presence of construction activity around Wall Street will have a beneficial psychological effect on bankers and brokers. It will also provide a meaningful Keynesian stimulus to a national economy that, let’s face it, was tottering on the brink of recession well before Sept. 11. The recession may still come, but the countercyclical spending should help shorten it.

Here’s what the former economist Paul Krugman (now a hack writer for the New York Times) wrote on September 14, 2001:

    “The driving force behind the economic slowdown has been a plunge in business investment. Now, all of a sudden, we need some new office buildings. As I’ve already indicated, the destruction isn’t big compared with the economy, but rebuilding will generate at least some increase in business spending.”

Here’s why they’re both wrong, as are all those who will surely begin talking about the beneficial effects of Hurricane Katrina on the U.S. economy:

    What Is Seen and What Is Not Seen

UPDATE: Well, the New York Times did manage to resort to the broken-window fallacy (“Damage to Economy Is Deep and Wide,” by Eduardo Porter; requires simple registration) on the day that I wrote the post above:

    But economists point out that although Katrina has destroyed a lot of accumulated wealth, it ultimately will probably have a positive effect on measured growth over the next few months as vast resources from around the country are channeled to rebuilding.

    Even as shuttered businesses will temporarily add to joblessness, the huge reconstruction effort is expected to create jobs in construction and a host of related sectors. Insurance companies and the federal government will pick up a significant portion of the cost.

    “Longer term, in the wake of a number of hurricanes there is actually an increase in measured output that even shows up at the national level, because there is a whole bunch of rebuilding activity,” said Stephen P. A. Brown, director of energy economics at the Federal Reserve Bank of Dallas. “Though in some sense it would be easy to argue that we have been made worse by the hurricane, the process of rebuilding of property contributes to an increase in output.”

At least Mr. Brown, quoted above, had the decency to refer to “an increase in measured output” and to try to hedge against being a complete fool by noting that “in some sense it would be easy to argue that we have been made worse by the hurricane….” Maybe “a net decrease in wealth and well being” is the “sense” in which “it would be easy to argue that we have been made worse by the hurricane.” If I were in a car crash and terribly injured, Mr. Brown would note that there would be a “sense” in which I would be “made worse by the car crash.” But, of course, only “a sense.”
Posted by Tom Palmer at August 30, 2005 11:33 PM | TrackBack