Hurricane Irene is bearing down on the east coast of the United States, and the economic outlook is not encouraging.
The Wall Street Journal called the hurricane an "economic worst-case scenario." The Wall Street Journal also cited a study by Munich Re which said that at least $100 billion in insured losses from an East Coast hurricane could ravage an already unstable economy. This figure, he added, does not include loss of productivity or loss of human life.
What's more, because New York City is extremely densely populated (you've seen the borderline-line scary roommate situations), the impact of a major hurricane, economic and human, could be devastating. A hurricane capable of 100 mph winds could raise the level of New York Harbor by 10 to 15 feet, ravaging neighborhoods, drowning subways in saltwater, and taking down power lines.
The article, written by Elvira Veksler, stands out to me because there is no mention of the supposedly stimulating effects of natural disasters. That's a good thing.
It's often - incorrectly - argued that natural disasters help an economy because it forces people to begin repair work which encourages people to spend money. But the problem with that theory is that it ignores the fact that natural disasters kill people and destroy assets. Yes, natural disasters drive people to replace those assets, but that spending drives people to spend less on other things. They do not stimulate an economy.
Today I read:
The power outages and shuttered airports may stop the engines of commerce for several days, but Hurricane Irene might have provided some short-term economic stimulus as billions of dollars will likely be spent to repair the damage to the East Coast over the weekend.
If disasters were good things, we'd expect people to destroy their own property or we'd expect governments to bomb their citizens' property. How often do we see people destroying their stuff and, when we ask them why, they answer "Because it makes me better off"?
Disasters destroy assets and lives, and while we can't replace the lives, we can replace the assets. So people spend money to rebuild, money that would have been spent on other things and would have stimulated other industries. People may have gone to movies, or bought musical instruments, or new cars, or any number of other things. But nature forced their hands to spend on repairs.
So instead of stimulating spending in an economy, disasters merely redistribute spending that would have occured into the construction industry, not to mention the assets (wealth) that is destroyed by the disaster. This may be good for the construction industry, but it is not costless to society.
Like we profs like to tell our Principles of Econ students: "there is no such thing as a free lunch." There is also no such thing as a stimulative disaster.