Well, weather forecasters were correct that Sandy would be destructive. But the economists Obama cited have been off base thus far; companies are waiting to see what may happen in 2013 before they’ll agree to ramp up investment. For example, a host of expensive new regulations may well be on the way.
Meanwhile, when considering whether Sandy’s destruction will end up boosting the economy, consider the broken window fallacy explained by economist Frederic Bestiat way back in 1848 (now that’s a forecast!). He explains that, while the money used to repair a broken item benefits the person making the repair, the rest of us lose out because that money isn’t available to purchase new products.
“Society loses the value of objects unnecessarily destroyed,” Bestiat noted. “To break, to destroy, to dissipate is not to encourage national employment.”
In modern terms, consider what Bestiat calls “seen” effects: there are people who will “get” a new house or a new car as a result of Sandy. But that house or car merely replaces one that, less than a week ago, was perfectly serviceable.
Meanwhile, the family that lived in the destroyed house or relied on the car to get to work is being forced to live out of suitcases, spending time with relatives or paying for a hotel or apartment. And they’re not able to get around without a car. These are among the “not seen” effects that Bestiat warned about.
Then there’s the loss of productivity, another hidden cost of the storm. Businesses up and down the east coast were shuttered by the storm. The New York subway system was swamped. Even if their buildings weren’t damaged, companies will never get those work days back. There were deals left undone, products left unproduced, and food spoiled by the loss of power.
Then, of course, some businesses were literally washed away. Those owners may well decide not to rebuild at all. That imposes a “not seen” cost for their employees and suppliers that won’t be known for months or even years.
“Destruction is not profitable,” Bestiat wrote a century and a half ago. It’s a big reason Keynesian economics doesn’t work, and a lesson we’ll be re-learning as the massive bills from Hurricane Sandy come due.