A Lesson in Hurricane Economics

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By The Daily Reckoning Australia | November 6, 2012 6:30 PM EST

Were you watching the markets yesterday, Fellow Reckoner? Well, you might have saved yourself the time. Stocks were flat. Oil and gold both rose, but each by less than half a percent. A virtually uninterrupted snoozefest, in other words.

East Coasters' time would have been better spent bailing out their basements. Those on the West Coast could have headed to the beach.

But there was, perhaps, the hint of a lesson in yesterday's trading. But you had to look closely...

When markets opened in New York, one Dow-listed darling scooted ahead of the crowd. Home Depot, which has already clocked a 45% gain YTD, jumped ahead another 2.5% before lunchtime.

The logic here is simple enough. Investors were betting that the home improvement retailer would be one likely beneficiary from Hurricane Sandy. Homeowners need to repair their homes after the storm. Home depot has all their needs. What's not to like?

Nothing, really. Taken in isolation, the havoc wrought by Hurricane Sandy probably is a boon for the retailer. At least in the short term. Roofs need repairing. Windows need fixing. Basements need bailing out.

Hurricanes, along with earthquakes, natural disasters and the strange advent of DIY home improvement television programming, are good for Home Depot. But that's only part of the story. Sadly, it's the part people lacking the ability to look past their own noses tend to focus on.

Dr. Peter Morici, a professor at the Smith School of Business at the University of Maryland and former chief economist at the US International Trade Commission, is one such person. For Morici, gauging the damage of Sandy is more than 'merely adding up insurance payouts and uninsured losses.'

Mired in myopia, the well-degreed professor wrote in a CNBC blog post that went to press just hours before Sandy made landfall on Monday: 'Disasters can give the ailing construction sector a boost, and unleash smart reinvestment that actually improves stricken areas and the lives of those that survive intact.'

Where the 'smart reinvestment' comes from, the professor doesn't say. Lacking Morici's academic qualifications, we'll resort to taking a wild, pie-in-the-sky guess: it will come from...somewhere else.

In other words, the resources to which Morici refers will not be conjured out of thin air. The work will come as an opportunity cost to the community. Every brick laid, every roof mended, every man hour employed to repair the destruction left in Sandy's wake will be a brick...a roof...a man hour not put to use somewhere else.

The lesson, as Bastiat, Hazlitt and countless others have sought to illuminate, is to take into account that which is unseen. That something is a benefit to one part of the economy says nothing about its effect on other sectors. More importantly still, is tells us nothing about its net effect.

Energy and resources do not magically appear, as the professor would have us believe, but merely change their form. Applied to chemistry, this law (sometimes known as the principle of mass/matter conservation) helped unshackle 19th century chemists from their crude fixation with alchemy.

More than 100 years on, modern mainstream economists of Morici's strange bent have yet to learn their lesson. Not content to merely miss the point, the professor went out of his way to avoid it altogether when he continued, further in his post...

'...rebuilding after Sandy, especially in an economy with high unemployment and underused resources in the construction industry, will unleash at least $15-20 billion in new direct private spending - likely more as many folks rebuild larger than before, and the capital stock that emerges will prove more economically useful and productive.'

Following Morici's tortured logic, one gets the feeling that he thinks hurricanes might actually be a net positive for the economy. But, according to an estimate he cites, losses from Sandy would be "about $35 to 45 billion."

So far, Morici has only shuffled $15-20 billion from one place to another. Still a net loss. Ah, but a good Keynesian never lets a natural disaster go to waste. Here he continues, summoning that most magical of tools, the "multiplier effect."

"Factoring in the multiplier effect of $15-20 billion spent rebuilding yields an economic benefit from reconstruction of about $27-36 billion. Add to that the gains from more a [sic] more modern and productive capital stock-likely in the range of $10 billion - and consumer and business spending that is only delayed but not permanently lost-likely in the range of $12 billion - and the total effects of natural disasters of the scale of Sandy are not as devastating two years down the road."

And there you have it, Fellow Reckoner. What was once seen as a multi-billion dollar natural disaster is really, when viewed through the lens of mainstream-approved academia, a multi-billion dollar boon to the economy.

Back on planet earth, hurricanes are devastating events that reduce - rather than raise - our standard of living.

They wreck lives and property, reduce communities to rubble and ravage entire regions. Our thoughts today are with those who, instead of building on what they once had, must now exhaust scarce resources just getting back to where they once were.

Regards,

Joel Bowman
for The Daily Reckoning Australia

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The article was first published by The Daily Reckoning Australia

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