How Natural Disasters Impact Local Economies

The recent natural disasters in California, Texas, Florida, and Puerto Rico have been incredibly devastating. Many lives were lost and countless properties were destroyed, leaving people in a state of despair wondering how to proceed with their lives.  Our deepest sympathies go out to those affected by these tragedies.

When the discussion turns to rebuilding the lives, businesses and homes of these unfortunate victims, many economists have tried to cast a silver lining on these tragedies by saying that natural disasters can provide a potential boost for economic activity through creative destruction and deficit spending. However, this assessment may not be entirely accurate as communities are often left facing problems they never intended to solve utilizing scarce resources. Whenever a natural disaster destroys viable homes, businesses and infrastructure, current household and corporate savings are diverted from normal spending to disaster spending.  Hence, disaster recovery spending often benefits some while hurting others.

This concept is made clear in Fredric Bastiat’s famous Broken Window Essay, where Bastiat noted that when a window was broken, it often surmised to be “too bad for the owner, but his loss is the window repairman’s gain. There is more business.” Bastiat argued this was a fallacy. Yes, the glazier got more income. But whatever the window owner paid for repairs was money not available to buy something else.  So, some other shop owner or tradesman lost potential income. Society did not gain or lose a window but rather the window was replaced without any net increase in economic benefit.

The action of disaster relief by Congress is often socially responsible and politically necessary, but at the end of the day, the local economy’s growth trend will likely not be affected in a major way. There is no question there will be a short-term boost in GDP due to government deficit spending; however, after this growth spurt, residents of affected areas typically have a drop in personal savings and a flattening of wages because of lack of local corporate growth. Further complicating the problem is the notion that state or local governments sometimes consider raising taxes to cover disaster relief, which may cause firms to shift operations elsewhere in the state or to some other state entirely.

If there is a true silver lining from the aftermath of these tragedies, it is the countless stories of neighbors and outsiders donating their free time in the cleanup and rebuilding efforts.  By spending time and effort outside of their normal jobs helping to clean and rebuild communities, these good Samaritans are helping to boost local communities and thus not diverting resources from other critical commitments.   There is no question that the storms, fires, and earthquakes of 2017 have had a devastating impact on communities, and the helping hand might be the most powerful economic tool of all.

Posted on October 24, 2017 in Economy

Share the Story

Back to Top