No, Natural Disasters are Not Good for the Economy

Wealth is not created by destroying things.

Boats are partially submerged in the wake of Hurricane Irma, Monday, Sept. 11, 2017, in Key Largo, Fla.

By Published on September 11, 2017

Every time there is a natural disaster, old economic fallacies make their appearance. And they are usually always the same. In particular, the argument that a natural disaster is good for the economy. This should make little sense.

Wealth is not created by destroying things. A natural disaster destroys wealth, doesn’t create it. I doubt anyone affected by a hurricane would argue that he is better off after the natural disaster than before.

A Misreading of GDP

The argument that an event such as a natural disaster is good for the economy rests in the positive impact seen in GDP (as is argued) after the natural event. If GDP increases, then the economy is doing better.

But this is a misreading of GDP. This variable is a flow of wealth, it is not a stock of accumulated wealth. It is possible that wealth creation (flow) increases at the same time the stock of wealth is decreasing. And this is what happens during a natural disaster.

This is just another case of a too common fallacy in economics.

Imagine that someone’s house caught fire and burnt down. This person decides to start working extra hours to increase his income and be able to buy a new one. The extra hours makes his income (GDP) increase. But his situation is considerably worse because he lost his stock of wealth (remember Bastiat’s broken window fallacy?). Arguing that a natural disaster (or a war, etc.) is good for the economy is like arguing that this person is better off because he has to work extra hours to recover his loss.

This is just another case of a too common fallacy in economics. We know that if the economy is doing better, the result will be better GDP and unemployment indicators. But from observing a better GDP and unemployment indicators we cannot, and should not, conclude that the economy is doing better. More important than observing what is happening to GDP is understanding why it is changing its behavior.

It could be argued that one of the problems of the Keynesian view of the world is the focus on what happens to output and unemployment rather than why these variables are moving. Not surprisingly, we get to the conclusion that going to war (or having a natural disaster) would be a good way to achieve full employment.

 

Reprinted from Notes on Liberty.

Nicolás Cachanosky is an Assistant Professor of Economics at Metropolitan State University of Denver, a co-editor of the journal Libertas: Segunda Época, and the manager of El Hub Económico, an index of Argentine economic series. He is a macroeconomist with interests in business cycles, monetary theory and policy, and comparative institutions.

This article was originally published on FEE.org.

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  • Nobody Specific

    Right the nation as a whole is hurt by these disasters. The effects on regions and individuals can be quite a bit different however.

    Hurricane Andrew was a good example of this. FL experienced massive destruction 25 years ago from that. FL isn’t its own separate nation though, massive flows of federal dollars went to rebuild it and in the process they wound up with lots new infrastructure that they very much benefited economically from having especially during the turn of the century digital explosion.

    I suspect the same thing will happen again. I don’t mean to suggest we should not spend federal monies helping FL recover just that because they don’t exist in an economic vacuum they actually can in some cases locally gain from ‘the broken windows’ so to speak.

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