Why natural disasters don’t “grow the economy.”
Part 3 of 3 (read Part 1, read Part 2)
“Society loses the value of things which are uselessly destroyed.” — Frederic Bastiat, economist
Guess what? Natural disasters — hurricanes, floods, wildfires — are good for the economy. True, they cause a temporary downturn when local economies founder, but in the long run they spur growth, measured as an increase in the Gross Domestic Product (GDP).
So we are told by leading business pundits, stock market analysts and some economists. They explain that rebuilding during the years following a disaster creates jobs, consumes huge quantities of materials and ultimately replaces obsolete infrastructure with more efficient, larger facilities such as harbors, terminals and airports, increasing commercial capacity. Thus the “creative destruction” function of capitalism — chucking the old to make room for the new — is performed for free by Nature herself.
Whoopee! Let’s pump a bunch more carbon into the air to create more superstorms to wreck more cities so we can all get rich. Let the good times roll!
Um…I hate to be a spoilsport, but from the perspective of sustainable economics — not to mention human suffering — there are some problems with these rosy forecasts from orthodox economists for whom “growth” is the only measure of prosperity.
To begin with, it’s important to remind ourselves that the GDP doesn’t actually measure economic progress such as increases in employment levels and wages, or beneficial technological and medical advances. GDP simply measures the total volume of economic activity, including recovery costs. For example, if a school bus crashes and 40 kids are taken to the emergency room, the costs of replacing the bus and their hospitalization are added to the GDP as “positive growth.”
Economist Frank Hollenbeck, writing for the Mises Institute’s web site, uses the parable of a broken window, conceived by French economist Frederic Bastiat in 1848, to explain why repairing damage (rebuilding after a disaster) represents overall economic loss, not growth. Suppose we break a window, call a repair man and pay him $100 to replace it. That $100 will be added to the GDP, counted as growth.
Now suppose the window had not been broken and the $100 instead was spent on clothing. The $100 will still be added to the GDP, but the window, which has intrinsic value (called “embodied energy” in environmental economics) will be preserved. Thus, while the glazier does not benefit directly, society and the economy as a whole benefit because money is exchanged and we have both new clothes and a window. The $100 is used for progressive — as opposed to regressive — economic activity.
The preservation of serviceable existing infrastructure and housing is especially important in a society that does not have savings with which to replace them. This is the case in today’s America, with its astronomical governmental and personal debt. The unnecessary replacement of costly goods and facilities depletes our remaining capital, and diverts it from investments that could represent true growth and create new, as opposed to redundant economic opportunities. Meanwhile, if our infrastructure needs to be updated, let’s plan and build it on our own timetable, not that of a capricious global climate.
But these arguments, sufficient rebuttals though they are to the foolishness that destruction engenders prosperity, pertain only within the context of standard or orthodox economics, which assumes that we have infinite material resources at our disposal. In fact, we live on a small planet with finite resources (although we have access to unlimited energy from the sun). Thus the idea that natural disasters create wealth by consuming more of our remaining materials contradicts any notion of a sustainable, regenerative economy, the only workable paradigm for long-term prosperity and security. To survive and thrive, we’ll have to conserve the remaining resources at our ecological house.
Editor’s Note: This article appeared previously in other publications as part of an ongoing series called “Your Ecological House,” written by Philip S. Wenz, the publisher of Firebird Journal. A sub series of Your Ecological House on the “The new economics of climate chaos,” will be published on this site in several installments.
Great article, Mr. Wenz.