Home > The Economy > Why natural disasters are good for capitalism

Why natural disasters are good for capitalism

from Jim Stanford

It’s been amusing  to listen to the pundits discuss the economic implications of Hurricane Sandy. Of course, we all know it closed the financial markets in NYC for two days. (That should lead to a sudden spike in productivity, by my reckoning, since millions of people stop looking at pointless charts and do something useful for a change.) Financial analysts worry about the impact on insurance companies. Their shares will surely plunge when the markets reopen. One trader interviewed on Toronto radio put it bluntly: “Shoot first, ask questions later.” In other words, sell them all off, and then buy back any that you later find out may not have been hit so badly by Sandy’s fallout. [Rarely do you get such an honest glimpse into the base mindset of financial brokers!]

The bigger irony, however, is that natural disasters usually lead to a subsequent improvement in the real economy. Stuff gets destroyed, and then stuff gets rebuilt. The act of rebuilding sparks investment, construction, and employment — which in turn generates subsequent downstream spending via a multiplier effect. Assuming that insurance companies pay out what they’re supposed to, individual households have some resources to fall back on, and U.S. governments step in with some assistance (that one might be iffy, given all the fiscal and political barriers blocking normal government in America these days), Hurricane Sandy will certainly produce a measurable boost in economic activity next year all along the devastated U.S. eastern seaboard.

One well-studied disaster was the ice storm which hit Quebec and Ontario in 1998. While GDP was lost during the storm itself (due to multiple closures, etc.), the subsequent stimulus provided by the gigantic rebuilding effort generated new activity that more than offset what was lost during the storm itself. The two provinces led Canada the next year in real GDP growth (over 6%), driven in part by strong public and private investment spending induced by the storm. Paul Darby of the Conference Board of Canada provided a useful accounting of the storm’s net positive effect, in his short report, “Economic Impact of the 1998 Ice Storm.”

How do we understand the potentially positive economic impact of a very negative, life-destroying event? The irony is rooted in a fundamental feature of capitalism: what is produced, depends on what somebody is willing to pay for. With very rare exceptions, in other words, output is limited by demand: not the inherent need for something, but by the ability and willingness to pay for it (Keynes called this “effective demand”). That’s why at any point in time (including right now), vast productive capacity sits around the economy un-used: because no agent is willing to pay for what those agents can produce.

A natural disaster changes that calculus. The physical need to rebuild is obvious. And insurance payouts, government aid, or dis-saving provide the means to do so. Money that was sitting idle before the hurricane hit, is suddenly put into motion. “Dead money,” in Mark Carney’s terminology, lives again.  Formerly idle construction workers are put to work repairing the damage. They earn wages, which they in turn spend, generating new incomes and spending all the way down the economic food chain. (Typically the estimated total multiplier effect of major construction spending, which naturally embodies a high domestic content, is close to 2-to-1.)

The same perverse logic applies to wars. Canada went from depression to genuine full employment almost overnight in 1939. Why? Because something happened that induced the country, led by government, to spend enormous sums of money and produce as much as we possibly could. The normal decision-tree that motivates production under capitalism (namely, something will happen if private cost-benefit decisions mean it is profitable for it to happen) was supplanted. The motivation for production then became: “do it because we have to do it — and we’ll somehow find a way to pay for it.”

While we can trace the income and expenditure linkages that explain this ironic result, we should never lose sight of the fundamental irrationality on which the outcome rests. If there were idle construction workers before the hurricane hit, why can’t we put them to work building something new and useful (public transit, affordable housing, reclaiming parkland), instead of waiting for random destruction to rain from the skies? The short answer is that we can. Whenever productive resources are idle (and under capitalism that’s most of the time), putting them to work can make us all better off. But it requires a fundamental change in the decision-making process that guides our economy. We would start doing things because they are useful and needed, not because someone decided to pay for them.

  1. November 6, 2012 at 12:21 pm

    If you consider only our conventions for measuring GDP, then this is certainly true. In the event of a big snow storm, where the snow gets cleaned up and everyone goes back about their business it is almost certainly true: more people are employed, generating more income; more stuff may be produced and consumed.

    But an event like Hurricane Sandy is quite different from a blizzard due to its widespread destruction of public and private capital stocks. Easily billions of dollars of capital stock have been destroyed in New York, New Jersey, and elsewhere. This lowers potential output. Sure, stuff can be rebuilt, and maybe even built stronger and better, but replacing existing capital has an opportunity cost.

