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Natural Disasters Don't Increase Economic Growth
Submitted by Frank Hollenbeck of the Ludwig von Mises Institute,
Hurricane season is nearly upon us, and every time a hurricane strikes, television and radio commentators and would-be economists are quick to proclaim the growth-boosting consequences of the vicissitudes of nature. Of course, if this were true, why wait for the next calamity? Let’s create one by bulldozing New York City and marvel at the growth-boosting activity engendered. Destroying homes, buildings, and capital equipment will undoubtedly help parts of the construction industry and possibly regional economies, but it is a mistake to conclude it will boost overall growth.
Every year, this popular misconception is trotted out although Frédéric Bastiat in 1848 clearly put it to rest with his parable of the broken window. Suppose we break a window. We will call up the window repairman, and pay him $100 for the repair. People watching will say this is a good thing. What would happen to the repairman if no windows were broken? Also, the $100 will allow the repairman to buy other goods and services creating income for others. This is “what is seen.”
If instead, the window had not been broken, the $100 may have purchased a new pair of shoes. The shoemaker would have made a sale and spent the money differently. This is “what is not seen.”
Society (in this case these three members) is better off if the window had not been broken, since we are left with an intact window and a pair of shoes, instead of just a window. Destruction does not lead to more goods and services or growth. This is what should be foreseen.
One of the first attempts to quantify the economic impact of a catastrophe was a 1969 book, The Economics of Natural Disasters. The authors, Howard Kunreuther and Douglas Dacy, largely did a case study on the Alaskan earthquake of 1964, the most powerful ever recorded in North America. They, unsurprisingly, concluded that Alaskans were better off after the quake, since money flooded in from private sources and generous grants and loans from the government. Again, this was “what is seen.”
While construction companies benefit from the rebuilding after a disaster, we must always ask, where does the money come from? If the funds come from FEMA or the National Flood Insurance Program (NFIP), the government had to tax, borrow, or print the money. Taxpayers are left with less money to spend elsewhere.
The economics of disasters remains a small field of study. There have been a limited number of empirical studies examining the link between growth and natural disasters. They can be divided into studies examining the short-term and long-term impact of disasters. The short-term studies, in general, found a negative relationship between disasters and growth while a lesser number of long-run studies have had mixed results.
The most cited long-run study is “Do Natural disasters Promote Long-run Growth?” by Mark Skidmore and Hideki Toya who examined the frequency of disasters in 89 countries against their economic growth rates over a 30-year period. They tried to control for a variety of factors that might skew the findings, including country size, size of government, distance from the equator and openness to trade. They found a positive relationship between climate disasters (e.g., hurricanes and cyclones), and growth. The authors explain this finding by invoking what might be called Mother Nature’s contribution to what economist Joseph Schumpeter famously called capitalism’s "creative destruction.” By destroying old factories and roads, airports, and bridges, disasters allow new and more efficient infrastructure to be rebuilt, forcing the transition to a sleeker, more productive economy. Disasters perform the economic service of clearing out outdated infrastructure to make way for more efficient replacements.
There are three major problems with these empirical studies. The first is counterfactual. We cannot measure what growth would have been had the disaster never occurred. The second is association versus causation. We cannot say whether the disaster caused the growth or was simply associated with it.
The third problem is what economists call “ceteris paribus.” It is impossible to hold other factors constant and measure the exclusive impact of a disaster on growth. There are no laboratories to test macroeconomics concepts. This is the same limitation to Rogoff’s and Reinhart’s work on debt and growth, and many other bilateral relationships in economics. Using historical data from the early 1900s, researchers found that as the price of wheat increased, the consumption of wheat also increased. They triumphantly proclaimed that the demand curve was upward sloping. Of course, this relationship is not a demand curve, but the intersection points between supply and demand. The “holding everything else constant” assumption had been violated. In economics, empirical data can support a theoretical argument, but it cannot prove or disprove it.
So what do we do if the empirical studies have serious limitations? We go back to theory. We know a demand curve is downward sloping because of substitution and income effects. Wal-Mart does not run a clearance to sell less output! Theory also holds that natural disasters reduce growth (i.e., the more capital destroyed, the greater the negative impact on growth).
