I decided to write this post just in case the premise of its title is not obvious to everyone. Apparently it’s not since I was watching a bit of CNBC earlier this morning and caught Jim Cramer explaining how Hurricane Sandy will boost GDP. Technically he’s correct and it will create jobs and it will definitely help certain building related companies. However, what is often quite surprisingly missed is that at the end of the day wealth is destroyed and expending massive resources to replace destroyed wealth is not good for the country even though it might create jobs and boost GDP. In the end we end up back where we started and have missed out on all the other things those resources could have been directed towards creating.
It turns out that some French dude named Frederic Bastiat figured this out over 150 years ago. It’s called the broken window fallacy. This point is often missed by people (often politicians) who believe that job creation at any cost is worthwhile – like when the government builds a bridge to nowhere or creates jobs in new technology industries that don’t pan out (Solyndra) or pays people to destroy their cars so that new ones can be built (cash for clunkers). So when a giant hurricane hits and creates a million jobs it’s kind of like a big ill-conceived government program. The problem is that the standard economic metrics focus merely on production and not on wealth increases or decreases. So $1 B worth of perfume production is counted the same as $1 B worth of vaccines or replacing $35 B of structures destroyed by a hurricane is counted the same as building $35 B of new structures. What we really need to focus on is increases or decreases in wealth and Hurricane Sandy will decrease our wealth.