After the Disaster: We All Are Poorer

Editor's note: In the aftermath of Hurricane Hermine and the floods in Louisiana, recovery and rebuilding soon will be underway. While this may appear to be an economic boost to the affected areas, economist Don Boudreaux explains the unseen.

Economic derangement inevitably follows natural disasters. Here's the derangement du jour:

“Record-breaking floods in Louisiana have killed 13 people, damaged or destroyed 40,000 homes and landed 8,000 people in shelters. And yet flood-hit East Baton Rouge Parish — where 14% of residents live below the poverty line — and the rest of Louisiana are expected to ultimately benefit from the rebuilding effort as insurance funds and federal dollars start to pour in.”

Kayla Ruble, Vice News

Read the entire, and entirely — and sadly — predictable, report here: news.vice.com/article/louisiana-flood-recovery-expected-to-provide-stimulus-for-troubled-state-finances
Wealth from wreckage. Riches from ruins. Development from destruction.

I'd say that Frederic Bastiat would spin in his grave, but Bastiat's ghost - like Bastiat in the flesh — has heard this nonsense so frequently that its occurrence is no more of a surprise than are downed trees in a hurricane.

The most common form of this fallacy — committed, for example, by Mr. Paul Krugman in his New York Times column of Sept. 14, 2001 — is the proclamation that the effort to rebuild destroyed buildings and replace destroyed resources results in so much extra spending that the number of human wants that are satisfied by newly mobilized resources is greater than was the number of human wants that were being satisfied before the blessed destruction occurred.

This form of the fallacy is Exhibit A for economists who perform the great social service of warning people to look for the unseen and to avoid seeing only that which is most immediate and obvious. The advice is to look at reality as competent economists look at reality and not as typical, economically uninformed reporters, pundits and politicians look at reality.  

The advice is to ask questions that come naturally to the minds of competent economists: From where do the resources come to rebuild the destroyed homes, factories, roads and bridges? Does nature, having at one moment cruelly unleashed resource destruction upon humanity, at the next moment munificently bestow upon humanity new stocks of resources out of nothing, ex nihilo, inspired to do so merely by observing humans spend money at a faster rate than money was spent before?

If we are to believe typical reports that flood out after natural disasters strike, the apparent answer is “Yes.”  In fact, we are further ensured, not only are the resources used for the rebuilding free, the total stock of economic resources is enlarged by the natural disaster, so that society has a larger combination of resources and goods and services after the natural disaster than it had before.

This claim is absurd, of course. But it is widely believed to be true.

A different form of the fallacy involves looking at only the locale affected directly by the natural disaster and concluding that whatever happens to that locale in the wake of the disaster is the only relevant outcome to consider.  

For example, it is said that one source of Baton Rouge's coming good fortune is the dollars that Uncle Sam will transfer to that locale as federal disaster-relief aid — dollars that the people of Baton Rouge will then spend to acquire the real resources they'll use to rebuild.

It very well could be that amount of real resources that such federal aid transfers to Baton Rouge is so large that it leaves the people of that place economically better off than they were before the tragic floods struck. But Baton Rouge's gain is other people's loss.  

For Americans as a whole — for humanity as a whole — the floods must be reckoned to still make us poorer. Such reports as the one linked above never are accompanied by corresponding reports with headlines such as “Baton Rouge's Flood of Good Fortune Makes All Other Americans — and America At Large — Poorer.” But such a report should be a natural accompaniment to the ever-predictable “XYZ's Natural Disaster is Really its Blessing in Disguise.”

A variation on this form of the fallacy involves a focus on the private insurance funds that the (insured) people of the disaster-struck area will receive. If the insurance is properly run, these funds do not on net make the people of the ravaged area wealthier.  

Not only does proper insurance require customers to pay deductibles, but against whatever “gain” is received by the victims, post-disaster, must be weighed both the premiums that they paid pre-disaster for the insurance and the premium hikes that will likely occur post-disaster.  

And either way, whether the insurance is properly or improperly run, society at large is unquestionably made poorer by the natural disaster — no matter how much faster people might, because of the natural disaster, spend money.

Finally, it's true that clever folk can tell stories of how natural disasters might change humans' work effort, risk-taking propensities, inclination to innovate and other human characteristics that result in an increased flow of output of real goods and services. But it remains the case that had the human characteristics changed in these happy ways without the resource destruction caused by a natural disaster -- as they have changed in the past — then society would be richer still had the natural disaster not struck.

Don Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics and Economics at the Mercatus Center at George Mason University and a professor of economics at George Mason University.