Opinion: No, natural disasters like Irma aren’t good for the economy

Does this look like good economic policy to you? A car port awning sits on U.S. 17 after being ripped off by Hurricane Irma on Monday in Bowling Green, Fla. (AP Photo / Chris O’Meara)

Once the storm passes, one inevitability is the calculation of the costs of rebuilding the affected areas. And another is the argument some people will make that this rebuilding is actually a kind of economic stimulus.

Which is absolute nonsense.

I was getting ready to write a post about this when I saw Jon Gabriel had beaten me to it at USA Today. So I’ll let him start the rebuttal:

“A long time ago, a French guy named Frédéric Bastiat shattered this kind of nonsense, calling it ‘the broken window fallacy.’ In his essay ‘That Which Is Seen, and That Which Is Not Seen,’ Bastiat showed that destruction never boosts the economy.

“He imagined a boy broke a window. (Something I excelled at as a kid — sorry, north Phoenix.) Now his dad needs to pay to replace it. Amateur economists in the neighborhood tell the dad that’s a tough break, but note how great it is for the local glassmaker. Why, he would go out of business if annoying kids (such as yours truly) never put a baseball through a window.

“In fact, the economic growth would be even better if they sent me around to smash the windows of every house on my street.

“True, the glaziers would make a few extra bucks whenever I moved into a neighborhood. That’s the economic impact that is seen.

“But the impact that isn’t seen is the fact my long-suffering dad can’t spend that money on a new guitar, a dinner out, or counseling for his petty vandal of a son.

“Moreover, replacing something that has already been purchased is a maintenance cost, not a purchase of truly new goods, and maintenance doesn’t stimulate production.” (link original)

That’s exactly right. Another way to put it is: You don’t boost the economy by destroying wealth. The people who lose property due to hurricanes or other natural disasters don’t simply gather up money off the ground and make the repairs or replace what’s gone. They have to dip into savings, borrow money, file insurance claims, and so on — taking wealth they’d accumulated to replace another form of wealth they’d accumulated. Better to have savings and insurance than not to have them, but having to use them to rebuild what we already had neither builds more wealth nor puts it to more productive use — which is ultimately how we grow the economy. Even to the extent it stimulates consumption, it’s really just shifting consumption from the future to the present or from one use to another, as Gabriel, channeling Bastiat, explained.

Think of it this way: If it really was good for the economy to have to rebuild a flooded or leveled city, you’d think someone would suggest evacuating and then bombing a major city every now and then. And yet, no sane person suggests something along these lines is a good thing. Well, almost no sane person.

This entire discussion highlights just how far Americans have veered from sound economic thinking. We have become fixated on consumption as a measure of economic vitality and source of economic growth. But growth actually comes from accumulating wealth and putting it to more productive use. And we have gotten away from that. If you want to know why middle-income families have become economically stagnant, one glaring reason is that economic policy and even conventional wisdom have overwhelmingly favored consumption over savings over the past decade or two. Yet, intuitively, we all know that we don’t consume our way to wealth — even if some of the trappings of heavy consumption might give off the appearance of wealth.

Saving money, on the other hand, not only helps individuals accumulate their own wealth. It provides pools of money for entrepreneurs to borrow against, seeking new and more productive uses of that wealth and providing returns for borrower and lender alike (not in every single case, of course, but in the aggregate). But even our investments don’t mostly work in quite that way these days: Arguably, the overemphasis on equity investing, as opposed to more traditional savings, shifts the risk and reward in ways that end up stunting economic growth.

Neither major party’s economic platform of late reflects this reality. Democrats seek more income redistribution to shift consumption from one end of the income scale to the other, as if growth depends on who spends a particular dollar. Republicans still repeat the mantra of lower taxes, but more and more they do so from the premise that … growth depends on who (in this case, government vs. private citizen) spends a particular dollar. While it may be true that much private spending is more efficient than much government spending, the GOP has largely forgotten the concept of keeping the tax burden low so that all Americans are better able to save money, build wealth and thereby grow the economy. With both parties preaching the mantra of consumption first, it’s no wonder we’ve lost our way.

