Are Disasters Good for the Economy?


Having family in tornado stricken Oklahoma is an uneasy trial this time of year. With the recent Shawnee and Moore, OK tornadoes reminded us in Georgia how precious our family relationships really are. Both my wife and I have had first hand experience with tornadoes and their lasting devastation.

As the media reports on the natural disasters that strike us all from time to time, it is important to remember that in no way do these disasters lead to an economic benefit for any economy. In a 2008 article, on the heals of the Shicuan Province earthquake in China that left some 80,000 dead, The Boston Globe released a story by Drake Bennett titled, “How Disasters Help with subtitle of Natural disasters can give a boost to the countries where they occur – and sometimes, the more the better”. In this commentary Bennett makes one economic blunder after another. The most glaring being that, in order to “prove” his thesis he cherry picked research articles and statistics. The opposing opinion has exhaustive studies on the subject, but Bennett only gives little space for these.

A look further, he makes that typical pundit use of the term “some”. As in, “some economists say” or “some people think” and so on. How much is “some”? No one knows. It’s a convenient way to interject your opinion where it doesn’t belong or when the facts don’t support your position. If I made the claim that the earth were flat, I could always find “some” that would agree with me. It means nothing.

Bennett goes on to state,

Traditionally, analysts have cautioned that Chinese growth figures should be greeted with skepticism, but, according to one school of economic thought, there may be something to the idea that the quake served as a brutal stimulus. In fact, some economists argue that hurricanes, earthquakes, floods, volcanic eruptions, ice storms, and the like, despite the widespread destruction they leave behind – indeed, largely because of it – can spur economic growth.

Notice the term “some economists” again. Who are these economists and how many? The “one school of economic thought” that Bennett eludes to is Keyensianism. The school of thought most adopted by central planners and their court priesthood, the academics and mainstream media. By being the only school of thought on an issue doesn’t necessarily discredit the position though. Not that it matters. The position itself is so ludicrous that simple logical deduction can smash it. Why wait on nature to destroy infrastructure when we could just roll a battalion of tanks down the city streets, blasting away? When a structure is constructed, shouldn’t the builders destroy the completed project and build another in it’s place?  Shouldn’t “some” economists logically then, encourage arson and bombings?  Just think of all of that economic stimulus! 


Broken Windows

Frederic Bastiat (1801-1850) would call this “The Broken Window Fallacy”. Bastiat used the example of a boy who accidentally broke the window of a baker’s shop. The towns folk gathered around and commented on how the money spent on replacing the window will be good for their local economy. After all, the glassier will receive the benefit of the money and spend it in the economy. The receiving business will pass that money on to the next and so and so on. What Keyensians call “The Multiplier Effect”. In fact, it was a good thing that the baker suffered the damage. The baker, on the other hand, set the record straight. He explained that instead of replacing a good that had already been produced and thus had already contributed the local wealth, he had planned on purchasing a new coat from the tailor with that money. The new coat would in turn add to the local wealth of the economy. Replacing a good already produced only gives a short term gain to the receiver of the money. The economy as a whole benefits in no way since the scarce resources had already been employed in making the first window. Employing those same resources again to replace a good that had already been produced actually subtracts from the overall wealth of an economy.

Bennett argues against Bastiat by saying,

“When something is destroyed you don’t necessarily rebuild the same thing that you had. You might use updated technology, you might do things more efficiently. It bumps you up,” says Mark Skidmore, an economics professor at Michigan State University. “Disasters help people think about things differently.”

This might fly in a zero transaction cost world, but we live in a reality where transactions do have a cost. Who pays for all these upgrades? Should the baker then, in Bastiat’s example, upgrade to triple pain UV resistant glass? He would most definitely pay more for the “bump up”. How does that benefit the baker? Keyensians would say that the baker doesn’t pay out of pocket for the new window, he has insurance.  But at their own peril, they ignore secondary effects and long term consequences. The payout of funds from an insurance pool effects many participants, causing their premiums to increase and thus subtracting from the available capital to invest in real economic wealth. Sure, the baker has a new window that might save him $2.00 on his next power bill, but how does that add to the wealth of the economy as a whole? It doesn’t. If the baker wanted to upgrade to a newer type of glass, he should invest his own capital. By dispersing the costs, socially, only creates a moral hazard by killing the incentive to minimize risk. The obvious example being the government’s backed mortgage policy that led to the housing crisis in 2008. 


