Averting Disasters

by Elaine Schwartz    •    Oct 3, 2011    •    625 Views

Disaster spending is setting records this year. At 81, the number of tornadoes, earthquakes, snowstorms, hurricanes and wild fires is equal to the total for all of 2010 and more than each of the previous 3 years.

Disaster spending almost created a disaster for the Congress.

At the end of the summer, the Congress could not agree on giving FEMA (Federal Emergency Management Agency) extra funding because the Democrats said, “yes” while Republicans wanted cuts elsewhere to offset the new spending. A FEMA impasse would have stalled a larger spending bill and shut down the government.

But then, FEMA said it could wait several days. Once the new fiscal year began on October 1, they would get funding already allocated to them. As the Washington Post described it, “Who averted a government shutdown, FEMA or Congress?”

The bottom line?

The FEMA impasse was about a lot more than the relatively small amount they needed. It returned us to the Democratic/Republican budget disagreement. The next deadline is November 18 when another shutdown is possible.

Here, in a digitalsurgeons infographic, you can see lots more about this year’s disasters.

The Economic Lesson

Knowing that disasters lead to clean-up spending and reconstruction, people have suggested disasters could fuel economic growth. Calling it “the fallacy of the broken window,” economist Frederic Bastiat (1801-1850) questions the assumption that a broken window can be an economic blessing. He agrees that a glazier would receive, for example, 6 francs to fix it. However, he then says, “…if…you conclude…that it is good to break windows, that it helps to circulate money…I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.”

Bastiat then points out that the money given to the glazier would otherwise have been spent on new shoes or a book. And, having been able to spend the 6 francs on a new pair of shoes, their owner would have had new shoes and the old, unbroken window.

An Economic Question: Told by a building contractor that he benefits financially from rebuilding after a natural disaster, could you use the “fallacy of the broken window” to disagree? Explain.

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