Freeman

IT JUST AIN'T SO

Hurricanes Are Creative Destruction?

Property Destruction Always Makes People Worse Off

FEBRUARY 01, 2000 by THOMAS J. DILORENZO

My employer, Loyola College, is a Jesuit institution and, as such, encourages its students to participate in myriad community-service programs. In teaching introductory economics, I propose on the first day of class a marriage of economic education and community service. I offer to give students aluminum baseball bats with which they will walk through the streets of Baltimore bashing in the windows of every car that they come across. The purpose of this rampage, I inform the students, is to stimulate employment and reduce poverty in the inner city.

The students are always quick to recognize that many jobs would, in fact, be created: auto repair, glass manufacturing, street sweeping, garbage removal, and so on. But once they are introduced to the first principle of economics—opportunity cost—they realize that to think of vandalism as an economic stimulant is a farce.

Sure, such vandalism may “create” certain jobs, but only by forcing people to spend money on auto repair that would have otherwise been spent (or invested) elsewhere. The jobs that are “created” are visible, whereas the ones that never materialize are invisible; but they are a very real part of the opportunity cost of using those resources. Government statistics do not measure the jobs, economic activity, and products that never materialize.

A Principle Missed

It is disheartening that a publication as distinguished as the Wall Street Journal would fail to understand this most elementary of economic lessons. But it has. In a September 17, 1999, news article titled “Hurricane Floyd May Leave Robust Economy in its Wake,” Journal reporter Tristan Mabry wrote that Hurricane Floyd, which devastated parts of the eastern United States, “won’t likely damp economic growth and may actually have churned up some extra economic activity.” Mabry quotes Marilyn Schaja, chief economist at Donaldson, Lufkin and Jenrette Securities Corporation in New York City as saying that the storm “may actually give the economy a boost.”

Ian Shepherdson of High Frequency Economics, Inc., told the Journal that the hurricane actually accelerated GDP growth by 0.5 percent, or about $30 billion. “That could add fuel to the nation’s already revved-up economy,” stated the economically clueless Mabry. U.S. Labor Department economist Richard Rosen chimed in, “We’re sensitive to the weather.”

Continuing with the weather theme, Mabry further stated that “like meteorologists, economists are quickly trying to focus their forecasts to reflect changing conditions.” In other words, as Austrian economists have long contended, economic “forecasting” is largely a fraud. When forecasts are off base (which they almost always are), they are simply revised, after the fact, ostensibly to “reflect changing conditions.”

All this talk of Hurricane Floyd as an economic stimulant is, of course, absolute nonsense. If what these commentators say is true, we should be celebrating the occurrence of natural disasters, vandalism, and even war, and investing our life savings in places like Serbia, East Timor, and Iraq. (One wonders how much of Mabry’s own portfolio is invested in Timorese bonds.) The American Civil War should have made the southern states—vast parts of which were looted and burned to the ground—the economic dynamo of the late nineteenth century, with Charleston and Savannah overwhelming New York City and Chicago as the nation’s centers of commerce and finance.

Property destruction always makes people worse off than they were before, but because of their ignorance of economics, Wall Street and government bean counters fall for what Henry Hazlitt, building on a Frederic Bastiat fable, called the “broken-window fallacy.” Once one understands the concept of opportunity cost, which is rooted in the reality of pervasive economic scarcity, then one does not fall for other fallacious notions either, such as a government-spending “multiplier effect,” because one recognizes the destructiveness of the taxation that is necessary to finance the government’s spending.

Nor could one be so foolish as to believe that government “jobs” programs could possibly create jobs on net. The only thing that such programs can do is to create government make-work jobs by destroying more productive private-sector jobs. No matter how such jobs programs are financed—through direct taxation, borrowing, or inflationary monetary expansion—they must divert resources from the private to the governmental sectors. In so doing, they destroy private-sector jobs that had been created as a means of serving consumers in order to generate patronage jobs whose main purpose is to allow politicians to buy votes and advance their careers with taxpayers’ money. Every government program ever proposed was advanced with the help of the fallacious notion that it will somehow “create jobs”—in addition to enlightening the unenlightened, healing the ill and the lame, saving the environment, etc., etc.

Pervasive Ignorance

It is no accident that so many supposedly educated people are ignorant of the most basic concept in economics. As Ludwig von Mises wrote in Human Action, the state is perpetually at “war” with economics and economists, for economic education exposes the fraud involved in the something-for-nothing promises of politicians. “The paramount role that economic ideas play in the determination of civic affairs,” Mises wrote, “explains why governments, political parties, and pressure groups are intent upon restricting the freedom of economic thought.”

A variant of the broken-window fallacy is government “disaster relief.” The billions of taxpayer dollars spent in recent decades have subsequently created a massive moral hazard, which has made natural disasters much more economically harmful than they would otherwise have been. According to The Weather Channel, there have actually been fewer east-coast hurricanes in the past 20 years than the historical average, but the damage from them is much higher because coastal property is much more developed. An important reason why so much development has taken place in the paths of hurricanes is that the government subsidizes it with “disaster relief,” money for rebuilding, and federal flood insurance. This creates an even bigger role for government in future disasters.

The more involved the government becomes in “responding” to natural disasters, the worse will be the economic destruction caused by them. When economically illiterate journalists tell us that hurricanes and government create prosperity, we should answer resoundingly, “It Just Ain’t So!”

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February 2000

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