More capital means more growth. Robinson Crusoe will catch more fish if he sacrifices time fishing with his hands to build a net. Now, suppose a hurricane hits the island and destroys all of his nets. Robinson could go back to fishing with his bare hands and his output would have been permanently reduced. He could suffer an even greater decline in output by taking time to make new nets. The Skidmore-Toya explanation is to have him apply new methods and technologies to build even better nets, allowing him to catch more fish than before the hurricane. Of course, we may ask, if he had this knowledge, why didn’t Robinson build those better nets before the hurricane? This is where the Skidmore-Toya logic falls apart. Robinson did not build better nets before the hurricane because it was not optimal for him to do so.
If a company decides to replace an old machine with a new one, among the primary considerations are the initial price of the new machine, the applicable interest rate, and the reduced yearly costs of operation of the new machine. Using net present value analysis, the company determines the optimum time to make the switch (a real option). A hurricane forces a switch to occur earlier than would have been optimal under a price and profit motive. The hurricane therefore created a different path for growth. The creative destruction would have occurred, but on a different, more optimal, timeline.
The same conclusions can also be drawn from manmade disasters. Contrary to what many Keynesian economists would have you believe, WWII did not grow the US out of the great depression. Capitalism did!
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Man made disasters like the auto industry? It takes the energy of 4000 gal of gasoline to make the average car. I f the car would last even twice as long as normal, that energy could be used to keep the price of energy down for the middle and under classes.
There are cases where disasters have resulted in massive economic benefits. In these cases the result of the natural disaster was for the populace to rise up and overthrow and oppressive government. The black plague started Europe on the way to the rennaisance. The earthquake in Nicaragua caused the overthrow of the government to great benefit. The destruction of Germany and Japan etc. Winston Churchill outlined this in his books: "The History of the English Speaking Peoples." Great disasters sometimes wipe out the weak, eliminate dependence on the government, and raise everyone's ire toward a weak and ineffectual government.
The US building codes are not designed to pretect occupants in natural disasters or provide for an economical installation. A concrete home would cost 1/3 the price to build but would be considered a military bunker and we can't just let wingnuts who elect to live in tornado alley live in concrete bunkers. Don't get me started on fire safety or water infiltration, good god why are they all built out of wood!
there are no opportunity costs in a fiat world. the hundred dollars that went to fixing the window will be printed again to buy a new pair of shoes. bastiat's theory only works in a world with finite and slow growing money supply constrained by the value of gold. in a fiat world, anything is possible. one can have everything but all fiat money systems collapse and you end up with nothing if it happens on your shift.
As long as resources to make windows and shoes, etc. continue to seem infinite as they have for the past 150-200 years Bastiat is wrong. When resource production eventually? peaks then the concept of scarcity comes back into play.
Why is it these Mises people argue for the concept of scarcity when it comes to broken windows but when it comes to peak resources they argue against the concept of scarcity to the point of talking about terraforming planets and shit?
If I spend $100 in cash right now, I won't be able to burn it for heat when the economy crashes.
You must not have that "technology known as a printing press" like the government.
It's sad that we have to keep deflating this argument, but people (I'm looking at you, Krugman) continue to spout it off as if it were somehow valid.
"Natural Disasters Don't Increase Economic Growth"
No, but world wars do after their over. Massive distruction leads to massive brebuilds.
In the case of a nuke war the roaches and insects win.
A natural disaster could theoretically increase economic growth.
Example:
Meet "Townsville", this town has been in economic decline for 30 years, most homes in this town are in shambles, the cost of demolishing these homes out-weighs the potential gains, a hurricane comes by tomorrow, and levels the town, a developer comes in, buys all the distressed land and builds a new housing and office complex in the area replacing all the old broken junky homes with new offices/homes/workplaces.
The cost saved in demolishing what needed demolishing anyway, provided a free capital improvement.
That being said, such a scenario is far from a practical/regular occurrence.
A natural disaster could be a GOOD thing, if it happened in the right area, an area that needed DEMO work anyway! but thats about the only plausible way it could be a plus.
