Wednesday, August 31, 2011

Was Hurricane Irene a Stimulus Package?

Irwin Keller at MarketWatch thinks so. As MSM reports:
Kellner compares this kind of stimulus to President Roosevelt's Works Progress Administration. "The fact that more money was in circulation resulted in more income, spending, jobs and eventually more purchases of capital goods by business," he adds. "While it lasted, it helped us climb out of the depths of the Great Depression."
Can this expand the economy?
Keller is so wrong. It is maddening that we have our economic intelligence insulted like this every time a disaster hits. It is no doubt true that some forms of spending increased and will continue to increase as people rebuild from destruction by the hurricane. That does not mean, however, that people are left more wealthy or that the economy will be more healthy.

Henry Hazlitt, in his Economics in One Lesson, has a more accurate take on such assertions by applying Bastiat's example of the broken window fallacy to the supposed blessings of destruction. "No man burns down his own house on the theory that the need to rebuild it will stimulate his energies" (p. 27). "Plants and equipment cannot be replaced by an individual or a socialist government) unless he or it has acquired or can acquire the savings, the capital accumulation, to make the replacement. But war [or a hurricane] destroys accumulated capital" (p. 30).

Hazlitt was also provides a more accurate assessment of the economic efficacy of the WPA. "When we had our WPA, it was considered a mark of genius for the administrators to think of projects that employed the largest number of men in relation to the value of the work performed--in other words, in which labor was least efficient" (p. 72).

Even if the destruction wrought by Hurricane Irene causes some people to increase spending on construction and, therefore, not hold as much cash as they otherwise would (Keynes' unpardonable sin of hoarding), they are still left worse off, because they would rather hold a certain cash balance that they now cannot because they must make house repairs. 

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