Guest Post: Natural Disasters Are Not Good for the Economy

by Nicolás Cachanosky

Every time there is a natural disaster old economic fallacies make their appearance. And they are usually always the same. In particular, the argument that a natural disaster is good for the economy. This should make little sense.

Wealth is not created by destroying things. A natural disaster destroys wealth, doesn’t create it. I doubt anyone affected by a hurricane would argue that he is better off after the natural disaster than before.

The argument that an event such as a natural disaster is good for the economy rests in the positive impact seen in GDP (as is argued) after the natural event. If GDP increases, then the economy is doing better. But this is a misreading of GDP. This variable is a flow of wealth, it is not a stock of accumulated wealth. It is possible that wealth creation (flow) increases at the same time the stock of wealth is decreasing. And this is what happens during a natural disaster.

Imagine that someone’s house caught fire and burnt down. Because of this situation, this person decides to start working extra hours to increase his income and be able to buy a new one. The extra hours makes his income (GDP) increase. But his situation is considerably worse because he lost his stock of wealth (remember Bastiat’s broken window fallacy…?). Arguing that a natural disaster (or a war, etc…) is good for the economy is like arguing that this person is better of because he has to work extra hours to recover his loss.

This is just another case of a too common fallacy in economics. We know that if the economy is doing better the result will be better GDP and unemployment indicators. But from observing a better GDP and unemployment indicators we cannot, and should not, conclude that the economy is doing better. More important than observing what is happening to GDP is understanding why is changing its behavior.

It could be argued that one of the problems of the Keynesian view of the world is the focus on what happens to output and unemployment rather than why these variables are moving. Not surprisingly, we get to the conclusion that going to war (or having a natural disaster) would be a good way to achieve full employment.

Reprinted from Notes on Liberty.

Nicolás Cachanosky is an Assistant Professor of Economics at Metropolitan State University of Denver, a co-editor of the journal Libertas: Segunda Época, and the manager of El Hub Económico, an index of Argentine economic series. He is a macroeconomist with interests in business cycles, monetary theory and policy, and comparative institutions.

This article was originally published on FEE.org. Read the original article.

The Pope's Medieval Economics - Still and Again

With a brief respite for Thanksgiving, social media and the blogosphere have been astir with conversations about Pope Francis' new apostolic exhortation, Evangelii Gaudium ("Joy of the Gospels"), which, despite being a lengthy disputation on the Trinity and other aspects of Catholic theological dogma, has had its few passages on economics singled out for praise and criticism.

I have earlier written about how the top ranks of the Catholic hierarchy are stuck in the Middle Ages when it comes to economic thinking, including Pope Emeritus Benedict XVI.

The core problem in the current Pope's thinking is found in this passage from Evangelii Gaudium (slightly truncated):

"In this context, some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts..."

This has been "confirmed by the facts" so many times I am confounded by the Pope's ignorance of free-market economics, whose theoretical principles were first propounded by the Spanish Scholastics of the early Renaissance.

This Pope, like his predecessors, adheres to a medieval mode of thinking about economics in which wealth distribution is a zero-sum game: Some people are rich because other people are poor. It completely ignores how wealth can be created (making a bigger pie, not just cutting up smaller and smaller pieces to share) through human ingenuity facilitated by the rule of law, respect for property rights, and freedom of thought and information.

The rise of capitalism -- or, as I prefer to call it, free enterprise -- has historically been the most effective driver of wealth creation and lifting people out of poverty. In the past 30 years alone, a billion people who were once living in dire poverty are now middle-class and even rich (by any standard) just in China and India, where liberalized economic policies have freed them from lives that were, by all accounts, nasty, brutish, and short (if not solitary, given those countries' large populations).

As Matt Welch, writing in Reason, put it in a slightly different way:

More people have escaped poverty the past 25 years than were alive on the planet in 1800. Their "means of escape" was largely the introduction of at least some "laws of competition" in endeavors that had long been the exclusive domain of authoritarian, monopolistic governments.

To be fair, the Pope comes from Argentina, where cronyism and mercantilism have long been presented (falsely) as free enterprise. In that context, it would be easy to assume that capitalism creates poverty rather than eliminates it. The affluence and abundance of the modern world were never envisioned by the Bible, which incorrectly prophesies that "the poor will be with us always."

As we have seen in the unprecedented progress of the past 200 years, there is no inevitability to poverty.