Are Disasters “Good” for the Economy?
This summer Americans watched as Hurricanes Harvey, Irma, and Maria took lives and left devastating destruction in Texas, Florida, and Puerto Rico respectively. In such times of horror, it’s understandable that many would want to look for a silver lining. That’s what New York Fed President William Dudley attempted to offer when speaking to CNBC recently.
After acknowledging that these disastrous events and the toll they would take on those affected, Dudley said that, while the disruption of commerce and rise in prices associated with these storms have an immediate negative impact on the economy, “Those effects tend to be pretty transitory.” He went on to say, “The long-run effect of these disasters unfortunately is it actually lifts economic activity because you have to rebuild all the things that have been damaged by the storms.” While that logic might make sense to some, other economists and observers take issue with this line of thinking, sometimes referring to it as the “broken window fallacy.”
As Reason explains, the term “broken window fallacy” comes from French economist Frédéric Bastiat who debunked a common theory of the time that a son breaking his father’s store window actually spurred economic activity as it would require him to hire someone to replace the glass. From there the glass worker might spend his money on another good or service, with subsequent transactions taking place down the line. However Basitat noted that the fatal flaw in this theory is that it doesn’t take into account what the initial shop owner might have done with the money had he not needed to replace his window. For example, shifting to modern day and increased scope, a business owner who may have been planning an expansion (which could lead to new jobs and wealth) but is instead forced to spend money to rebuild does little good for the economy.
Along that line, Forbes contributor Amir Jina argues that the long-term economic effects of these hurricanes are decidedly negative. He writes, “Storms like Harvey and Irma can lower the long-run growth of the United States, effectively rewinding our economy and leaving its imprints for up to two decades. That’s because, if these hurricanes had not made landfall, the billions of local, state and federal taxpayer dollars that will now rightly go towards the recovery efforts in the form of federal emergency aid and other public services would have gone elsewhere to grow our economy.” Furthermore Jina points out that unemployment in areas affected by Hurricane Katrina some 12 years ago is still higher than it was before the storm hit — the result of many small businesses failing to bounce back. In turn, during such hardships, safety net programs like unemployment and Medicaid are spread thin. To prevent a similar outcome post Harvey, Irma, and Maria, Jina also suggests that lawmakers not only focus on relief packages with infrastructure rebuilding but also on generating incomes.
While it might be comforting to think that these devastating storms we’ve seen this summer might actually lead to some economic good, that might not be the case — at least not in the way that William Dudley claims. That said, it’s impossible to guess how things might have turned out had these storms not occurred, making it difficult to disprove the “broken window” theory once and for all. However what’s far more important that arguing economic theory in the wake of these disasters is to ensure that those affected are able to get back on their feet and hopefully come out even better off than before.