Economy

Opinion: No, natural disasters like Irma aren’t good for the economy

Does this look like good economic policy to you? A car port awning sits on U.S. 17 after being ripped off by Hurricane Irma on Monday in Bowling Green, Fla. (AP Photo / Chris O’Meara)

Once the storm passes, one inevitability is the calculation of the costs of rebuilding the affected areas. And another is the argument some people will make that this rebuilding is actually a kind of economic stimulus.

Which is absolute nonsense.

I was getting ready to write a post about this when I saw Jon Gabriel had beaten me to it at USA Today. So I’ll let him start the rebuttal:

“A long time ago, a French guy named Frédéric Bastiat shattered this kind of nonsense, calling it ‘the broken window fallacy.’ In his essay ‘That Which Is Seen, and That Which Is Not Seen,’ Bastiat showed that destruction never boosts the economy.

“He imagined a boy broke a window. (Something I excelled at as a kid — sorry, north Phoenix.) Now his dad needs to pay to replace it. Amateur economists in the neighborhood tell the dad that’s a tough break, but note how great it is for the local glassmaker. Why, he would go out of business if annoying kids (such as yours truly) never put a baseball through a window.

“In fact, the economic growth would be even better if they sent me around to smash the windows of every house on my street.

“True, the glaziers would make a few extra bucks whenever I moved into a neighborhood. That’s the economic impact that is seen.

“But the impact that isn’t seen is the fact my long-suffering dad can’t spend that money on a new guitar, a dinner out, or counseling for his petty vandal of a son.

“Moreover, replacing something that has already been purchased is a maintenance cost, not a purchase of truly new goods, and maintenance doesn’t stimulate production.” (link original)

That’s exactly right. Another way to put it is: You don’t boost the economy by destroying wealth. The people who lose property due to hurricanes or other natural disasters don’t simply gather up money off the ground and make the repairs or replace what’s gone. They have to dip into savings, borrow money, file insurance claims, and so on — taking wealth they’d accumulated to replace another form of wealth they’d accumulated. Better to have savings and insurance than not to have them, but having to use them to rebuild what we already had neither builds more wealth nor puts it to more productive use — which is ultimately how we grow the economy. Even to the extent it stimulates consumption, it’s really just shifting consumption from the future to the present or from one use to another, as Gabriel, channeling Bastiat, explained.

Think of it this way: If it really was good for the economy to have to rebuild a flooded or leveled city, you’d think someone would suggest evacuating and then bombing a major city every now and then. And yet, no sane person suggests something along these lines is a good thing. Well, almost no sane person.

This entire discussion highlights just how far Americans have veered from sound economic thinking. We have become fixated on consumption as a measure of economic vitality and source of economic growth. But growth actually comes from accumulating wealth and putting it to more productive use. And we have gotten away from that. If you want to know why middle-income families have become economically stagnant, one glaring reason is that economic policy and even conventional wisdom have overwhelmingly favored consumption over savings over the past decade or two. Yet, intuitively, we all know that we don’t consume our way to wealth — even if some of the trappings of heavy consumption might give off the appearanceof wealth.

Saving money, on the other hand, not only helps individuals accumulate their own wealth. It provides pools of money for entrepreneurs to borrow against, seeking new and more productive uses of that wealth and providing returns for borrower and lender alike (not in every single case, of course, but in the aggregate). But even our investments don’t mostly work in quite that way these days: Arguably, the overemphasis on equity investing, as opposed to more traditional savings, shifts the risk and reward in ways that end up stunting economic growth.

Neither major party’s economic platform of late reflects this reality. Democrats seek more income redistribution to shift consumption from one end of the income scale to the other, as if growth depends on who spends a particular dollar. Republicans still repeat the mantra of lower taxes, but more and more they do so from the premise that … growth depends on who (in this case, government vs. private citizen) spends a particular dollar. While it may be true that much private spending is more efficient than much government spending, the GOP has largely forgotten the concept of keeping the tax burden low so that all Americans are better able to save money, build wealth and thereby grow the economy. With both parties preaching the mantra of consumption first, it’s no wonder we’ve lost our way.

While Hurricanes Harvey and Irma may not actually stimulate economic growth, maybe they can stimulate some economic understanding.

[“Source-kylewingfield”]

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Loknath Das

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