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Response to Jacoby: Hurricane Irene will spur investment

Posted by Alan Wirzbicki  August 29, 2011 05:32 PM

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While the principle behind Jeff Jacoby’s column and accompanying blog post seems logical — that spending on repairs and rebuilding after a disaster does not actually serve as stimulus because it takes money out of the economy that could otherwise be used for new investment — its application to the aftermath on Hurricane Irene is based on the false presumption that anyone in either the public or private sectors was doing much investment before the storm hit. While Jacoby cites the parable of the boy who breaks a shopkeeper’s window, forcing the shopkeeper to spend six francs on fixing the window rather than on “better shoes [or] a new book,” this is a situation where otherwise the shopkeeper, or rather the shopkeeper’s insurance company, likely would not have spent the money at all rather than investing it.

A hurricane is certainly not the most effective way to stimulate the economy. Fixing infrastructure wrecked by the storm is nowhere near as effective as making the trillions of dollars worth of necessary repairs needed prior to Irene. But, at a time when businesses are hesitant to spend the money to hire and the government is politically paralyzed from undertaking any large-scale spending (with the exception of the 2009 stimulus, which was undermined by a corresponding fall in state and local government spending), this type of involuntary investment will make an economic impact.

In a normal economic situation, Jacoby's point would make a lot more sense. However, in our current dysfunctional economic and political environment, where House Majority Leader Eric Cantor is threatening to hold emergency funding for FEMA hostage to his own personal priorities in cutting spending, things are so dire that a natural disaster actually is an economic stimulus. In fact, some analysts are already boosting estimates for US GDP in the second half of 2011 as a result. Jacoby is viewing Irene’s impact from a theoretical perspective but, unfortunately, disasters don’t only happen in theory.

Reuters/Chip East: Workers removing trees and other hurricane debris in New Jersey on Monday.

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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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