Hurricane economics

You might have thought it was a bad thing that Hurricane Floyd caused
loads of property damage, flooded whole towns, interrupted commutes, and
generally mucked everything up. This is a fair assumption. But it is one
to which economists are sometimes blind.

It never fails: after some natural disaster an economist pops up to
reassure folks that there is an upside. All the rebuilding that takes
place actually provides a productivity boost. The carpenters,
water-pumpers, roofers, and building suppliers all enjoy business they
would otherwise not have. The money they make will be spent on other
goods. All this new activity gives the economy a shot in the arm, and
even boosts GDP.

Lest you think I am setting up a Keynesian straw man, consider the
Wall Street Journal’s Sept. 17, 1999, story, “Hurricane Floyd May Leave
Robust Economy in Its Wake.” Marilyn Schaja, chief economist at
Donaldson, Lufkin & Jenrette Securities Corp. in New York, tells a
gullible journalist
that the storm “may actually give the economy a boost.”

“Despite property damage and unproductive hours in emergency
shelters,” the story goes on to report, “rebuilding and replacement of
goods apparently helped to buoy the local economies. Ms. Schaja expects
Floyd, which has steered clear of any major population areas, to leave a
similar legacy,
lifting annual GDP by 0.2%.”

Instead of weeping about Floyd, according to this logic, we should be
celebrating. Maybe we need more natural disasters, not fewer. Can
someone invent a machine that will flood all our towns and destroy all
our houses? Should we also cheer vandalism and mayhem in general? Maybe
the violence of the Indonesian military is actually good for East Timor.

Maybe, too, the destructive effects of taxation — a sure destroyer
of private property — are good for us too. Finally, if a hurricane is
good for the economy, what about the vast looting machine called the
federal government that extracts nearly $2 trillion from the private
sector every year?

The fallacy is easy to detect. You can’t just consider the money
spent on rebuilding. When calculating the costs of something, you have
to consider the alternative uses of resources. Instead of repairing your
storm-damaged roof, you might have saved the money for investment.
Instead of paying higher insurance premiums wrought by the storm, you
might have used the money to improve your standard of living. The cash
paid out for rebuilding is always a second best use of resources.

Economists call the failure to see this the “broken window fallacy,”
after a parable first told by 19th-century French economist Frederic
Bastiat and then retold by Henry Hazlitt in “Economics in One Lesson”
(1946). In the story, a boy throws a rock through the window, and the
onlooking crowds
debate the meaning of it all. The crowd concludes that it was actually a
good thing the glass was broken. They wallow in this fallacy until a
real economist shows up to confirm their first intuition that property
destruction always makes people worse off than they were before.

Once you discover this, you can dispense with a wide variety of
Keynesian policies. When resources are used for uneconomic purposes
(funding the welfare-warfare state, for example), there is no
“multiplier” that makes up for the costs of the initial destruction
(e.g. the taxes that were extracted to pay for the goods or services).
Government spending doesn’t “spur” economic growth; it only diverts
resources from more desirable to less desirable uses.

Sadly, the manner in which the GDP is figured tends to disguise the
costs associated with economic destruction. For one thing, you can’t add
and subtract what you can’t see, and most of the costs of a hurricane
(or a government) consist in goods not produced and services not
provided. In addition, the GDP only calculates money spent and resources
produced, even when there were better economic alternatives.

So the hurricane may cause the GDP to rise. But that is not the same
thing as causing productivity to rise. The GDP is a fiction created by
government statisticians, and it builds in a bias towards disguising the
costs of government and overcounting its benefits. For example, it
doesn’t count the
costs associated with taxes. No wonder the political elites like it so
much.

Hurricane Floyd not only produced property destruction, it also
unleashed totalitarian political sentiment. Every mayor and governor in
the affected areas went on television to denounce the supposed gougers
in the insurance, motel, and gasoline business who would use this
tragedy to raise prices. The truth is that natural disasters create
additional demand in the face of a short supply of a whole range of
goods and services. The price system is the market’s way of responding
to the new realities. Controlling prices and insurance premiums can only
increase shortages and prolong misery.

If it is real gougers we are looking for — people who would use
tragedy to advance themselves and their fortunes — look no further than
the political class. Bill Clinton used the occasion to grandstand about
the saving power of the feds, and his statements led to the largest and
most unnecessary
mandatory evacuation in the American history. Three million people were
tossed out of their homes to face grueling traffic without food or
water.

Are mandatory evacuations ever necessary? Only if we believe that
government is somehow capable of discerning risks to lives and property
that people themselves cannot see. Clearly, the experience with Floyd,
which didn’t come close to its terrifying billing by the government’s
weather predictors, demonstrates that they cannot. In a free country,
mandatory evacuations should never be allowed. People should be allowed
to decide for themselves whether to leave or stay.

In the end, it was government and not the hurricane that ended up
being the worst threat. And that threat is just beginning. The pork will
flow to all affected areas, swelling the size and power of political
establishments loyal to the Democratic Party. This is a discernible and
calculable threat,
one best met by a mandatory evacuation of that nest of looters we call
the federal government.