Pyrrhic Stimulus

“Disasters,” writes the bow-tied celebrity economist Peter Morici, “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.”

Oy… Hurricane Sandy appears to be having a number of perverse effects…

•  Knight Capital — the outfit that sent more than 100 stocks on wild swings in August thanks to a “software glitch” — ran into generator problems at its New Jersey headquarters yesterday and couldn’t execute orders from brokers
•  ADP accidentally released revisions to its September jobs report a day early — about which more below
•  And economists who should know better are playing up the storm’s “stimulus” effects.

Look! It’s a boon to the auto industry!

“Rebuilding after Sandy,” Mr. Morici writes at Yahoo Finance, “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.”

Oy.

Mr. Morici is hardly alone. “You certainly don’t want to get a stimulus out of disaster,” adds Mesirow Capital’s Diane Swonk, “but they certainly do tend to stimulate.

“Much of it is infrastructure spending,” she tells MarketWatch, “so the subways, the electrical grid, the downed power lines, the roadwork, the overtime on that. That’s the initial stuff that’s done immediately, along with window replacement.”

Window replacement?

Really?

“The broken-window fallacy,” wrote Henry Hazlitt in his 1946 gem Economics in One Lesson, “under a hundred disguises, is the most persistent — and rabble-rousing — misunderstanding in the history of economics.”

Taking his cue from the 19th-century French economist Frederic Bastiat, Hazlitt tells the story of a vandal who breaks a bakery window. The baker supposedly stimulates the economy with his purchase of a new window. Never mind that he’d hoped to buy a new suit with the money and the glazier’s gain is the tailor’s loss.

“No new ‘employment’ has been added,” Hazlitt sums up.

Here, the clumsy Morici, likely aware of this reality, tries to justify his position by pointing out that many storm victims will “rebuild larger than before.

“On the shore,” he says, “older smaller homes on large plots are replaced by larger dwellings that can accommodate more families during the summer tourist season. The Outer Banks of North Carolina saw such gains several decades ago after rebuilding from a storm of similar scale.”

Um, wait a minute: Aren’t many of those homes “on the shore” insured by the federal government?

Why yes, they are: “Four months before Hurricane Sandy hit the East Coast,” Ira Stoll writes at Reason, “President Obama quietly signed legislation expanding the federal program that offers taxpayer-subsidized flood insurance to oceanfront homeowners.”

Now multifamily dwellings are covered in addition to the single-family variety. It’s right there in the catchall “transportation bill” that links your passport to your back taxes and requires a “black box” in all new cars.

Rebuilding “bigger and better” will take place with money taken out of a taxpayer’s pocket and put into the pocket of property owners who built in a flood zone.

“Net-net,” we’re still no better off.

“For the umpteeth time,” writes Jeffrey Tucker at Laissez Faire Today, “there is no upside to wealth destruction. But try telling that to the folks who calculate GDP.

“It is very likely the Sandy will be given credit for any fourth-quarter fake economic growth. After all, that’s how government affects the GDP. The more it spends, the higher economic growth appears to be.”

Look at the GDP figures that came out last Friday. We pointed out then how government spending accounted for most of the “growth.” Indeed, economists at George Mason University’s Mercatus Center figure it’s the biggest quarterly increase in federal spending in two years.

And it gets worse: Private-sector production — the stuff that doesn’t get shifted from one pocket to another, or is run up on Uncle Sam’s no-limit card — is falling.

“This is not economic growth,” says Mr. Tucker. “No matter how many economists tell us that the storm will inspire all kinds of new and wonderful things, this storm has been a disaster and a serious blow to the economy when we least needed it.”

Cheers,
Addison Wiggin