  2. Bruce E. Woych
    November 6, 2012 at 12:28 pm

    While this appears well intentioned it is, at best, a normalization process that attempts to coordinate and index a path through correlated disaster histories. At worst it is not only the wrong message but the foundation for another perverse version of the creative destruction message from the iron circle.

    The “gross” and “associative” “benefits” of disaster capital are not the incentive for a restorative production. The “morale” message of take up the challenge is appropriately distributed by the press, good will charities. the community based veterans and religious associations that have experienced great tragedies in long range life. The economic message of how this will spur production is a pure opportunist’s sham and will only result in widespread systemic scams that go undetectable as the rats infest and scavenge what is left of the infrastructure.

    A serious alternative economic message should be to watch out for power grabs by the wealth & stealth crony financial sector…and should already be tracking the economic spectrum for high class “looting” that are beyond the obvious radar of price gauging and profiteering. Follow the MONEY! See where the massive public expenditures actually go across the state…including special privileges and neglected domains. Economists should
    be “objectively” measuring every aspect of the money trail and the paths it takes through the reconstructive (and hopefully restorative) field. If this is simply a “field day” for markets and a cover for redistribution of wealth…we the people want to know about it! If this turns into an asset grabbing destruction of a middle class state that has been building itself since the end of World War II, then we do not want to hear about your calculus of production cover up story of pseudo-health in our economy. To that I say…GET TO WORK!

    The second focus should be on tracking how this will impact the middle class in New Jersey.
    Like it or not, the continuity of damages across New Jersey is a perfect opportunity to study socio-economic impact to the average middle class family. Just as it is a perfect opportunity for the unethical to take advantage of these victims, the time is now to catch them in the acts of such exploitation and to evaluate “real” transitions for value and losses in extreme homogeneous disaster strikes. To that I say…Your already LATE! Get in there and get to the data in place to benchmark the transitions! In short…GET TO WORK!

  3. Geoff Davies
    November 6, 2012 at 9:27 pm

    Increasing the GDP may be good for “capitalism” or “capitalists”, but GDP is not a measure of wellbeing. It is a measure of activity involving money.

    Yes we have to spend more and expend more effort to fix things that are broken in disasters, but only in the bizarre worlds of mainstream economists and financiers is this a good thing.

    This article merely follows the pathological logic to its conclusion.

    It would be far more constructive to advocate the abandonment of increasing GDP as the obsessive goal of economic management.

    To properly measure material wellbeing, you have to make a balance sheet, and you have to *subtract* costs from incomes. Then you find that disasters are disastrous. Duh!

    • May 14, 2014 at 10:14 pm

      So appreciate how simply you have made this point I first learned about a couple years ago via Hawken’s and the Lovins’s “Natural Capitalism” (1999).

  4. November 6, 2012 at 9:52 pm

    Hey Geoff, the point of this tongue-in-cheek commentary was obviously not to argue that disasters actually ARE good, nor to imply anywhere that GDP is indeed equivalent to well-being. It was to highlight the irrationality of decision-making under capitalism, such that resources left idle for years can suddenly be mobilized when a disaster occurs (thus generating employment, production, and income). If we can put people to work repairing a disaster, why don’t we do so WITHOUT a disaster? “Duh!” indeed!

    • Bruce E. Woych
      November 7, 2012 at 1:44 am

      Jim: I also mistook the direction of the article, and perhaps that shows how much we have been handed under the umbrella of rational choice and public choice political economic theories…not to mention naked unfettered realism under unrestrained capital. The notion that this is a Republican version of a job creation is not out of the range of such theory these days. “Vain Capital” will find a way!

      • Bruce E. Woych
        November 7, 2012 at 2:04 am

        Jim Stanford: check this out; See what you think.

        Published on Tuesday, November 6, 2012 by The Nation
        Superstorm Sandy—a People’s Shock?
        Seizing the climate crisis to demand a truly populist agenda
        by Naomi Klein

    • Geoff Davies
      November 7, 2012 at 10:48 pm

      Touche Jim. You got me. I scanned the first part and reacted. And, sadly, there are plenty who would make your argument and be serious about it.

      And you do make a good point. It has been said before during depressions – the work is there to be done and the people want to do the work, so why isn’t it happening. At the moment it’s debt being paid down. A monetary and banking system that generates vast amounts of debt which then collapses seems to be a big part of it. It was shown in Worgl, Austria, in 1932 that a sensible money system could lift a town out of depression.

  5. November 7, 2012 at 7:57 am

    Good article. It would be great to see a human economy instead of the financial economy we have today. How can we have an economy that stimulates and gains from disasters, pollutions and causing human suffering and consider it sane?

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