In the aptly titled article “Politicians and Other Disasters,” Randall W. Forsyth of Barron’s includes a word of warning for those who might suggest that rebuilding after Superstorm Sandy will generate economic benefits.
[I]t looks like the storm’s destruction will be a significant factor in the course of the U.S. economy in the weeks and months ahead, with each data point having an asterisk attached because of its impact. Guesses — and at this point that’s all you can call them — of the losses from Sandy fall into a range of $30 billion to $60 billion, according to Barclays economists Michael Gapen and Peter Newland, which would roughly equal those inflicted by Hurricane Andrew in 1992 but fall significantly short of the $140 billion wreaked by Katrina in 2005, a storm bracketed by Wilma and Rita in that extraordinary season.
Katrina had a negative impact on industrial production, retail sales, consumer confidence, payrolls, and unemployment claims, and gave a boost to inflation, Gapen and Newland write, adding that they expect a smaller effect from Sandy on output and prices. In any case, any lift to gross domestic product from reconstruction has to be weighed against those losses of income and production, along with the destruction of part of the capital stock of homes and other structures. “Somewhat paradoxically, the direct destruction of the capital stock is not a GDP event, but the reconstruction effort is,” they write, echoing nineteenth-century classical economist Frederic Bastiat. In his famous parable about the broken window, he wrote that the glazier made money repairing it, which boosts GDP, but doesn’t count the cost.
It’s nice to read an allusion to Bastiat‘s classic work on the seen and unseen.
