Saturday, August 27, 2011

A Reminder Of Why Natural Disasters Are Economic Disasters

Eastern United States have -or are soon about too- been struck by two natural disasters. First, an earthquake and now Hurricane Irene. Considering that some Keynesians argue that from a purely economic point of view such events are good, read Art Carden's article that reminds us of why natural disasters are economic disasters too.


Blogger Ralph Musgrave said...

Art Carden’s article is an unsophisticated treatment of this topic. He just assumes that the destruction from hurricanes or throwing bricks through windows exceeds the benefits, which in most cases it probably does. However, if unemployment is well above NAIRU and if the multiplier is high enough, then the increase in GDP resulting from hurricanes could exceed the damage done by the hurricane.

The above point is similar to Keyes’s point about the possible benefits of paying people to dig holes in the ground and fill them up all day. He did not seriously advocate this as a cure for unemployment. The purpose of the point was just to illustrate the effect of the multiplier.

7:47 AM  
Blogger stefankarlsson said...

Ralph, all you're saying is that if the multiplier is high, then the net effect will be positive. Which is true of course, but only as an analytical statement. The whole point of Carden's argument was to argue against significant multiplier effects.

9:55 AM  
Blogger stefankarlsson said...

A reader asked me to post this comment:

"There are three possibilities as to how the shopkeeper could have financed the repair to his glass window.

The shopkeeper can use savings. If he does so, then he no longer has those savings available for his current or future consumption, for example to buy a new bed this year or live on in retirement in a future year, or for investment in his shop, for example, to buy a better mechanical adding machine or to give his clerk some more hours of work. In this scenario, the shopkeeper is worse off since he can no longer buy the things he would have purchased. The people from whom he would have purchased those goods or services would also be worse off.

The second possibility is that the shopkeeper can borrow money to pay for the repair to his glass. In this case, he has incurred a debt that he must repay, probably (if he’s not living in 2011!) with interest. Again, the shopkeeper is worse off because he borrows money to replace that which he already had, a window.

The third possibility, insurance, just reduces to the first. By paying for insurance premiums in advance of the harm he later experienced, he has already prepaid for the repair to the window. Only the timing of the payment has changed.

What of the ne’er-do-well child who threw the brick that broke the window? He may have derived a fiendish utility from the deed, but it was purely destructive from an economic point of view — just like an earthquake or a hurricane."

9:35 PM  

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