On August 23rd, a fake Paul Krugman account on Google+ joked that the East Coast Earthquake could have been a stimulus if it had done more damage:
People on twitter might be joking, but in all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage.
Others, citing Bastiat’s “broken windows” parable say that simply picking up after a disaster is net economic drag that diverts capital from more productive uses. Who is right? Both, actually.
Obviously, disasters on balance are NOT good for the economy in the aggregate and DO divert resources from productive uses. So hoping for big disasters as an economic stimulus is simply silly.
But sometime, in some places, a disaster or even the threat of a disaster can be an economic boost when it encourages worthwhile investment that isn’t directly related to the disaster itself. A “beneficial” disaster requires a real confluence of characteristics: there has to be otherwise dormant capital that’s injected into the economy, there have to be worthwhile investment opportunities beyond simple disaster repair and the disaster can’t be so serious or likely to reoccur that that it creates future uncertainty.
These are tough tests but some disasters still pass them: hurricanes that struck Charleston South Carolina in the 1980s ended up providing an impetus to develop the town’s below-capacity tourism sector, the billions spent to fix the Y2K bug (a potential disaster) ended up encouraging lots of productivity-enhancing computer system upgrades.
Given that US banks and companies are sitting on billions in un or under-used cash, there’s a good chance that the right disaster–an earthquake on a fault that’s not likely to shake in the same way for a long time to come–could stimulate useful investment and growth. But, like many things, it all depends on the specific circumstances.
