August 29 2011
Hurricane Irene Won't Improve the Economy
I appreciated Libby's post last week about Paul Krugman, Google+, and the D.C. earthquake. It was funny to see many people jump on the bandwagon and try to argue that a more destructive earthquake would've left people better off because of the additional spending ("and hence economic growth") that would have resulted from the expense of repairs.
What's NOT funny is that yesterday, in Politico, writer David Boak seriously suggested that Hurricane Irene's destruction would be a good short-term stimulus for the economy:
The power outages and shuttered airports may stop the engines of commerce for several days, but Hurricane Irene might have provided some short-term economic stimulus as billions of dollars will likely be spent to repair the damage to the East Coast over the weekend.
Mark Merritt, president of crisis-management consulting firm Witt Associates, said the hurricane should provide a bump in economic activity over the next few months.
"After a disaster, there's always a definite short-term increase," Merritt said. "There will be furniture bought, homes repaired, new carpet, new flooring, all the things affected by flooding."
I'm sure that some companies on the East Coast who deal in home repairs will see a boost in business this month. But that doesn't mean that the economy is going to improve, or that somehow we are all going to be better off. In fact, natural disasters mean the opposite; we are worse off.
Events like this might mean that people participate in some exchanges they wouldn't have otherwise made (like getting new flooring for a flooded basement), but that doesn't mean that new wealth is created. Money exchanges hands, but then houses, yards, and property end up like they started (rather than building new stuff). And there's opportunity cost: What would Irene victims have done with that money instead? Taken a family vacation? Hired a tutor for Susie? Saved it for college?
In one of my favorite EconStories Youtube videos, the Hayek character points out that "Jobs are a means, not the ends in themselves, people work to live better, to put food on the shelves, real growth means production of what people demand; That's entrepreneurship not your central plan."
People who work in repairs are selling an important service, but clearly if their business was the only measure of a healthy economy, we should all act like the British youth who wrecked havoc on their own towns. Then we could create all kinds of stimulus by tearing our own stuff apart... You can see how flawed this idea is. We all want to work to live better, not just to stay busy.
My heart goes out to all of the families in my home state of North Carolina (and in several other states) affected by the destruction and frustration of this storm. Picking up after Irene - a time-consuming and resource-consuming activity - ultimately doesn't leave them or the economy better off.