The Misuse of Creative Destruction


The article allows for a couple of paragraphs which explain the opposing position,

Don Boudreaux

To critics of this line of thinking, the problem is that it is, at best, a partial picture. It ignores, they argue, the fact that the money and labor that go into post-disaster rebuilding are simply being redirected from other productive uses.

“If you’re a carpenter, a trash remover, a physician, you may be made better off, but the things that those producers would have otherwise produced are not going to be produced,” says Donald Boudreaux, an economics professor at George Mason University. “Over any reasonably relevant period of time, society is not made wealthier by destroying resources,” he adds. If it were, “Beirut should be one of the wealthiest places in the world.”

No argument there. As was stated above, destroying and replacing things doesn’t make anyone richer. Plant a garden, ripped it all out and plant a new garden. How is that leaving you better off?

Bennett attempts to quote the psuedo-Austrian economist Joseph Schumpeter,

In this model, disasters perform the economic service of clearing out outdated infrastructure to make way for more efficient replacements – Mother Nature’s contribution to what the Austrian economist Joseph Schumpeter famously called capitalism’s “creative destruction.” 

This is the classic Keynesian way of taking Schumpeter out of context. The term “creative destruction” has

Joseph Schumpeter

nothing to do with destroying any goods or property.  Creative destruction describes the process by which consumers choose a new good over an older good. An example being the word processor over the typewriter. Typewriter manufacturers and their employees suffered after the choice consumers made by switching to the word processor. It also applies when new technologies or production techniques are being brought on line. These more productive and cost effective technologies reduce the overall cost and price of goods produced. This benefits consumers but harms those who jobs were destroyed in the new process of production. An example would be painting robots replacing workers who once hand spray painted automobiles in the production process. These displaced workers must find new employment, train for the new technology or change occupations altogether. But again, this is a classic maneuver of the left. By hijacking a word or term and changing it’s true meaning, they use this new definition to explain away an otherwise bad idea.

A Disaster Planned Economy

Bennett continues to explain that by having nature force the hand of governments and business owners, the long term benefits of having a newer infrastructure outweigh the short term catastrophic results of a disaster. In other words, by having nature centrally plan the economy instead of rational consumers and entrepreneurs, we would be left better off. The economists that he relies on make no distinction between a natural disaster or destruction brought on by warfare.  I guess a tornado or artillery barrage would leave an economy better off than real human beings who actually interact and make purposeful decisions. Brilliant.

He concludes by stating that it would be better in a disaster that no lives would be harmed. If only nature would spin up a sort of anti-neutron bomb kind of storm where only buildings were destroyed and not people. An imaginary economic position that he sums up with an even more egregiously imaginary disclaimer. He tells all of this only to conclude that natural disasters are bad because they kill people. The destruction of property – not so bad. Pure genius!


Conclusion


It is pretty simple to understand that in no way do disasters, man made or natural, benefit an economy. If they did we would call them “blessings”. By reallocating scarce resources to replace that which had already been produced or built is not economizing. The idea that natural disasters give an economy long term benefits by replacing old stuff with new stuff, makes about as much sense as “Cash for Clunkers”. Central planning, by governments or nature, misuse resources and harm, not help, an economy. Only consumers and entrepreneurs making purposeful and rational decisions on how to employ resources yields the best economic outcome. Economies survive and grow in spite of central planning, not because of it. How much more growth could we have without all of this economic mischief? 







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One thought on “Are Disasters Good for the Economy?

  1. Pingback: Are Disasters Good for the Economy? | The Libertarian Liquidationist

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