As always, the only real solution to economic problems is:
Slash Taxes for everyone to a trivial amount (1~3%) instead of 60% of income like we have now.
Slash real-estate taxes
Slash Sales Taxes
Force Banks to write down debts and cap interest rates
Fund government by selling savings bonds to the public, instead of taxing the public. (5$ for a 10$) bond), and instead of making the government pay the 5$ difference in interest, just make the note "money itself" on the maturity date.
"Note redeemable for all debts public and private for full face value upon or after maturity by law" there you go! problem solved!
But Krugman said an pretended alien attack would do. Let's look for exaterrestial life.
"A natural disaster could be a GOOD thing, if it happened in the right area"
Blow up a couple of nukes below Yellowstone or the fault off California, you'll have your natural disasters.
We already tried bulldozing NYC, with implanted nuclear devices detonated in sequence in harmony with structural steel antennas. The point is to make it all look like an accident, or once-in-a-lifetime thing, or we-didn't-see-it-coming, or black swan event.
I bet Detroit would look a lot better if it had regular hurricanes or monsters. All of the buildings eventually get knocked down, but the vacant ones stay knocked down. Quite a few studies have shown that vacant buildings are a huge contributor to crime.
WTF is this false religion called growth about? Stop the madness!
The misleading GDP as an indication of prosperity? What does GDP tell us? Nothing, it is the sum of the country, it has no relation whatsoever with how average Joe is doing, or how many people actually have living wages or even a job for that matter.
If exporting factories fire all workers and replace them with 2 times faster robots boosting their export, the GDP goes up, while things in reality got worse.
This GDP religion is a totally false and misleading indicator.. Misused again and again, like the growth meme. If we didn't use this ponzi system, there would not be no need for this fanatic growth nonsense in a finite world.
http://www.neweconomyworkinggroup.org/visions/living-wealth-indicators/g...
Who cares if it contibutes to economic growth? War, natural disaster, and divorce are 3 of the biggest contributors to GDP and GDP is the scoring system we use. I've never heard anyone ever debate whether a field goal is only half the effort of a touchdown. That's because reality doesn't matter. A field goal is worth half a touchdown based on the agreed upon scoring system and that's that.
You forgot about PAT's (or 2-point) conversions, just saying.
More proof it is time to rethink the system. Sustainability means planning our future in a way that we do not set ourselves up to crash and burn at some future date. Long-term planning has not been something politicians excel at or are even good at.
Our system is geared at getting politicians reelected and fulfilling the most pressing needs of today. Things like profit, greed, and quenching our unrelinquishing desire for growth are placed in front of longer term issues and needs. Mapping out a logical and sustainable long-term plan requires delving into some rather hefty philosophical questions like what brings real happiness. More on this important topic in the article below.
http://brucewilds.blogspot.com/2014/04/planning-sustainable-future-for-m...
The parable of the broken window is silly. The $100 would *not* have necessarily been spent if it wasn't used to fix the window. It might have spent its time insulating the bottom of someone's mattress. (A symmetrical argument applies to the repairman, the repair only had a real cost if he was operating at capacity, and had to forego some other repair to make this one.)
You can't consider it in a vaccuum. The parable is only proves the point if both actors are at the edge of their constraint.(household budget and workload)
I respectfully disagree with your premise. If saved the money might be later used to pay a n bill that might otherwise go unpaid ar used for a more positve purpose.
I know you are not suggesting we break all the windows so even more repair companies are formed.
I'm just suggesting that the parable proves nothing because depending on circumstances, it could help or hurt the economy.
While the money in the mattress might *later* be used to pay a bill, the money would be idle in the interrim. And it would be equally true that the repairman could use the money he received from the repair to pay a bill of equal value. Thus in the event of the repair we have two transactions( the repair and a bill), whereas in the case absent the repair we would have only one transaction(the bill pay). Each dollar ends up doing more in the world where we have the repair. (higher velocity of money)
What matters for whether the broken window helps or hurt is whether the repair comes at the expense of another repair or if the repairman would have been idle absent the repair. In other words, the amount of economic slack is the crucial variable determining the quality of the outcome.
Hurri-what?
