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Destroying Property Does Not Promote Economic Prosperity

I sit at home now (GMU is closed today) awaiting whatever will be the effects of hurricane Sandy.  I’m not sure what those effects will be, although I doubt that they will be as dire as some of the breathless commentaries are predicting.  (I could be proven wrong, of course; I hope that I’m not.)

One thing that I do not doubt, though, is that Americans will soon be flooded by commentary that assures us that the silver lining around the destruction caused by hurricane Sandy is a stronger economy.  Such nonsense always follows natural disasters.  Indeed – as Frank Stephenson documents over at Division of Labour – it’s already pouring in.  So I strike preemptively by reprising here a post from August 31st of last year – a post written in the wake of hurricane Irene:

Here’s a letter to the Programming Director of Washington, DC’s, WTOP Radio:

Enough with reports (heard in today’s 1pm hour) that natural disasters can be good for the economy.  The vulgar Keynesian economics upon which such reports are based is hopelessly confused on the issue.

According to Keynesians, recessions result from people feeling pessimistic about the future – a pessimism conjured by what Keynesians regard as wary “animal spirits.”  This pessimism prompts people to save too much and spend too little.

But even if we accept these Keynesian notions, is it likely that the optimism necessary to improve the economy will be sparked by destroying people’s homes and businesses?  How plausible is it that people – who before being hammered by the likes of a hurricane felt that their savings were too low – will go on sustained spending binges because natural disasters oblige them to dip into the very savings that they were previously trying to increase?  By what logic are “animal spirits” buoyed with confidence by tragedies that make people poorer?  On what theory do consumers or investors become more hopeful about the future while standing in the rubble left by natural disasters?

Please, no more such absurd reports.

Donald J. Boudreaux

I’m delighted that U.S. News & World Report‘s Rick Newman weighed in on this issue here (as one of many live bloggers, so you’ve got to search for Rick’s entries.)

UPDATE: Be sure to read Tim Worstall’s Forbes essay on this matter.