As the East Coast prepares for the onslaught of Hurricane Sandy, some economists are predicting that widespread destruction might actually be a boon to the economy.
Dr. Peter Morici, a professor at the Smith School of Business at the University of Maryland and former chief economist at the U.S. International Trade Commission, wrote in a blog post at CNBC.com that although the hurricane might cause as much as $45 billion in damages, the economic gains for the construction industry might leave the economy better off than before.
“Disasters can give the ailing construction sector a boost, and unleash smart reinvestment that actually improves stricken areas and the lives of those that survive intact,” he wrote.
Morici predicted an economic benefit of $27-36 billion in reconstruction spending, $10 billion from modernized capital stocks, and $12 billion in business and consumer spending.
Not all economists agree with Morici’s claims.
“This is a story we hear after every disaster,” wrote Art Carden, an assistant professor of economics at Samford University and research fellow at the Independent Institute, in an email to The Daily Caller News Foundation. “What isn’t recognized is that using resources to rebuild parts of the East Coast has an opportunity cost. The labor and resources that will rebuild houses destroyed by Hurricane Sandy will be labor and resources that aren’t being used to patch up homes in the Southeast or on the West Coast.”
While it’s true that the hurricane may benefit production in certain sectors, it does so only at a cost to the economy as a whole, said Carden.
“The hurricane doesn’t lead to new production, but it might lead to production in different places,” he wrote.
The idea that the destruction wrought by natural disaster benefits the economy is called the broken window fallacy, a name coined by the French economist Frederic Bastiat in 1850. When a shopkeeper’s window breaks, the window-maker makes a profit. But since the shopkeeper has to spend his money repairing the window, he can no longer spend it on clothes, or food, or other items. Since the money would be spent regardless, the net effect on the economy is one broken window.
“It is an age-old fallacy to suggest that destruction–such as that from Hurricane Sandy — can be ‘good for the economy,’” wrote Robert Murphy, an economist and senior fellow at the Pacific Research Institute, in an email to TheDC News Foundation. “If people are forced to rebuild after a hurricane or other disaster, they expend labor and other scarce resources merely to get back to where they were originally. If your neighbor is lounging at his pool and you set his house on fire, he will definitely ‘work harder,’ but you certainly haven’t made him richer.”
For Morici, the hurricane offers the chance to improve upon inefficient uses of land and resources.
“Consider a restaurant with inadequate patronage-its owner invests the insurance settlement in a new more attractive business,” he wrote. “On the shore, older smaller homes on large plots are replaced by larger dwellings that can accommodate more families during the summer tourist season.”
This analogy fails, according to Carden.
“[The restaurant] will suffer further when its wait staff and kitchen workers all leave to take jobs in construction,” wrote Carden.
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