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The only thing Sandy is good for is to remind us that economics is a science in a dismal state. Sandy delivers us articles called “Is Hurricane Sandy good for the economy? Experts disagree.” [my emphasis]
Oh dear, here we go again: some economics professor in a respectable position either hints at, or outright says, that a catastrophic event delivers a net economic gain.
Yup, this is what dr. Peter Morici, prof. at the Robert H. Smith School of Business at the University of Maryland – a top ranked school – has done. He argues that the destroyed existing capital stock will be replaced by improved capital, as the new build programme post-hurricane kicks in – and somehow this can leave everyone better off.
[A]n initial estimate of the economic losses imposed by Sandy is about $35 to 45 billion.
However, rebuilding after Sandy, especially in an economy with high unemployment and underused resources in the construction industry, will unleash at least $15-20 billion in new direct private spending–likely more as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive.
[W]hen government authorities facilitate rebuilding quickly and effectively, the process of economic renewal, in many tangible ways, can leave communities better off than before.
Morici completely falls for the broken window fallacy, ignoring the concepts of scarcity and opportunity cost. Resources that now have to go into reconstruction, are resources that had to be diverted from where they could otherwise have been employed. That is, rebuilding a better-than-before beach house somewhere around New York, means that those resources now cannot be used to build an additional beach house somewhere else.
The result: one new beach house after the hurricane, instead of two beach houses – one new and one old – without the hurricane.
Imagine hurricane Sandy never came – dr. Morici might have been prompted to wreck the east coast of the USA himself. Luckily, there’s still something else he can do: the west coast awaits him in pristine condition…