Think about it – when a natural disaster hits a country, a lot of things get destroyed, things that need to be replaced. The replacing of these things means money is spent – on building materials, asphalt, transportation, and aid to these areas. This spending would spur the economy, creating more jobs, and growing the economy. Or would it?
To most people, it is obvious – natural disasters can never be good for an economy. But for some economists, this idea is very convincing. This idea, in my opinion, is false, and to explain why, we have to explore the Broken Window Fallacy and the concepts of opportunity cost and unintended consequences.
The Broken Window Fallacy goes like this: A careless boy breaks a window. His father is understandably angry at the fact that he now has to spend 6 francs to repair the window. The townsmen, however, think the boy has done the village a service: because the boy broke the window, the father has to spend an extra 6 francs into the local economy, money he would not have otherwise spent. In the words of the townsmen:
Everybody must live, and what would become of the glaziers if panes of glass were never broken?
Sure enough, the glazier comes to fix the window, receives his 6 francs, and blesses the careless boy.
Now, do not go around breaking windows just yet! Because, as Bastiat states, the benefit to the glazier is only what is seen.
What is unseen is that, now that the father has spent 6 francs to repair the broken window, he can no longer spend it on something else. Suppose he wanted to buy shoes for his wife. Now that he has given his money to the glazier, he can’t buy shoes, disadvantaging the shoemaker.
In short, he would have spent his 6 francs one way or another, on something new. But the broken window has prevented that. Therefore, there is no benefit to the economy as a whole.
Note that Bastiat is not looking at the effect of the accident on the glazier. He is looking at its effect on wider society.
Sure, the glazier benefited, and may even have an incentive to go around breaking windows. But true economic output in the long term has not increased.
Therefore, on the topic of natural disasters, money spent on reconstruction is money that can no longer be spent on social security, education, healthcare, etc. Sure, construction companies may feel a business boom, and aid flowing to the affected area may spark an economic boom in that area. This growth, however, comes at the expense of growth in other sectors of the economy, and in other regions of the country.
Another idea linked to the Broken Window Fallacy is that War is good for the economy. After all, the US, South Korea, Japan, and Europe sprang out of their various wars stronger than before, didn’t they?
As with natural disasters, diverting resources towards war disadvantages other sectors of the economy that may help the economy grow in the long term, like education and health. In short, the opportunity cost of war is the more productive sectors of the economy the money could’ve been spent on.
While we notice the post-war success stories of the US, Japan, South Korea, and Europe, we seldom consider the less fortunate countries – countries that are still in conflict or are recovering from the destructive effects of war like the Philipines, Syria, and the Democratic Republic of the Congo.
So, to answer the question: No! Natural disasters are not good for the economy.
Did you enjoy the article? Subscribe below for more content like this!