The destruction in productive capital can easily mean a hurricane has a net negative economic impact, and not just on wealth but on the flow of economic activity. The positive economic impact of a hurricane comes from households and businesses stocking up on consumption goods and purchasing new capital, perhaps to replace old capital, e.g. buying a new sub-pump because the old one is worn out. This is why a hurricane that is expected to be huge but turns out to be much smaller is the most likely to have a positive economic impact: spending increases but capital is not destroyed.
An important question is how much of the spending will just be short term shifts from the next few weeks into today, as in the case where households stocked up on foods and will eat it over the next few weeks. I think households and business have a lot of what you could call small capital and inventory that just sits around for a long-time, like flashlights and candles, and if this is economic activity shifted forward it is likely to come from farther in the future, making it more likely to have a positive economic impact.
Another thing to consider is prevented economic activity, like restaurant and movie visits pre-empted. Or, say, entire cities being shut down. Here again, the best case scenario is the hurricane is very small.
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Sunday ~ August 28th, 2011 at 1:05 am
Johnnie Linn
The positive economic impact of a hurricane is that it allows investment in physical and human capital (the ability to predict hurricanes correctly) to pay off. Malinvestment (a poor prediction) will have a multiplier effect as does any form of investment, but the initial poor decision is dead weight loss and has to be written off the total. So the best hurricane is the one that is accurately predicted.
Sunday ~ August 28th, 2011 at 2:18 pm
Kevin L
Well said, Johnnie Linn. Mr. Smith, I thin, has not considered all the consequences of unnecessary purchases made in fear of disaster. Any increase in consumption is a decrease in capital. The article even asserts that “small capital” does nothing except in the rare case of a disaster. As someone who lived in a natural disaster-prone area, I can attest that most people had more emergency-related items than were really needed, and I think it’s safe to say that in general decisions made out of fear are less effective.
In short, that “small capital” represents purchasing power that might have been invested in something more productive. True, when comparing the purchase of disposable batteries to the purchase of a restaurant meal there is little difference. But when thousands of people purchase those occasional items, it can be a sizable chunk of capital that will now sit dormant in closets and basements rather than being productive.
Monday ~ August 29th, 2011 at 5:06 pm
jamesoswald
It may be a subtler statement of the broken window fallacy, but it’s still a broken window. People must forgo other types of consumption in order to buy hurricane preparation goods. The hurricane adds nothing to the production possibility frontier so ipso facto must make people worse off. It might increase short run spending, but if the central bank is competent, it shouldn’t even impact medium run spending levels.