While Hurricanes Harvey and Irma may not actually stimulate economic growth, maybe they can stimulate some economic understanding.

Reader Comments 0

60 comments
Visual_Cortex
Visual_Cortex

Nobody else stated the obvious so I will:


natural disasters like Irma aren’t good for the economy


...and by the prezact same token, neither are wars.

Queen of Ctown
Queen of Ctown

FEMA needs to stop paying people to rebuild houses (sometimes multiple times) where houses should not be.   If folks and their insurance companies want to take the risk, fine.   If it's a "disaster", everyone's heart starts bleeding and, after all, it's guv'ment money and that's unlimited, right?   If I were let my home insurance lapse and my house were struck by lighting and burned to the ground, too bad, no help from anyone.  But if I have a million dollar beach house washed away by a hurricane, by all means pay me to rebuild and give me a couple of year's rent in the meantime.

Ychromosome
Ychromosome

Shhhh. Next thing you'll be doing is telling people that leasing a car isn't smart. Who will advertise then?

FIGMO2
FIGMO2

The only economic good to come from Hurricanes Harvey and Irma would be a remedial course in basic common sense. Instead of looking for disasters to fix our economy, economists and politicians should stop the unnatural disasters they inflict on American consumers and job creators every single day.

By eliminating red tape, silly regulations and unnecessary taxes, each of us will be free to actually grow our economy instead of passing around the dwindling dollars we already have. 

^^^ the money quote from Gabriel's article.

Rather than telling people to get out of a hurricane's way, perhaps government should get out of the people's way.

Here's_to_Blue
Here's_to_Blue

@FIGMO2 "Rather than telling people to get out of a hurricane's way, perhaps government should get out of the people's way."


Yeah, I'm sure the government, having information about an approaching storm, should just "get out of the people's way" by withholding that information and let the people suffer unexpectedly as intended by nature.


Sheesh, FigMo . . . you've outdone yourself this time with your illogic.


And before you respond with "schnirt," schnirt to you ahead of time.

Eye wonder
Eye wonder

@Here's_to_Blue @FIGMO2

A died in the wool sheepcon will always always always find a way to blame government or Obama. Always. (Just look at Lil J down below!)

FIGMO2
FIGMO2

@Here's_to_Blue @FIGMO2

Get out of the way as it relates to the money quote.

Just a little word play, Blue.

Nice try though. 

A liberal wind but no damage.


RoadScholar
RoadScholar

@FIGMO2 Yeah just give them money unchecked! Remember the cons disgust with welfare fraud, real or not? Real fraud is disgusting but inferring widespread fraud that, after checking, did not happen, but continuing to rale against shows their inability to learn and their generalization. We don't need regulations? Look at Equifax! Look at their executives!

stogiefogey
stogiefogey

Good article.

Along with the generalization that "economic policy and even conventional wisdom" are to blame you could add, for lack of a better term, upbringing...having someone(s) in one's formative years to instill habits about saving and consumption that last a lifetime.

Demonstrating the wrong habits - generational welfare comes to mind - has the opposite effect. It's the rare individual who can rise above the influence of weak financial teaching by parents and relatives who themselves are just toddlers in adult bodies. 


Kyle_Wingfield
Kyle_Wingfield moderator

@stogiefogey You're definitely right about habits -- that's a big reason the wrong kind of thinking has become conventional wisdom.

Lil_Barry_Bailout
Lil_Barry_Bailout

The majority of Democrats don't need a tax cut. They're already paying zip.

LogicalDude
LogicalDude

JohnnyReb: "Almost half of wage earners pay no federal income tax now, yet you want to put another load on the back of those that do pay."


