Look on the bright side…

Like Dick O’Brien, I’m often late to peruse my copy of the Economist, so it wasn’t until this morning that I got round to reading last week’s issue. It wasn’t exactly a choking-on-muesli moment, but I did find myself startled to read this passage from the leader on Katrina:

History suggests that the hurricane will have little effect on the national economy. Despite all the pictures of sinking hotels and flooded convention centres, the overall impact of natural disasters is often close to neutral: lost output (which will be large) is then compensated for by a surge in reconstruction and public spending (also large). That may be scant comfort to individual hoteliers, residents and insurers, but on a national level the economic damage will be real but limited.

[emphasis added]

Somebody at The Economist needs to be familiarised with the work of a certain French gentleman. Now, I’m no economist, but I can see that any money devoted to this “surge in reconstruction and public spending”, just like the money James Goodfellow has to spend repairing his window, is merely diverted from constructive use in other parts of the economy, not conjured up from thin air. Perhaps a better way of phrasing this might have been to say that the American economy is large and flexible enough to withstand the undoubted shock represented by Katrina’s devastation. You expect to see broken-window thinking in the aftermath of such a disaster - there was certainly plenty of it after the tsunami - but not in a publication calling itself The Economist.

5 Responses to “Look on the bright side…”

  1. John Says:

    Frank,

    It seems to me that the only way a hurricane like Katrina could have a ‘neutral’ effect on the economy is if it (a) generates greater efficiency in public spending - money that would have been wasted is used productively and (b) encourages people to work harder in the face of total destruction, i.e. productivity increases.

    I’m not sure that this holds up, but I thought I’d put it out there.

  2. Frank McGahon Says:

    I don’t think that really does hold up, there’s really no reason why the devastation in itself ought to make public spending more efficient or increase productivity. Remember, for this to be “neutral” any such marginal increases would have to make up for the total dead loss of the cost of the damage.

  3. John Says:

    there’s really no reason why the devastation in itself ought to make public spending more efficient or increase productivity

    Well, there’s already talk about rolling back the $24bn highway bill, which is mostly unessential pork spending. That still leaves $175 or so to find in other efficiencies. I doubt that they’ll find those, but I’m sure that if they really tried, they could.

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