It was inevitable that with the arrival of Hurricane Sandy, various economic pundits would speculate on its effects on “the economy.” Needless to say, some were saying that the hurricane would boost spending—both at the retail and then reconstruction level—and in that sense might actually provide a lift to GDP. The whole episode is yet another reminder that old fallacies die hard in economics. The commonsense notion that a natural disaster is bad is correct; only “sophisticated” analysts could think otherwise.
The basic problem here is what Henry Hazlitt called the “Broken Window Fallacy,” ..
We might say this, if we take “the economy” to be the same thing as “official GDP,” but in so doing we have totally severed the connection between conventional metrics of economic health and actual human welfare ..
.. Thus, to the extent that we want to engage in aggregate measures of human well-being, the only sensible conclusion is that “society” or “America” or “the economy” is poorer on net ..
The “macro” case of an economy with idle resources, suddenly being jolted out of its rut by a hurricane, is analogous to a “micro” case of a man who was laid off, agonizing over what to do with himself. Should he go back to school, apply to work at fast food restaurants, start his own lawn-cutting business…? Then, in the midst of his indecision, he realizes his house is on fire! The man suddenly knows exactly what he needs to do with himself—he has to run to the kitchen and grab the fire extinguisher. Yet would anybody dare argue that the fire, notwithstanding the property damage to the house, at least solved the man’s problem of idle labor?
In conclusion, under any reasonable sense of the term, a natural disaster such as Hurricane Sandy is not “good for the economy.” People who argue otherwise are simply demonstrating the problems with the conventional obsession with official GDP statistics.