Are you for or against lower taxes?  That "almost half" is from the Bush tax CUTS.  


What are your solutions?  You are quick to deride any "liberal" sounding policy, but you are silent on what you would do. 


The way to increase those number of taxpayers is to have the lower income groups EARNING MORE.  Which means, raising the minimum wage to where people hit the tier to pay taxes.  But please, if you have other ideas, let us know. 

JohnnyReb
JohnnyReb

@LogicalDude

My solutions are to curtail welfare which is taking place by reinstating the "must work" rule that Obama had suspended.

And, enforce welfare law like we are now enforcing immigration law.

Cut the corporate and small business tax rate.

Revise the tax code to make it easy to file.

Reduce the rates and brackets on personal returns.

Abolish the death tax.

AvgGeorgian
AvgGeorgian

@JohnnyReb @LogicalDude

Great reading in link  below - the whole page. Your statements seem very uninformed.


"For instance, according to IRS statistics, in 2007, the top 400 taxpayers of the United States received an average of $344.8 million and paid only 17.2% of that income in taxes, including payroll taxes that they may have paid. If you look at the above table again, you will note that someone who makes a mere $20,000 per year pays an effective tax rate of 19.2% — even after subtracting the standard deduction and personal exemption! Furthermore, hedge fund managers, some who make more than $1 billion per year, are exempted from paying any payroll taxes on their performance fee, which is usually most of their compensation if they are profitable, thanks to their Republican friends in Congress."



http://thismatter.com/money/tax/tax-structure.htm


"

Kyle_Wingfield
Kyle_Wingfield moderator

@AvgGeorgian @JohnnyReb @LogicalDude CBO doesn't get into the top 400 households, but its data for the top 1% shows an average total federal tax rate (income, FICA, etc. combined) of 29.5%, and for a household earning $20,000 per year (i.e. the lowest quintile) an average total federal tax rate of 4%: https://www.cbo.gov/sites/default/files/112th-congress-2011-2012/reports/all_tables2010_1.pdf

The federal tax system is indeed very progressive, more so than that of any industrialized country. You might want to get a new source.

AvgGeorgian
AvgGeorgian

@Kyle_Wingfield @AvgGeorgian @JohnnyReb @LogicalDude

I suggest you read the article. It clears up some basic assumptions about taxation.


"The above table is misleading because it shows only the taxes assessed on working income, which is the most highly taxed form of income. It suggests that the wealthy pay a higher effective tax rate on their income than poorer people. However, because of favorable tax treatment for investment income and, especially for capital gains, and because large amounts of wealth can be transferred through gifts and inheritance (collectively, gratuitous transfers) tax-free, the wealthy actually pay a far lower effective tax rate if the taxes that they paid is divided by all of their income, including investment income and inherited wealth."

AvgGeorgian
AvgGeorgian

@Kyle_Wingfield @JohnnyReb @LogicalDude

"A progressive, marginal tax rate also makes economic sense, since money, like everything else, has a declining marginal utility. In other words, $1 is worth a lot more to someone who earns $10,000 per year than to someone who makes $10 million per year. Poor people need the money to buy essentials, whereas rich people spend their money for luxuries, so the wealthy can pay higher taxes without seriously lowering their standard of living."

AvgGeorgian
AvgGeorgian

@Kyle_Wingfield @JohnnyReb @LogicalDude "However, the largest single factor that has created this inequity in taxation is the fact that earned income is the most highly taxed income, even though, for maximum economic growth, earned income should be the least taxed, because the higher price of wages due to these income taxes decreases the demand for labor while the lower amount received by the suppliers of this labor reduces supply — in other words, it lowers the incentive for work. In economics, this is referred to as the deadweight loss of taxation. Indeed, it is only work that increases the economic wealth of any society. Even investments cannot create true economic wealth unless it is used to put people to work, and transferred wealth actually reduces economic wealth because the people that receive it have a reduced incentive to actually work. Hence, the prudent economic policy of any government should be to tax work the least and gratuitous transfers the most."

