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Thursday, September 08, 2005

Hurricane Damage & Economic Lunacy

Walter Williams:
"According to a couple of poorly trained economists, there's a bright side to Hurricane Katrina's destruction. J.P. Morgan senior economist Anthony Chan believes hurricanes tend to stimulate overall growth. As reported in 'Gas Crisis Looms' (Aug. 31, 2005), written by CNN/Money staff writer Parija Bhatnagar, Mr. Chan said, 'Preliminary estimates indicate 60 percent damage to downtown New Orleans. Plenty of cleanup work and rebuilding will follow in all the areas. That means over the next 12 months, there will be lots of job creation which is good for the economy.'

Professor Doug Woodward, of the business school at the University of South Carolina, has the same vision. Professor Woodward said, 'On a personal level, the loss of life is tragic. But looking at the economic impact, our research shows that hurricanes tend to become god-given work projects.' Within six months, Professor Woodward 'expects to see a construction boom and job creation offset the short-term negatives such as loss of business activity, loss of wealth in the form of housing, infrastructure, agriculture and tourism revenue in the Gulf Coast states.'

Let's ask a few smell-test questions about these claims of beneficial aspects of hurricane destruction. Would there have been even greater economic growth and job creation for our nation had Hurricane Katrina not only destroyed New Orleans, Mobile and Gulfport, but other major metropolitan areas along its path, like Cincinnati and Pittsburgh, as well? Would we consider it a godsend, in terms of jobs and economic growth, if a few more category 4 hurricanes hit our shores? Only a lunatic would answer these questions in the affirmative."
Right on Walter. The hurricane destroyed an enormous quantity of wealth and assets, not even mentioning the loss of life which also means a loss of productive resources. Re-creating the wealth and the assets is simply replacing what people in the economy already had achieved through their own productivity.

Could there be a grain of truth to Mr. Chan’s idea that overall growth could increase as a result of hurricane Katrina? Obviously the jobs he spoke about would only be temporary and have little (most likely no) positive impact on growth over any significant time frame. If hurricanes do increase growth it must do so through other means. To put this in more economical terms: is there anything a hurricane could do that would be considered an economic good?

The idea came to me that, maybe a hurricane’s destructive force could be a natural demolition team. That is, there is a cost to demolishing a building that a firm would have to pay to build a more efficient building. If a hurricane came along and demolished the building, the associated cost of demolition would have been saved. Thus a hurricane could aid in efficiency and substantial growth.

But, the potential scale of destruction that a hurricane, as we have seen, is far greater than just the destruction of a single building. It is possible that a hurricane could destroy an inefficient highway system. Over the years, even the most efficiently designed highway cannot keep up with changes in technology and the changing population of the city. The hurricane would have the added benefit of destroying the outdated highway system in a day, instead of months or years.

Of course such ‘creative destruction’ would be small (if significant at all) compared to the billions spent replacing assets, doesn’t compare to the loss of life.
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