Here are the predictions and a chart of hurricane activity since 1900.
http://wattsupwiththat.com/2014/05/22/noaa-predicts-near-normal-or-below...
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"The same conclusions can also be drawn from manmade disasters. Contrary to what many Keynesian economists would have you believe, WWII did not grow the US out of the great depression. Capitalism did!"
Well, it was really increasing throughput of energy and materials. Note that the oil extraction curve and coal extraction curves were already steadily increasing and continued increasing for quite a while.
It sickens me to hear people talk about how war will be good for the economy. The catalyst for war has not been diminished as many people have hoped it would once the world matured. National pride, political agendas, religious and ethnic hatreds are some of the biggest roadblocks to world peace.
Often we seem to forget as we look back to World War II and past a dozen "lesser Conflicts" that peace has been the exception rather then the rule for hundreds and thousands of years. The true reality is that across the world few mothers want to see their children killed and most farmers want to be left along to raise their crops and earn a living. More on the subject of war as a solution to conflict in the article below.
http://brucewilds.blogspot.com/2014/05/war-and-what-is-it-good-for.html
War Inc. (Part 3/4)
http://www.youtube.com/watch?v=9WWArMoIDo4 (9:08)
The Godless mind is a natural disaster. For the rest everything is perfect.
Disasters increase economic activity and reduce economy networth
only keynesian economists can not understand that or tell the difference between the two concepts
Thanks for addressing this popular misconception that is often spread by the media and those who don't understand how the economy works. I view it as defensive spending instead of offensive spending, meaning the money spent is to protect or get you back to where you were rather than move you forward.
We must differentiate the kinds of economic growth and understand that all growth is not created equal. If you spend money but afterwards have little to show for it you have wasted it. Sadly, much of the money America "invests in itself" each year through government spending and programs falls into this category. We need the right kind of economic growth to propel us forward. It must be sustainable, with a purpose, well directed, and have long lasting benefits. The article below delves deeper into what is quality growth.
http://brucewilds.blogspot.com/2014/01/false-demand-fuels-wrong-kind-of-...










Retired officers poised to profit after Pentagon’s alarmist climate change report
http://www.washingtontimes.com/news/2014/may/26/sponsors-of-pentagons-alarm-raising-climate-study-/?utm_source=RSS_Feed&utm_medium=RSS
Retired military officers deeply involved in the climate change movement — and some in companies positioned to profit from it — spearheaded an alarmist global warming report this month that calls on the Defense Department to ramp up spending on what it calls a man-made problem.
The report, which the Obama administration immediately hailed as a call to action, was issued not by a private advocacy group but by a Pentagon-financed think tank that trumpets “absolute objectivity.” The research was funded by a climate change group that is also one of the think tank’s main customers.
The May 13 report came from the military advisory board within CNA Corp., a nonprofit based in Alexandria, Virginia, that includes the Center for Naval Analyses, a Navy-financed group that also gets contracts from other Pentagon units. CNA also operates the Institute for Public Research.
CNA’s webpage states that it is not an advocacy group. It says it maintains “absolute objectivity. In our investigations, analyses and findings we test hypotheses, carefully guard against personal biases and preconceptions, challenge our own findings and are uninfluenced by what a client would like to hear.”
The Center for Naval Analyses’ motto is “high quality, impartial information.”
One of the CNA panel’s vice chairmen, retired Navy Vice Adm. Lee Gunn, is president of a private think tank, the American Security Project, whose prime issue is warning about climate change.
The other vice chairman, retired Army Brig. Gen. Gerald E. Galloway Jr., is a prominent adviser to the Center for Climate and Security, a climate change group.
In all, four CNA board members sit on the panel of advisers to the Center for Climate and Security, whose statements on climate change are similar to those found in the CNA report.
Other board members work in the climate change world of consulting and technology.
The CNA advisory panel is headed by retired four-star Army Gen. Paul Kern, who sits on the board of directors of a company that sells climate-detection products to the Pentagon and other government agencies. At least two other board members are employed in businesses that sell climate change expertise and products.
The greatest influence on CNA reports seems to come from the Center for Climate and Security, whose position is that the debate on climate change, or man-made global warming, is over.