There seems to be a dangerous myth circulating around the media in the days following Hurricane Sandy.
A Yahoo! Finance poll asked readers whether the effects of Sandy would hurt the American economy, benefit it, or prove negligible. The most popular answer by far, with 47% of the vote, was that the economy would benefit from the destruction.
Here's what some other commentators had to say.
Derek Thompson at The Atlantic says, "More significantly, the aftermath of the storm requires 'replacement costs' that raise economic activity by forcing businesses and government to rebuild after a destructive event."
Derek, do you lose things on purpose so you can pay the replacement costs?
Here's Peter Morici of The Street: "Disasters can give the ailing construction sector a boost, and unleash smart reinvestment that actually improves stricken areas and the lives of those that survive intact."
Really Peter? How about New Orleans post-Katrina? Or any other disaster area, for that matter?
On Wednesday night, Susie Gharib of PBS's The Nightly Business Report posed the question to Mark Zandi of Moody's Analytics, saying: "People often hear that when there's a disaster like Sandy, it's a boost for the economy. Is that going to be true in this case?"
Zandi set her straight, responding simply, "Well, no, this is a natural disaster, and disasters are bad for the economy."
Thanks, Mark.
Of course, some businesses benefit, as happens whenever the normal balance of supply and demand is skewed. Stocks of home improvement retailers like Home Depot (HD 2.41%) and Lowe's (LOW 2.10%) rose a few points on Wednesday, while generator maker Generac (GNRC 2.49%) jumped 20% on Wednesday. Well, duh -- they make generators, which become immensely more valuable when the power goes out.
But the real problem with this misconception is that it reveals a fundamental misunderstanding of the basic tenets of capitalism. Free markets work because they value the efficient use of labor and capital above all else, which in turn encourages innovation and raises the standard of living for everyone as consumers choose the products and services that offer them the greatest benefits at the lowest costs.
Economic activity for the sake of economic activity does nothing. If disasters like Sandy actually benefited the economy, then we could just go out and destroy houses on our own. There's no need to wait for Mother Nature.
Part of this misconception is tied to an over-reliance on GDP and the obsession with "jobs" as indicators of a healthy economy. GDP is a strict measure of economic activity and does not take into account issues like quality, inefficiency, or corruption. The estimated $50 billion in losses from the storm, between property damages and closed businesses, will not be subtracted from GDP, although the costs paid to repair property will be added to the figure. Harvard Business Review columnist Umair Haque once quipped, "Hey, if you want to boost GDP, go out and break your neighbor's arm."
Similarly, jobs are only good for the economy when they represent an efficient use of labor. Replacing or repairing something already in existence might be necessary, but we'd be better off avoiding it in the first place.
This misconception also seems to have a historical origin. Many Americans believe that World War II was what really got us out of the depression, but that notion oversimplifies a much more complex series of events. Our government borrowed a record amount of money to pay for the war, which acted as a stimulus to jolt us out of recession as the war provided jobs that were previously unnecessary. We were able to avoid destruction on our shores, while Europe and Asia lay in ruins, which left us the world's unscathed free-market superpower. This allowed us to evolve into a manufacturing powerhouse and thus enjoy the prosperity of the '50s and pay back that massive debt. The war only "benefited" the economy in the context of a much larger chain of events.
So with the election just a few days away, this seems like a good time to step back and recognize what's actually good for the economy. Innovation and efficiencies that raise the standard of living and productively grow the economy are good. Natural disasters are bad. Employment alone is not a sign of a healthy economy. After all, our ancestors had their own word for employment. They called it survival.