Kyle_Wingfield
Kyle_Wingfield moderator

@AvgGeorgian @JohnnyReb @LogicalDude  They do pay tax on their investment income. And past attempts to raise their capital gains taxes has backfired because the wealthy, more than the rest of us, can choose when to realize that income. Higher rates have tended to simply reduce the investment income they realize, and thus the taxes they pay. 

Kyle_Wingfield
Kyle_Wingfield moderator

@AvgGeorgian @JohnnyReb @LogicalDude The reason the average total federal tax rate is less than that for lowest-quintile households is because their income-tax liability is negative, offsetting some of the FICA liability. The CBO report breaks down the tax liability for the bottom quintile in 2007 as follows:

Individual income tax: minus-6.8%

Social insurance (FICA): 8.8%

Corporate income tax: 0.4%

Excise tax: 1.6%

Add it together, and you get 4%.

Kyle_Wingfield
Kyle_Wingfield moderator

@AvgGeorgian @JohnnyReb @LogicalDude What's interesting is to compare how average total tax rates changed for each income group between 1979 and 2007:

Bottom quintile: minus-4 percentage points, or a 50% decrease

Second quintile: minus-3.7 points, or a 26% decrease

Middle quintile: minus-4.3 points, or a 23% decrease

Fourth quintile: minus-3.8 points, or an 18% decrease

Top quintile: minus-2.4 points, or a 9% decrease

If you break it down within the top quintile:

Top 10% of earners: minus-2.9 points, or a 10% decrease

Top 5% of earners: minus-3.9 points, or a 12% decrease

Top 1% of earners: minus-7.5 points, or a 20% decrease

So, proportionally, the biggest cut went to the bottom quintile. 

Kyle_Wingfield
Kyle_Wingfield moderator

@AvgGeorgian @JohnnyReb @LogicalDude "Then gains in wealth by use of mortgage deduction and other tax relief for wealthy  should be incorporated."

You seem to think all this is outside the tax system. It isn't. The tax code accounts for the mortgage interest deduction and other deductions. It factors those in to determine how much tax they pay on the income they report. So this is the tax each group pays even after accounting for all their deductions.

AvgGeorgian
AvgGeorgian

@Kyle_Wingfield @AvgGeorgian @JohnnyReb @LogicalDude


As it should due to the subsistence level of income needed. 

You act as if income at each bracket is not taxed the same. Apart from tax credits, all taxpayers are taxed the same on each part of their income that falls in that tax bracket.

Kyle_Wingfield
Kyle_Wingfield moderator

@AvgGeorgian @Kyle_Wingfield @JohnnyReb @LogicalDude "You act as if income at each bracket is not taxed the same. Apart from tax credits, all taxpayers are taxed the same on each part of their income that falls in that tax bracket."

Not sure in what way I indicated otherwise. I am talking about the average TOTAL federal tax rate.

Kyle_Wingfield
Kyle_Wingfield moderator

@AvgGeorgian @Kyle_Wingfield @JohnnyReb @LogicalDude You're the one who brought up credits all of a sudden. I thought we were talking about deductions. In any case, I still don't know what point you're trying to make: The CBO data show how much tax each income group paid, on average, as a share of its income. That's net of deductions, credits, personal exemptions, etc.

Kyle_Wingfield
Kyle_Wingfield moderator

@AvgGeorgian   @LogicalDude  Here is the bottom line, and the last comment I'll make on this thread that's only tangentially related to the topic: If you are looking to the tax code to solve inequality, you are barking up the wrong tree.

AvgGeorgian
AvgGeorgian

@Kyle_Wingfield @LogicalDude

Not trying to solve wealth inequality, just trying to encourage very low tax rates farther up the income ladder with higher taxes and more brackets once you are well past subsistence level.

bu22
bu22

@AvgGeorgian @Kyle_Wingfield @LogicalDude  A basic flaw in your article that discredits the author's opinion.  Investment creates jobs.  That is the reason for the lower tax on capital gains.  And its why both parties talk about encouraging Americans to save more.

