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Hurricane Harvey will not be an economic boon for Texas

On the afternoon of March 11th, 2011, a magnitude 9.0 to 9.1 earthquake hit just off Japan’s east coast. It was quickly followed by a tsunami tidal wave, flooding, landslides, fires, building and infrastructure collapse, and a nuclear radiation leak from a damaged power station. 16,000 people were killed and another 2,500 disappeared.

But some saw silver linings to this disaster. President Clinton’s former treasury secretary, Larry Summers, said “It may lead to some temporary increments ironically to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake Japan actually gained some economic strength.”

This might sound utterly bizarre to non-economists. If its true, why not nuke a different US city each month until growth is really popping? In the wake of Hurricane Harvey, this argument got an outing in the Pioneer Press this last weekend economist Edward Lotterman’s thought provoking column.

Broken windows

Many economists find arguments such as Summers’ bizarre as well. Lotterman offers a good summary of their usual arguments

In a famous essay, the mid-1800s French economist Frederic Bastiat noted that when a window was broken, some would observe “well, too bad for the owner, but his loss is the window repairman’s gain. There is more business.” Bastiat argued this was a fallacy. Yes, the glazier got more income. But whatever the window owner paid for repairs was money not available to buy something else. So some other shop owner or tradesman lost money. The owner had a window just as before, but did not have the new shirt or frying pan that they might have bought. Society as a whole lost a window and there was no net increase in economic activity, Bastiat argued.

He also offers a good summary of the counter arguments

Keynes argued that [Bastiats’s argument] might be true in certain cases such as with full employment and no unused labor or factories.

But when there was slack in the economy with idle workers and mills, then government spending, particularly financed by central bank creation of new money, might indeed increase total output.

One could imagine a situation of a sluggish economy with laid-off carpenters and roofers, unused backhoes and piles of unsold sheet rock and air conditioners. Federal disaster spending, particularly that not offset by less spending elsewhere or by higher taxes could, in the view of Keynesians, increase total national output. Bastiat would be wrong.

What about Texas? 

So who is right about Texas?

In July, unemployment in Houston stood at 4.9%, down a full percentage point since February. Considering that the Federal Reserve considers an unemployment rate somewhere in the range of between 4.5 and 5% as the lowest level of unemployment that the U.S. economy can sustain, there would not seem to be the “slack in the economy with idle workers…laid-off carpenters and roofers” necessary for Keynes to be right in this case. Neither are these idle workers to be found further afield. That same month, the unemployment rate for Texas stood at 4.3%, the same as the national rate. The US economy is not currently crying out for more stimulus spending.

Hurricane Harvey is and continues to be a human tragedy. Particularly in the regions affected, it will be an economic one as well.

John Phelan is an economist as Center of the American Experiment.




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