The economics of hurricanes

First Published: 2011-09-02

"In the short run, my view is that Irene is going to inject an economic stimulus."

The quote above is from a leading Bahamian businessman in reference to the damage caused by Hurricane Irene.

The "Broken Window" story in Henry Hazlitt’s Economics in One Lesson" illustrates the fallacy in the leading businessman’s erroneous assumptions.

The businessman is right with his first conclusion. The hurricane damage may mean more business for construction firms but for the homeowner it is a loss because the money for repairs to his house is no longer available for other uses.

So instead of replacing his old car the money saved for that purpose is required to restore his house to its pre hurricane condition. There is no gain for the homeowner.

Nor has new "employment" been added. The businessman was thinking only of the immediate parties involved in restoring the property; the homeowner and the construction firm. He has forgotten the loss if business to other parties – not involved in hurricane repairs.

Overlooked are the parties that could have benefited had the insurance money and required deductible been available for new capital expenditure.

"Seen" is the rebuilding but "unseen" is the purchase of a new T.V., car, house or whatever, precisely because it will not be purchased.

Buy your copy of Economics in One Lesson online here…

As Professor Steve Horwitz pointed out for the Foundation for Economic Education (FEE) this week:

"The inability to imagine the unseen is the source of a great deal of bad economics. For example, many observers claim the hurricane will create jobs, and they are right. However, creating jobs is not the same as creating wealth if those jobs are just cleaning up the mess from a disaster. And the same goes for creating jobs through government stimulus programs and the like: The path to prosperity comes from reducing the amount of labor needed for what we currently produce so we can free it to produce other goods we’d like to have but can’t yet efficiently produce. This is just another way of seeing why having to devote labor to cleaning up a mess is a loss in wealth, not a gain."

"We’ll never put a stop to natural disasters, but if people imagine the "unseen", it may be possible to correct disastrous economics."

Enjoy this brief video, based on Frederic Bastiat’s essay, What Is Seen and What Is Not Seen, below:

Help support The Nassau Institute