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Irene topples trees, but it can’t uproot the "stimulus" fallacy

Posted by Alan Wirzbicki  August 29, 2011 12:22 PM

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I wrote yesterday about the “broken window” fallacy — the delusion that the destruction of property through a natural disaster can be seen as good news, since the funds spent on cleanup and reconstruction provide economic stimulus and jump-start new growth. In the wake of Hurricane Irene, I predicted, “some expert will quickly reassure us that all the destruction is good for the economy.”

Sure enough, here is University of Maryland professor Peter Morici, former chief economist at the US International Trade Commission, who wasted no time finding Irene’s supposed silver lining. Post-hurricane rebuilding will unleash billions of dollars in “new direct private spending,” Morici writes at RealClearPolitics, and “the capital stock that emerges will prove more economically useful and productive.” Once the devastation is passed, he explains, “the process of economic renewal can leave communities better off than before.”

In a story in Politico, reporter Josh Boak made an even more elaborate case that the hurricane’s upheaval is really a boon:

The power outages and shuttered airports may stop the engines of commerce for several days, but Hurricane Irene might have provided some short-term economic stimulus as billions of dollars will likely be spent to repair the damage to the East Coast over the weekend.

Cumberland Advisors Chairman David Kotok saw the storm as likely jolting employment in construction, an industry paralyzed by the bursting of the real estate bubble in 2008.

“We are now upping our estimate of fourth-quarter GDP in the U.S. economy,” he said in an email Sunday. “Billions will be spent on rebuilding and recovery. That will put some people back to work, at least temporarily.”

Kotok expects GDP growth — which limped along at less than a percentage point for the first half of the year — to exceed 2 percent in the last three months of the year and potentially reach 3 percent.

Mark Merritt, president of crisis-management consulting firm Witt Associates, said the hurricane should provide a bump in economic activity over the next few months.

Perhaps such thinking reflects an innate human urge to find a positive outcome in any negative news, but it simply isn’t true that you can create wealth by destroying wealth. When Hurricane Irene or any other disaster wipes out productive assets, the economy is poorer. The money that pours in afterward to repair the damage may be a very welcome boon to those in need — but it cannot make society more prosperous than if disaster had never struck.

AP Photo/Bennington Banner, Austen Danforth: Bennington Police Chief Paul Doucette looks at a collapsed bridge on Route 9 in Woodford, Vt., on Sunday.

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ABOUT THE ANGLE Online commentary and news analysis from the Boston Globe. The Angle is produced by Rob Anderson and Alan Wirzbicki. You can follow Rob on Twitter at @rcand.

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