Hurricane Of Fortune? Unemployment Claims Up

Michael Giberson

In a follow-up to my earlier posting, THE HURRICANE OF FORTUNE, on the absurdity of the USA Today article claiming “Economic Growth from Hurricanes Could Outweigh Costs,” I observe that the U.S. Department of Labor said a rise in initial jobless claims was likely due to the effects of hurricanes, including Ivan, which forced the closure of thousands of businesses in parts of the South. CBS Marketwatch reports that initial jobless claims for the week ending September 25 were at the highest level since February.

By the way, USA Today isn’t the only newspaper to push this idea. Thomas DiLorenzo noted in an essay published in February, 2000, that the Wall Street Journal has made this same mistake:

In a September 17, 1999, news article titled “Hurricane Floyd May Leave Robust Economy in its Wake,” Journal reporter Tristan Mabry wrote that Hurricane Floyd, which devastated parts of the eastern United States, “won’t likely damp economic growth and may actually have churned up some extra economic activity.” Mabry quotes Marilyn Schaja, chief economist at Donaldson, Lufkin and Jenrette Securities Corporation in New York City as saying that the storm “may actually give the economy a boost.”

Ian Shepherdson of High Frequency Economics, Inc., told the Journal that the hurricane actually accelerated GDP growth by 0.5 percent, or about $30 billion. “That could add fuel to the nation’s already revved-up economy,” stated the economically clueless Mabry.

There is, by the way, an economics literature on natural disasters. Two abstracts, the first of which comes to the obvious conclusion and the second of which reveals an interesting long run look at the issue:

Guimaraes, Paulo ; Hefner, Frank L. ; Woodward, Douglas P., “Wealth and Income Effects of Natural Disasters: An Econometric Analysis of Hurricane Hugo,” Review of Regional Studies v23, n2 (Fall 1993): 97-114.

Abstract: Following natural disasters, many regions face substantial losses of wealth. However, some sectors experience temporary gains in economic activity as a result of insurance claims and other short-term income flows. This paper examines the economic gains and losses from Hurricane Hugo in South Carolina. The analysis is based on a multi-sector regional econometric model, which allows us to examine the state’s economy “with and without” the storm. We first obtained estimates based on pre-Hugo period data. Then, we simulated the state’s economy in the post-Hugo period based on the actual values of national economic variables during the reconstruction period-yielding the “without” storm estimates. We found that the income gains were neutral overall, despite a major surge in some sectors. Even in these sectors, the economic gain remained below the unreimbursed wealth loss. Thus, the catastrophe had a net negative economic effect.

Skidmore, Mark ; Toya, Hideki, “Do Natural Disasters Promote Long-Run Growth?” Economic Inquiry v40, n4 (October 2002): 664-87.

Abstract: In this article, we investigate the long-run relationships among disasters, capital accumulation, total factor productivity, and economic growth. The cross-country empirical analysis demonstrates that higher frequencies of climatic disasters are correlated with higher rates of human capital accumulation, increases in total factor productivity, and economic growth. Though disaster risk reduces the expected rate of return to physical capital, risk also serves to increase the relative return to human capital. Thus, physical capital investment may fall, but there is also a substitution toward human capital investment. Disasters also provide the impetus to update the capital stock and adopt new technologies, leading to improvements in total factor productivity.

My only comment about this last article is that the areas in the U.S. most affected by natural disasters are not the same areas that are stereotypically associated with investment in human capital.


2 thoughts on “Hurricane Of Fortune? Unemployment Claims Up

  1. This reminds me of an article about the economist Henry George that I read about 20 years ago. George suggested a strategy of maximizing imports and minimizing exports (exactly what many not competent in economics suggest). He accomplished this by loading all of the exports on to ships that would then be sunk by the trading partner after they had left port. The trading partner did the same, loading their exports on ships to be sunk by the first country on the open seas. Both countries experienced maximum exports without the “threat” to their economies posed by imports. (The insurers must have taken a big hit, or their rates were very high.) Not a way to raise living standards.

    So, natural disasters no doubt increase deficit spending, (something Keynesian economists often advocate) and release nonproductive assets more quickly than obsolete technologies and assets might be released otherwise. But on balance, it is counterintuitive to think that destruction of wealth and allocation of productive assets and labor to emergency recovery efforts increase the standard of living.

    One other take. Thinking in terms of Maslow’s Hierarchy, economic activity is allocated to basic necessities, food, shelter, etc., and away from higher Maslow level activities after a natural disaster. These basic needs are very tangible and visible to most individuals. Followed to the logical extreme, it is easy to see that subsistance economies are full employment economies, they just don’t have the standard of living most of us aspire to.

  2. So, natural disasters no doubt increase deficit spending, (something Keynesian economists often advocate) and release nonproductive assets more quickly than obsolete technologies and assets might be released otherwise. But on balance, it is counterintuitive to think that destruction of wealth and allocation of productive assets and labor to emergency recovery efforts increase the standard of living.

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