RoadScholar
RoadScholar

"If it really was good for the economy to have to rebuild a flooded or leveled city, you’d think someone would suggest evacuating and then bombing a major city every now and then."

While addressing this remark later, what a stupid proposal in the first place.

Yeah, filing those insurance reports are very costly? Making the deductible may be hard, but at least you're not out of pocket for the whole lose. Same thing for healthcare. Those w/o insurance now wish they had it!!!!!!!!!!!!


"We have become fixated on consumption as a measure of economic vitality and source of economic growth."

And why is that? Could it be the constant barrage of advertising and giving business tax breaks?


" It provides pools of money for entrepreneurs to borrow against, seeking new and more productive uses of that wealth and providing returns for borrower and lender alike."

So paying off loans does not affect buying power?


" the GOP has largely forgotten the concept of keeping the tax burden low so that all Americans are better able to save money, build wealth and thereby grow the economy. "

So infrastructure taxes which repair our depleted infrastructure and build transportation and communication is bad; Don't they also supply jobs and employment for those who need it?

BTC
BTC

Laughing that an article about economics immediately draws 3 spam posts about the ease of earning thousands from part time internet work...

LogicalDude
LogicalDude

Good article Kyle.  One result of our nation's economic policies is the redistribution of savings/wealth from the middle class to the upper 1%.

Economic policies that tax those 1% at much higher rates will likely mean putting a lot more of those funds back into the economy instead of being hoarded. 

Plus, perhaps raising the minimum wage will get more funds into the lower and middle classes. (seems that keeping the minimum wage the same has hurt the lower/middle class the most since prices of goods have still risen, but the purchasing power (income) of the lowest wage has not. 

People need to work 2 or 3 jobs just to make ends meet, and many times both spouses need to work just to make ends meet. Granted, many two worker homes can now afford more goods, and that there is a change from a primary breadwinner to two-income households. 

(not going into sidetrack about technology that eases households home duties and the expense it takes to get that ease.)


Any policies you see can help fix what you see is broken?  Because you're right, the policies both Republicans and Democrats keep putting forth result in where we are today. 

JohnnyReb
JohnnyReb

@LogicalDude

LogicalDude your photo is in the dictionary at liberal.

Keeping the money one earns, regardless of how much you earn is NOT redistribution.

The government taking your money and giving it someone else IS redistribution.

Almost half of wage earners pay no federal income tax now, yet you want to put another load on the back of those that do pay.

The places that have forced a minimum wage boost are finding it does not work.  Businesses cut hours so the worker is taking home about the same as before IF - IF - s/he still has a job as automation is replacing them where possible.

And, I bet those two earner families have a smart phone for mom, dad, and each of the kids.

RoadScholar
RoadScholar

@LogicalDude Doesn't working two or more jobs , and having two spouses working, esp with the assault on what overtime they are expected to work w/o just compensation, affect the family structure? Maybe companies that do not pay a living wage  should be taxed further for the welfare these families need? How about taxing hedge funds to a higher more appropriate level?

JohnnyReb
JohnnyReb

@AvgGeorgian @JohnnyReb @RoadScholar @LogicalDude

Roads are paid for from multiple revenue paths.

State gas tax.

Federal highway tax.

General revenues.

Everyone that pays a tax of any kind is contributing to roads.

Liberals like to use the "you did not build that" theme originated by either Obama or Pocahontas but the truth is, yes we did build that along with everyone else.

Unlike welfare, it is not a specific wealth transfer.

stogiefogey
stogiefogey

"...I worked to design and pay for the roads..."

Considering that so many of our roads are poorly designed and very poorly maintained you might want to dial back the self-congratulation.