Really? A Hurricane Can Be Good for the Economy??

The below is just a quick scribble after catching a headline this morning. The topic deserves more, and better, than you'll get here, but you'll get the point.

One of my many pet peeves is the faulty notion that somehow destruction at the hands of Mother Nature is a good thing for an economy. As New York Fed President William Dudley apparently stated in an interview this morning. I only read the headline:

"Fed's Dudley: Hurricanes will boost economic activity over the long run."

This is faulty thinking at the extreme!

Okay, so yeah, a bunch of construction companies with various specialties will descend upon a crippled city in the aftermath of a hurricane. The rebuilding will utilize additional labor and mounds of materials. And of course we could tell a "positive" story with regard to banking (gotta fund it all), legal (bound to be lawsuits galore), temporary housing (for the victims, and of course they'll be importing a lot of workers), and on and on.

But here's the thing, we live in a world of finite resources. Thus, all of the goods, services and labor brought to bear (and rightly so!) in the aftermath are resources that will not be available for their originally intended uses. I.e., other areas of the economy/industries will suffer as materials and labor that were once readily available become difficult, if not impossible, to procure. Suffice to say that, at a minimum, acquiring the resources now diverted elsewhere will become a very expensive proposition; one that will weigh heavily on the affected industries as well as their customers who'll have to ultimately pay for the higher cost of production. Then of course we could talk about the small businesses who cater to the consumer who'll have notably less discretionary income after paying the higher prices brought about by the diverting of resources to the storm-torn community.

In essence, yes,  some people's/industries' prospects will appear to improve (and it may very well temporarily move the needle on some of the data we track), but it will ultimately, and absolutely, come at the expense of the economy at large.

Bottom line: While the ability to redirect resources to where they're urgently needed is a beautiful thing, let's not pretend that pain and destruction is ultimately good for society. I mean, if it were, we should insist that the government apply our taxpayer dollars to bulldozing a few major cities every year. Sounds crazy when you think of it that way...

Henry Hazlitt had it right:

"The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.” 

 ― Henry Hazlitt, Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics

If this morning's headline had it right, Mr. Dudley -- at least in this instance -- would be your bad economist.