Hurricane Sandy a Huge Boon to the Economic Fallacy Industry

Broken windows as far as the eye can see

Libertarians on Twitter are sighing in frustration at this monstrosity of logic by Peter Morici, an economist and professor at the Smith School of Business, University of Maryland:

Disasters can give the ailing construction sector a boost, and unleash smart reinvestment that actually improves stricken areas and the lives of those that survive intact. Ultimately, Americans, as they always seem to do, will emerge stronger in the wake of disaster and rebuild better-making a brighter future in the face of tragedy. …

[R]ebuilding after Sandy, especially in an economy with high unemployment and underused resources in the construction industry, will unleash at least $15-$20 billion in new direct private spending—likely more as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive.

Regarding the latter, consider a restaurant with inadequate patronage—its owner invests the insurance settlement in a new more attractive business. On the shore, older smaller homes on large plots are replaced by larger dwellings that can accommodate more families during the summer tourist season. The outer banks of North Carolina saw such gains several decades ago after rebuilding from a storm of similar scale.

Perhaps cognizant that people might scream at him about broken windows, he shifts the debate a bit to argue that insurance settlements will result in people rebuilding bigger and better. It's not replacing – it's real economic growth. Eventually.

Except as Ira Stoll pointed out yesterday, the insurance for those homes on the shore is likely subsidized by the federal government. The money spent from those insurance claims is hardly growth. It's money shifted from one part of the economy to the other (or, you know, spending money we don't even have). So when those bigger and better buildings get destroyed in yet another hurricane a couple of decades down the line, guess who pays again?

In addition, here are some lovely stats from July showing where Americans stand on savings. The average American family has $3,800 in savings. About 25 percent of American families have no savings at all. I don't know the economic situation of North Carolina decades ago, but I'm guessing they hadn't been struggling through a decade of a recession.