Hurricane Sandy was an invader, one that splashed ashore with as much destructive power as any foreign (or perhaps interstellar) invader could hope to bring to bear against our coasts. Thus, in the opinion of economist Paul Krugman, the storm should help boost the American economy.
“If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months,” the Nobel Prize winning economist declared on CNN in 2011. “And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better [off].”
Krugman’s managed to sum up Keynesian economics in 30 seconds. This theory holds that massive amounts of government spending -- even on something unnecessary, such as a program to protect against Space Invaders -- can boost the economy. Speaking again of invaders, Krugman added at a conference this summer: “we could get something that could cause the government to say, ‘Oh, never mind those budget things; let’s just spend and do a bunch of stuff.’”
Well, Hurricane Sandy swamped cities, killed dozens, left millions without electricity and could cost $20 billion. Rest assured that estimate will only climb. To an economist such as Krugman, that must sound like great news. All those repairs and rebuilding jobs will force American companies to stop hoarding cash, which they’ve been selfishly doing.
“Today, American companies have nearly $2 trillion sitting on their balance sheets,” Barack Obama told the Chamber of Commerce last year. “And I know that many of you have told me that you’re waiting for demand to rise before you get off the sidelines and expand, and that with millions of Americans out of work, demand has risen more slowly than any of us would like. We’re in this together, but many of your own economists and salespeople are now forecasting a healthy increase in demand.”
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.