Broken Window Fallacy in Joplin

June 1st, 2011

The Times attempts to find a silver lining on the destruction of recent tornados, giving credence to the Broken Window Fallacy, in a piece titled Reconstruction Lifts Economy After Disasters.

The deadly tornadoes and widespread flooding that have left a trail of death and destruction throughout the South and the Midwest have also disrupted dozens of local economies just as the unsteady recovery seemed to be finding a foothold.

But a new phase is slowly beginning in some hard-hit areas: reconstruction, which past disasters show is typically accompanied by a burst of new, and different, economic activity. There is no silver lining to a funnel cloud, as anyone who survived the tornadoes can attest, but reconstruction can help rebuild local economies as well as neighborhoods.

“A Burst of new, and different economic activity?” Seriously. Well yes, there will be funds spent on repairing decimated towns. But what would that money have been spent on in the absence of this horrific natural disaster? Think of all the homes and life savings destroyed by these tornadoes. But all the Times can see if reconstruction efforts.

But there are already stirrings of economic activity. Home Depot, whose store in Joplin was destroyed, began selling lumber and other supplies from a parking lot there on Tuesday as it prepared to open a 30,000-square-foot temporary store.

But what about all of the other stores that will go out of business? Sure, after you break a window the glass maker (or Home Depot!) gets business. What about the tailor? Who can buy a suit from him when all money must be spent to rebuild?

No one would suggest that disasters are a desirable form of economic stimulus. But economists who have studied the impact of floods, tornadoes and hurricanes have found that after the initial anguish and huge economic disruptions, periods of increased economic activity frequently follow as insurance money and disaster relief flow in to jump-start rebuilding.

So money “flows” into the disaster area. Flows from where? And how is the source of that money flow affected?

Even as the natural disasters eliminated thousands of jobs, the needs of recovery have created others. Companies like Unified Recovery Group, which is clearing storm wreckage in Alabama and Tennessee, are hiring workers and subcontractors to cart off debris. Construction companies are hiring, too. In Tuscaloosa, James E. Latham, chief executive officer of WAR Construction, said his firm had rehired workers who had been laid off during the downturn and had added new employees to prepare for the work ahead, like rebuilding an elementary school.

What about high-skilled jobs in all of the businesses decimated by the Tornado? Replacing those jobs with manual labor jobs?

After Hurricane Katrina hit the Mississippi Gulf Coast in August 2005, employment dropped steeply, said Marianne T. Hill, a senior economist at the Mississippi Institutions of Higher Learning. By May 2008, however, the area had 99 percent of the total jobs it had before the storm, Ms. Hill said, but the employment makeup had changed. There were more construction jobs and government jobs, and fewer jobs in manufacturing, retail, transportation and, as tourism suffered, leisure and hospitality.

The Times actually supported my intuition. Surely this is not a net benefit?

As insurance claims are paid, a further economic stimulus lies in the shopping that some people will do to replace lost goods.

There is no stimulus in replacing lost goods! There is a net loss. People are spending money on things they didn’t previously need.

Finally, after a page of fluff, the Times gets to something an actual economist wrote.

When researchers studied the economic impact of a deadly tornado that hit Oklahoma City in 1999, they found that the labor market improved after the storm, and not just in the construction sector.

“The fact of the matter is, it created this catalyst for a renewal,” said one of the researchers, Jamie Brown Kruse, director of the Center for Natural Hazards Research at East Carolina University.

“Catalyst for renewal.” That is quite a far cry from “A Burst of new, and different economic activity.” Certainly when cities are destroyed, they must be “renewed” (or abandoned). But the total net cost of these disasters is staggering.

Why am I even surprised anymore?

My heart goes out to the poor people in these devastated regions. I wish you the best of luck in your recovery, though try not to listen to the Times for economics advice.