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Stormy Economics

Posted By Don Boudreaux On August 30, 2012 @ 5:21 pm In Complexity & Emergence,State of Macro,Stimulus,The Economy | Comments Disabled

Here’s a letter to Slate:

Matthew Yglesias correctly notes that employment surges upward in locales soon after they are damaged by natural disasters (“Storm Stimulus [1],” Aug. 30).  But he concludes too quickly that extra spending of the sort that funds the rebuilding of locales such as Katrina-stricken New Orleans is key to restoring employment in slumping economies.

The surge in economic activity following natural disasters is in response to demands that are reasonably definite and that can be met by using routine methods of production.  Consumers’ (and their insurers’ and governments’) willingness to pay to have roofs patched and roads resurfaced is pretty certain, and the economic ‘infrastructure’ for firms to meet these demands is already in place.

A slumping economy is different.  Entrepreneurs are unusually uncertain about which outputs they will, and which they will not, be able consistently to sell at profitable prices.  (Contrary to Mr. Yglesias’s assumption, it’s unclear that more resources devoted to residential construction would today be part of an economically sustainable pattern of resource use.)  And if the source of the sluggishness is not insufficient aggregate demand but, rather, enterprise-unfriendly tax and regulatory policies – especially in the face of a need for the economy to significantly alter patterns of resource use into ones that are more sustainable over the long-run – then government stimulus spending or opening of the monetary spigot will only mask the problem rather than solve it.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA  22030

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[1] Storm Stimulus: http://www.slate.com/articles/business/moneybox/2012/08/hurricane_isaac_and_the_government_how_natural_disasters_create_jobs_and_what_economic_policy_needs_to_learn_from_them_.single.html

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