Will Hurricane Sandy Stimulate the Economy?

Tim Worstall at Forbes explains that while GDP will increase, this does not constitute growth:

Imagine that the total wealth of the US is $100 trillion. All the buildings, the factories, the financial assets, the human capital, the natural resources, all add up to $100 trillion. The GDP of the country is around $15 trillion. That second is the flow that we get from the stock of the first.

Now imagine that Hurricane Sandy does $10 billion of damage to that wealth (for our purposes it doesn’t matter whether it’s $100 billion or $1 trillion. Although this obviously matters to everyone except for the purposes of this example). The US is now worth $99.990 Trillion. GDP might rise to $15.01 trillion as we repair that damage. But we’re not in fact any richer at all: despite the fact that GDP has gone up. What has actually happened is that some of our stock of wealth has been destroyed and we’re having to do more work in order to rebuild it.

George Mason Economics Professor Donald J. Boudreaux attacks the reasoning behind a hurricane stimulus:

According to Keynesians, recessions result from people feeling pessimistic about the future – a pessimism conjured by what Keynesians regard as wary “animal spirits.” This pessimism prompts people to save too much and spend too little.

But even if we accept these Keynesian notions, is it likely that the optimism necessary to improve the economy will be sparked by destroying people’s homes and businesses? How plausible is it that people – who before being hammered by the likes of a hurricane felt that their savings were too low – will go on sustained spending binges because natural disasters oblige them to dip into the very savings that they were previously trying to increase? By what logic are “animal spirits” buoyed with confidence by tragedies that make people poorer? On what theory do consumers or investors become more hopeful about the future while standing in the rubble left by natural disasters?

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