(This article was featured in our print issue, which was published on Nov. 10, 2012.)
In the wake of Hurricane Sandy, much of the northeast lays in ruins. Homes have been destroyed, neighborhoods have been flooded, and lives have been lost. Economic damages have been estimated at $20 billion. My heart goes out to all affected by this disaster.
However, there may be a silver lining to all this…
Despite the misfortune brought about by the hurricane, this disaster could be exactly what our economy needs right now. Let’s take a look at what the aftermath of Hurricane Sandy will be in the coming weeks:
First, relief efforts will be sent to to help those hit hardest by the disaster. The large majority of this will be government-funded. As a student of Econ 311 (macroeconomics) at Northwestern, I have learned that more government spending is what we need to bring economic growth up and unemployment down. On top of this, there is a mystical multiplier effect when the government spends money—every dollar spent by the government results in tens, nay hundreds, of dollars of money for the public!
After the initial disaster relief efforts have finished we will begin to see efforts to repair damages. Take broken telephone lines as an example. As I write, there are likely thousands of broken telephone lines scattered across the east coast. Each line must be repaired and, more specifically, must be repaired by someone. Each broken telephone line results in one more task for telephone line repair men. This means more jobs.
It gets better. Telephone line repair men don’t work for free; they receive wages for their efforts. After repairing the broken telephone lines, the repair men will have more disposable cash in their pockets. With this extra money they may choose to go out to a local restaurant. The income of the restaurant owner will go up, and he may choose to open another restaurant since business is now booming. This new restaurant will employ dozens of new workers, slashing unemployment and causing a rippling economic boom throughout the area.
Hurricane Sandy damaged far more than telephone lines, though. Cars, streets, houses, entire neighborhoods have been wiped out. For every destroyed car, one more will need to be purchased. For every leveled house, one more will be constructed. Not only will producing these goods create jobs, they will give both the auto and housing sectors of the economy terrific jolts.
When all is said and done, Hurricane Sandy will have made the east coast more prosperous than ever before. What first appeared to be a disaster will go down in history books as the event that took us out of the Great Recession.
I’m crossing my fingers that the midwest will be hit by an earthquake soon.
If something sounds fishy about all this, you might want to trust your intuition. What I have just described is a rendition of the Broken Window Fallacy—the idea that damaging events ultimately lead to increased prosperity. If this claim were true, then the correct policy prescription for America in times of economic turmoil would be to go around destroying property. While nearly nobody would think such a policy reasonable, many people (including famous economists) look at wars, terrorist attacks, and natural disasters through a clouded lens. Ideas such as “World War 2 brought us out of the Great Depression” are a direct result of such misguided thinking—focusing on what is seen, but not what is unseen.
As 19th century economist Frederic Bastiat explained in a timeless essay, destruction of an object such as a broken window necessarily leaves people worse off. Any resources, including money or time, that get spent on repairing the broken window are resources that would have been used to increase societal wealth had the window not been broken. Similarly, any resources that will be directed towards repairing the damage of Hurricane Sandy are resources that otherwise could have contributed to real economic growth.
The path towards economic prosperity is encouraging production, not applauding destruction.
In a broader context, focusing on the seen, but not the unseen has caused policymakers to make poor decisions throughout history. Protectionism, farm subsidies, bailouts, stimulus packages, even subsidized student loans are all measures that decrease the economic well-being of a society. Policymakers need only look at the long term and distributed effects of their actions to realize they are harming America, not helping her.
photo – Brian Birke