Hurricanes and Keynesian economics

Challenging Keynesian dogma - common sense for most non-economists.


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Hurricanes Do Not Have A 'Silver Lining'

Zero Hedge

31 October, 2012

It didn't take long for mainstream economists to provide us with some inane commentary regarding the latest natural catastrophe. Allegedly, the massive destruction of wealth hurricane 'Sandy' will leave behind has a 'silver lining'.

The WSJ for instance reports (under the heading 'Hurricane Sandy could boost GDP growth'):

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It’s hard to assess the economic damage of a storm that hasn’t yet passed. But some economists predicted Monday that, barring a catastrophic event, Hurricane Sandy would slow growth in the short term but have a negligible impact on, and possibly even boost, fourth-quarter growth

“While natural disasters take a large initial toll on the economy, they usually generate some extra activity afterward,” Moody’s Analytics economist Ryan Sweet wrote on the firm’s website Monday. “We expect any lost output this week from Hurricane Sandy will be made up in subsequent weeks, minimizing the effect on fourth quarter GDP.”

Jason Schenker of Texas-based Prestige Economics said hurricanes like Sandy usually lead to a bump in economic growth, mainly through stronger retail sales. In a note to clients, he cited to “the last minute run to hardware stores and supermarkets, or after-the-storm replacement of furniture, windows, cars, and other damaged durable and non-durable goods.” He said that, barring major damage to infrastructure in the mid-Atlantic region, Sandy will likely help retail sales in November.

In an earlier version of this report, the WSJ at least still deigned to mention that:

„The hurricane will, of course, cause a loss of production and wages, the size depending on the magnitude of the damage and the length of the disruption. The region in Sandy’s path along the East Coast has a GDP of about $10 billion a day.“

(emphasis added)

They make it sound as if nothing especially pernicious had happened. Let us leave aside that it may perhaps have been appropriate to say a word or two about the loss of life the hurricane has caused. Even so, if anything, this would be yet another good opportunity to question the value of GDP statistics.

The loss of wealth the hurricane has inflicted is very real; the wealth destroyed by it is most definitely gone. GDP does however not measure the existing stock of wealth and the impact the hurricane has on it. It measures the annual flow of wealth creation (although we must stress that the statistic nonetheless remains deeply flawed and can definitely not be accepted at face value), but it tells us nothing about existing wealth or its destruction. Maybe they should at least have mentioned that?

Certainly companies will try to make up for lost production and the dwellings and infrastructure that have been damaged by the hurricane will be rebuilt. This rebuilding activity is then recorded as an 'addition to GDP'.

Suppose though there had been no hurricane. Then all the resources that must now be expended on rebuilding what it has destroyed would be available for other uses. In that event, it would indeed be possible to create additional wealth. The hurricane has rendered us poorer by precisely what it has destroyed – the rebuilding activity is merely undertaken to catch up to the status quo ante.

The statement about the 'bump in retail sales' that will 'boost GDP' is just as absurd. If people engage in panic buying ahead of the hurricane, then this represents demand for consumer goods that has been pulled forward; even in terms of GDP statistics this seems hardly relevant, as future consumer demand will be commensurately lower.

The Keynesian Fallacy at the Core

 

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Why is it that modern-day economists always seem to insist that the destruction natural catastrophes and wars bring about is really a 'good thing' economically? We believe the main reason behind this stance is the unquestioned acceptance of one of Keynes' great fallacies: namely the idea that all economic activity – even unproductive activity – is somehow 'good'.Keynes for instance famously advised that governments could battle recessions by paying people to dig ditches and then fill them up again. He also published variants of this train of thought, as e.g. in his references to the joys and advantages of pyramid building. As Paul Cantor remarks on this:

„Lord Keynes's daffy paean to the power of pyramids has been something of an embarrassment to his followers, but, far from being uncharacteristic of his thought, this passage actually goes right to its heart. It is after all just another way of Keynes saying, "I never met a government expenditure I didn't like."

(emphasis added)

Naturally, if it were really true that we could create economic progress by breaking windows or digging ditches (we will admit that pyramids at least render what one might term 'monument services', even if the expense seems hardly justified by this), then the government should pay half the population for digging ditches and hire the other half to wreak wanton destruction. Some time later, everyone could be employed in rebuilding what has been destroyed. We'd have no unemployment and we'd have 'GDP growth', but would this make any sense?

It is the very same with the prosperity allegedly provided by war  (readers may recall that e.g. Paul Krugman was recently pining for a fake war with alien invaders, so as to spur deficit spending).

As Ludwig von Mises said about so-called 'war prosperity':

„War prosperity is like the prosperity that an earthquake or a plague brings. The earthquake means good business for construction workers, and cholera improves the business of physicians, pharmacists, and undertakers; but no one has for that reason yet sought to celebrate earthquakes and cholera as stimulators of the productive forces in the general interest.“

Evidently Mises didn't have the opportunity to encounter the mainstream economists infesting the world in the 21^stcentury. As we have seen after the tsunami that devastated Japan, they do in fact celebrate earthquakes as 'stimulators of the productive forces in the general interest' – the financial press almost immediately reported on economists gushing about the 'boost to Japan's GDP' the tsunami would bring about.

They forgot to mention that 'GDP' is obviously not a useful measure of wealth and welfare (nonetheless, the usual suspects were happy; Paul Krugman seems to imply that Japan could really use another tsunami, given how nicely 'GDP' has grown shortly after the last one). One suspects that these economists would probably see the 'silver lining' in a cholera epidemic too.

Hurricane Trivia:

 

This week was the first time since 1888 that the New York Stock Exchange was closed two days in a row due to really bad weather.