Several times this week I’ve heard people claim that Hurricane Harvey and the destructive flooding it has inflicted on Texans will actually be good for our economy because it will provide a boost to US GDP. Is that really true?
Many people have lost their homes and belongings to the flooding, and some have lost their lives. Early estimates of property damage range between $30 and $50 billion. Parts of Houston are expected to be uninhabitable for several months. It may take years for the region to completely recover.
But, say the believers in the theory that disasters can benefit the economy, these people will have to spend money replacing their lost belongings and rebuilding their damaged property. This will create new jobs and benefits — particularly to those in construction-related industries.
There are two flaws with this line of thinking.
- It’s not necessarily true that the overall impact of repairing the storm damage will be an increase to GDP.
- Even if GDP does experience a net increase as a result of the rebuilding process, it still doesn’t mean that the disaster and destruction are beneficial for the economy.
Will Harvey really increase GDP?
Yes, people will need to rebuild. So expenditures on the goods and services necessary for rebuilding will of course increase dramatically. There will be more construction jobs in the Houston area in the following months (perhaps years) than there would have been had the storm not happened.
But the money and other resources directed toward these rebuilding efforts would have been used in other ways had the disaster not happened. The dollars people will now spend repairing their homes cannot also be used to buy clothes, cars, vacations, or any number of things residents of Houston would rather have done with their hard-earned money.
So, when we consider the opportunity cost of the money used to rebuild — these other expenditures on vacations, etc. that will as a result of Harvey never be added to GDP — it’s not clear whether GDP will actually increase, decrease, or be largely unaffected.
GDP isn’t what you think it is.
Even more, increases in GDP do not give us a complete picture of the overall health of a country’s economy or the wealth of its citizens. Someone who spends all their savings rebuilding their home and replacing the belongings they already had is not better off than they were before, even if their expenditures do increase GDP. They’ll have their house and other belongings again, but they will no longer have their savings. And they will no longer be able to use those savings in ways that would have created new wealth instead of replacing the wealth they lost in the storm.
The long-run growth of an economy greatly depends upon the size and productivity of its labor force and its capital stock (the tools its labor force can use). A natural disaster destroys homes, businesses, and machinery; and it displaces large portions of the labor force.
A huge amount of money will need to be spent just to get Houston’s capital stock back to what it was before the storm. And this process will shift the labor of its residents toward rebuilding and away from creating new goods and services.
Broken windows are not a silver lining.
It may be comforting to try to search for a plus side to the losses that so many are enduring right now. But the destruction of lives and property never results in an overall positive effect on the economy. To believe otherwise is to commit the broken window fallacy.
Most of us have encountered some version of the broken window fallacy before. Every time someone claims that a war will increase economic growth, they are being fooled by the broken window fallacy. Even Nobel Prize winners, like Paul Krugman, have made similar errors when claiming that rebuilding in the aftermath of 9/11 would benefit the economy. Economists have been trying to set the record straight about this fallacy since Frederic Bastiat published his famous essay “What is Seen and What is Not Seen” in 1850.
Should we create a Department of Destruction and Rebuilding?
Destruction does not create wealth or grow the economy. If it did, then we ought to create a “Department of Destruction and Rebuilding,” tasked with periodically destroying capital goods to stimulate economic activity.
If the growth in the housing sector slows, the Department of Destruction could randomly select houses to burn down so that they can be rebuilt. If electronics sales begin to decrease, representatives from the Department of Destruction could show up at workplaces and homes across the country with baseball bats to smash televisions and computers — increasing the demand for replacement electronics in the process. If destruction were truly beneficial for the economy, this would be a good economic policy and not an utterly ridiculous proposal.
In times of disaster it’s natural to try to find a silver lining — but don’t go looking for it in broken windows. Not only is this line of thinking flawed, but it’s also patronizing to those whose lives have been affected by this tragedy.
It’s no comfort to a family that lost their home to hear that at least they are going to provide work for the contractors they’ll hire — especially if they have to deplete their savings or go into debt to pay for it.
Here’s where to look for the real silver lining of Hurricane Harvey.
When disasters and tragic events occur, it’s human nature to be moved by the plight of those who have been affected. As Adam Smith discussed in The Theory of Moral Sentiments, outsiders are inclined to have great sympathy for the people suffering from tragedy. We imagine ourselves dealing with similar unfortunate circumstances, and often become motivated to help ease the suffering of those unlucky enough to happen to live in the path of such a storm. Some people send donations, others volunteer their time to the relief and rebuilding efforts, but almost all of us have conversations about the things we think would make life easier for the storm victims. These discussions, more often than not, are plagued with economic fallacies.
If you’re looking for the real bright side to this disaster, you might find it by looking at the way people work together in Harvey’s wake to overcome challenges and rebuild. There are already countless stories about people donating their time and resources — and risking their lives — to rescue stranded community members.
Jim “Mattress Mack” McIngvale, the owner of two furniture stores in the Houston area, opened his stores to provide shelter for the families (and pets) affected by the flooding. He even sent his delivery trucks out to rescue people who did not have vehicles capable of navigating the flooded streets.
There has also been a massive influx of donations from across the country and across the world. This outpouring of concern for those in need and the immense amount of cooperation that takes place to help ease their suffering are some of the only true benefits of a disaster like this.