Monday, 31 August 2009

The long-term impact of hurricanes

A version of the Broken Window Fallacy is that while natural disasters, such as hurricanes, create havoc and impose large costs in the short run, they also simulate economic activity and thus are good for the economy. From the Economic Logic blog comes this counter to such thinking:
Makena Coffman and Ilan Noy study the case of the Hawaiian island of Kauai that was affected by hurricane Iniki in 1992, while neighboring Maui was not. Comparing the two islands, it appears clearly that while externally there are few signs of the hurricane seventeen years ago, Kauai is still suffering, mostly because its labor market still has not recovered, despite massive transfers right after the storm. Population took a permanent hit, at least partly as a consequence of a sudden drop in the housing stock and a spike in unemployment, and never recovered compared to the neighboring island.
Yes people natural disasters really are bad.


Matt Burgess said...

There are two broken window fallacy stories I like, both possibly from M Friedman.

In the first, Friedman was in China and being given a tour of a large construction. The manager proudly explained the site had largely foregone machinery so as to employ more men with shovels. Friedman is said to have asked: "Why don't you give them spoons?"

The second story was a response to the idea that war fixes economies. Friedman suggested that if war was such a great idea then in peacetime why not produce lots of guns then bury them.

I think both stories get to the basic insight of the difference between GDP and consumer surplus. As Bastiat said, the cost of fixing the broken window is one less book on the shelf.

The other thing about broken window fallacy is that it is a lesson for governments. The broken window fallacy is not a problem realised by voluntary co-operation, because no sane individual wastes their own time and effort needlessly putting things back to how they were. Yet somehow the obviousness of that lesson is lost in the political process. It isn't clear to me why. Add it to the list of reasons for why they should not go there.

Matt Burgess said...

The answer to my last question is of course that under voluntary co-operation, the loser is seen. He is the person who must pay to fix his own broken window, and is plainly made worse off for the free time or production foregone.

When government intevenes, the loser is unseen.